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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997

REGISTRATION NO. 333-22427
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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LABORATORY CORPORATION OF AMERICA HOLDINGS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 13-3757370
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

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358 SOUTH MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
(910) 229-1127
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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BRADFORD T. SMITH
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL,
CORPORATE COMPLIANCE OFFICER AND SECRETARY
LABORATORY CORPORATION OF AMERICA HOLDINGS
358 SOUTH MAIN STREET
BURLINGTON, NORTH CAROLINA 27215
(910) 229-1127
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

KEITH L. KEARNEY MARK C. SMITH
DAVIS POLK & WARDWELL SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
450 LEXINGTON AVENUE 919 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 450-4000 (212) 735-3000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
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Subscription Rights ......................................... (2) None
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Convertible Preferred Stock ("Preferred Stock") ............. $828,200,000(3) $250,970(6)
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Convertible Subordinated Notes ("Notes") .................... $250,562,450(4) None
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Common Stock................................................. (5) None

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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Such indeterminate number of Rights to purchase Preferred Stock as may be
issued to existing stockholders.
(3) Includes Preferred Stock to be issued in the form of dividends on
outstanding Preferred Stock in accordance with the terms thereof.
(4) To be issued in exchange for Preferred Stock at the option of the Company.

(5) Represents 192,000,000 shares of Common Stock, which is estimated to be
the maximum number of such shares which will be issued upon conversion of
the Preferred Stock or the Notes, together with such indeterminate number
of additional shares as may be required to be issued pursuant to the anti-
dilution provisions of the Preferred Stock or the Notes. Pursuant to Rule
457(i) no additional registration fee is payable in connection with the
registration of the Common Stock.
(6) Previously paid.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED MAY 20, 1997
10,000,000 Shares

LabCorp [LOGO]

LABORATORY CORPORATION OF AMERICA HOLDINGS

8 1/2% Series A Convertible Exchangeable Preferred Stock
or

8 1/2% Series B Convertible Pay-in-Kind Preferred Stock

(mandatorily redeemable June 30, 2012; liquidation preference $50 per share)

Dividends payable June 30, September 30, December 31 and March 31
($500,000,000 aggregate liquidation preference)

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Laboratory Corporation of America Holdings, a Delaware corporation (the
"Company"), is distributing to holders of record ("Recordholders") of its
common stock, par value $0.01 per share (the "Common Stock"), at the close of
business on May 29, 1997 (the "Record Date"), transferable rights (the
"Rights") to subscribe for and purchase, at the election of the holders of
the Rights (the "Rights Holders"), up to an aggregate of 10,000,000 shares
(the "Underlying Shares") of either 8 1/2% Series A Convertible
Exchangeable Preferred Stock, par value $0.10 per share, of the Company
(the "Series A Exchangeable Preferred Stock") or 8 1/2% Series B
Convertible Pay-in-Kind Preferred Stock, par value $0.10 per share, of
the Company (the "Series B PIK Preferred Stock" and, together with the
Series A Exchangeable Preferred Stock, the "Preferred Stock"), for a
cash price of $50 (the "Subscription Price") per share. Payment of the
Subscription Price will be held in a segregated account to be
maintained by the Subscription and Information Agent (as defined
herein) and will be applied to the purchase of Preferred Stock.
Rights Holders will be able to exercise their Rights until 5:00 p.m.
New York time on June 16, 1997 unless such time is extended by the
Company as described herein (the "Expiration Date").
(continued)

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE PREFERRED STOCK, SEE "RISK FACTORS" BEGINNING ON
PAGE 21.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Dealer Manager
Subscription and Solicitation Proceeds to
Price Fees(1) Company(2)
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Per Share(3)......................... $50.00 $2.00 $48.00
Total(3)............................. $500,000,000 $10,022,498 $489,977,502

(1) The fees payable to Credit Suisse First Boston Corporation ("Credit Suisse
First Boston"), the dealer manager for the Rights Offering, will vary
depending on the amount of the proceeds raised in the Rights Offering
excluding proceeds raised from or by Roche Holdings or any of its
affiliates. Credit Suisse First Boston will also receive a financial
advisory fee of $1,000,000. See "Plan of Distribution."
(2) Before deducting other expenses of the Rights Offering payable by the
Company estimated at $2,000,000 and the financial advisory fee referred to
above.
(3) Assumes that Roche Holdings purchases 4,988,751 shares of Preferred Stock,
that no other proceeds are raised by Roche Holdings or any of its
affiliates in the Rights Offering, and that Rights Holders other than Roche
Holdings purchase the remaining shares. If no Rights Holder other than
Roche Holdings purchases Preferred Stock, the total Subscription Price,
total Dealer Manager and Solicitation Fees and total Proceeds to Company
would be $500,000,000, $0 and $500,000,000, respectively.

The Dealer Manager for the Rights Offering is:

CREDIT SUISSE FIRST BOSTON

Prospectus dated May , 1997.

(continued from previous page)

Recordholders will receive approximately 0.08134 of a Right for each share
of Common Stock held as of the Record Date (the "Rights Offering"). As soon as
practicable after the Record Date, transferable certificates evidencing the
Rights (the "Rights Certificates") will be delivered to the Recordholders. No
fractional Rights or cash in lieu thereof will be issued or paid by the
Company. The number of Rights issued by the Company to each Recordholder will
be rounded to the nearest whole number, with such adjustments as may be
necessary to ensure that no more than 10,000,000 shares of Preferred Stock are
issued hereunder. Each Right consists of a basic subscription privilege under
which Rights Holders may purchase at the Subscription Price one full share of
Preferred Stock for each Right held (the "Basic Subscription Privilege").

Rights Holders who exercise their Basic Subscription Privilege in full will
also be eligible to subscribe (the "Oversubscription Privilege") at the
Subscription Price for shares of Preferred Stock that are not otherwise
purchased pursuant to the exercise of Rights (the "Excess Shares") of the same
series as purchased pursuant to such Rights Holder's Basic Subscription
Privilege, subject to availability and proration. Once a Rights Holder has
exercised the Basic Subscription Privilege or the Oversubscription Privilege
such exercise may not be revoked.

Roche Holdings, Inc. ("Roche Holdings"), a wholly owned subsidiary of Roche
Holding Ltd. ("Roche") is the owner of approximately 49.9% of the Common Stock
currently outstanding. Roche Holdings has informed the Company that it intends
to exercise its Basic Subscription Privilege and Oversubscription Privilege in
full for the Series B PIK Preferred Stock (subject, in the case of the
Oversubscription Privilege, to reduction in certain circumstances). As a
result, if no other Rights are exercised, Roche Holdings will purchase
10,000,000 shares of Series B PIK Preferred Stock. Because the Preferred Stock
is convertible into Common Stock at a conversion price which is less than the
current market value of the Common Stock, Roche Holdings will benefit from
that differential (assuming such differential continues to exist) if and when
it converts its Series B PIK Preferred Stock into Common Stock (which may not
occur before June 30, 2000).

The annual dividend for each share of Series A Exchangeable Preferred Stock
offered hereby is $4.25, payable in cash. The annual dividend for each share
of Series B PIK Preferred Stock offered hereby is $4.25, payable in shares of
Series B PIK Preferred Stock until June 30, 2003 and cash thereafter. The
Preferred Stock is convertible on or after September 30, 1997 in the case of
the Series A Exchangeable Preferred Stock, and on or after June 30, 2000 in
the case of the Series B PIK Preferred Stock, in each case, at the option of
the holder, into shares of Common Stock at a rate (subject to adjustment in
certain events) of 18.1818 shares of Common Stock for each share of Preferred
Stock, equivalent to a conversion price of $2.75 for each share of Common
Stock. The conversion rate was determined by the Company, in consultation with
Credit Suisse First Boston. Among the factors considered by the Board of
Directors in determining the conversion rate were (i) the market value of the
Common Stock; (ii) the present and projected operating results and financial
condition of the Company; (iii) an assessment of the Company's management and
management's analysis of the growth potential of the Company and of the
Company's market area; (iv) the aggregate size of the Rights Offering; and (v)
the conversion rate which the Board of Directors believes investors would
readily accept under current economic circumstances. The shares of Series A
Exchangeable Preferred Stock will be exchangeable, subject to certain
conditions, at the option of the Company, in whole (but not in part), on any
dividend payment date on or after June 30, 2000 for the Company's 8 1/2%
Convertible Subordinated Notes due 2012 (the "Notes") at a rate of $50
principal amount of Notes for each share of Series A Exchangeable Preferred
Stock. The Series B PIK Preferred Stock will not be exchangeable for Notes.
See "Description of the Notes." Except as described above, the terms of the
Series A Exchangeable Preferred Stock and the Series B PIK Preferred Stock are
identical in all respects. The Preferred Stock is not redeemable prior to July
7, 2000. On or after such date, the Company may redeem the Preferred Stock, in
whole or in part at the prices set forth herein, plus in each case, accrued
and unpaid dividends. All shares of Preferred Stock issued and outstanding as
of June 30, 2012 shall be redeemed by the Company at the redemption price of
$50 per share. Dividends on the

Preferred Stock are cumulative from the date of issuance and are payable
quarterly in arrears commencing September 30, 1997. See "Description of
Preferred Stock."

The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "LH." On February 26, 1997, the last full trading day before
announcement of the Rights Offering, the last reported sale of the Common Stock
on the NYSE Composite Tape was $3 3/4. On May , 1997, the last full day of
trading prior to the effective date of the registration statement of which this
Prospectus forms a part, the last reported sale price of the Common Stock on
the NYSE Composite Tape was $ . Application has been made to list the
Preferred Stock on the NYSE. It is unlikely however that the Series B PIK
Preferred Stock will be accepted for listing on the NYSE as it is expected that
following the Rights Offering the Series B PIK Preferred Stock will be held by
fewer than 100 holders. It is expected that the Rights will trade on the NYSE
until the close of business on the last trading day prior to the Expiration
Date, at which time they will cease to have value.

Upon consummation of the Rights Offering and satisfaction of certain other
conditions precedent, an amended and restated credit agreement (the "Amended
Credit Agreement") between the Company and its existing lenders will become
effective. See "Description of Amended Credit Agreement."

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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING STABILIZING TRANSACTIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "PLAN OF DISTRIBUTION."

PROSPECTUS SUMMARY

The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, included or incorporated by reference in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. In connection with the Merger (as defined herein) in April 1995,
National Health Laboratories Holdings, Inc. ("NHL") changed its name to
Laboratory Corporation of America Holdings. Unless otherwise indicated, all
references herein to the "Company" refer to Laboratory Corporation of America
Holdings and its consolidated subsidiaries following the Merger or NHL and its
consolidated subsidiaries prior to the Merger, as applicable.

THE COMPANY

GENERAL

Laboratory Corporation of America Holdings is one of the three largest
independent clinical laboratory companies in the United States based on 1996
net revenues. Through a national network of laboratories, the Company offers a
broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states. Since
its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the year ended December 31, 1996, the Company had net sales of $1,607.7
million and EBITDA before a provision for settlements and related expenses,
restructuring charges and non-recurring expenses of $173.7 million. See
footnote (k) to "Summary Financial Data" for a discussion of certain matters
related to EBITDA. Primarily as a result of the Settlement Charge discussed
below, operating loss and net loss during such period were $118.8 million and
$153.5 million respectively.

The Company has achieved a substantial portion of its growth through
acquisitions. In June 1994, the Company acquired Allied Clinical Laboratories,
Inc. ("Allied"), then the sixth largest independent clinical laboratory testing
company in the United States (based on 1993 net revenues) (the "Allied
Acquisition"). In addition, in April 1995, the Company completed a merger with
Roche Biomedical Laboratories, Inc. ("RBL"), an indirect subsidiary of Roche
pursuant to an Agreement and Plan of Merger dated as of December 13, 1994 (the
"Merger"). In connection with the Merger, the Company changed its name from
National Health Laboratories Holdings, Inc. to Laboratory Corporation of
America Holdings. In addition to the Merger and the Allied Acquisition, since
1993 the Company has acquired a total of 57 small clinical laboratories with
aggregate sales of approximately $182.4 million.

THE CLINICAL LABORATORY TESTING INDUSTRY

Laboratory tests and procedures are used generally by hospitals, physicians
and other health care providers and commercial clients to assist in the
diagnosis, evaluation, detection, monitoring and treatment of diseases and
other medical conditions through the examination of substances in the blood,
tissues and other specimens. Clinical laboratory testing is generally
categorized as either clinical testing, which is performed on body fluids
including 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 in connection with the diagnosis and treatment
of illnesses. Certain of these tests and procedures are used principally as
tools in the diagnosis and treatment of a wide variety of medical conditions
such as cancer, AIDS, endocrine disorders, cardiac disorders and genetic
disease. The most frequently requested tests include blood chemistry analyses,
urinalyses, blood cell counts, PAP smears, AIDS tests, microbiology cultures
and procedures and alcohol and other substance-abuse tests.

The clinical laboratory industry consists primarily of three types of
providers: hospital based laboratories, physician-office laboratories and
independent clinical laboratories, such as those owned by the Company. The
Company believes that in 1996 approximately 50 percent of the clinical testing
revenues in the United States were derived by hospital-based laboratories,
approximately 15 percent were derived by physicians in their offices and
laboratories and approximately 35 percent were derived by independent clinical
laboratories. The Health Care Financing Administration ("HCFA") of the
Department of Health and Human Services ("HHS") has estimated that in 1996
there were over 5,000 independent clinical laboratories in the United States.

BUSINESS STRATEGY

During 1996, management began implementing a new business strategy in
response to the Company's declining performance. These new strategic objectives
are as follows: remaining a low cost provider of clinical testing services;
providing high quality customer service to its clients; and improving account
profitability. In addition, the Company is focused on certain growth
initiatives beyond routine clinical laboratory testing. The Company believes
that as a result of this change in focus it is well positioned to achieve its
goal of leading the clinical laboratory industry by providing its customers
with innovative, responsive, and high quality services.

LOW COST PROVIDER

The Company believes that due to synergy programs implemented following the
Merger, its standardized equipment and its focus on cost containment, it is a
low cost provider of clinical testing services. Since the Merger, the Company
has been able to effect substantial operating cost reductions in the combined
businesses and expects that the full effect of these savings (approximately
$120 million per year when compared to the businesses' costs immediately prior
to the Merger) will be realized during 1997. In addition, the Company is
focused on other initiatives which are expected to achieve significant cost
savings in 1997. These plans include a new agreement with a supplier of
telecommunications services, additional supply savings primarily due to
increased efficiency, and further regional laboratory consolidation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Position."

The Company has also developed and implemented sophisticated management
information systems to monitor operations and control costs. All financial
functions are centralized in Burlington, North Carolina including purchasing
and accounting. Management believes this provides greater control over spending
as well as increased supervision and monitoring of results of operations.

CLIENT SERVICE

The Company competes primarily on the basis of the quality of its testing,
reporting and information systems, its reputation in the medical community, the
pricing of its services and its ability to employ qualified personnel. The
Company believes it is a leading provider of laboratory testing in terms of its
menu and quality of testing services. As a result of the required focus on the
consolidation process related to the Merger, however, the Company believes that
its level of client service has been negatively impacted. Therefore, in 1997,
with the consolidation process substantially completed, one of the Company's
goals is to improve client service. An important factor in improving client
service includes the Company's initiatives to improve its billing process. See
"Business Billing."

ACCOUNT PROFITABILITY

including those with managed care organizations, and selectively repricing or
discontinuing business with existing accounts which perform below Company
expectations. The Company believes that as a result of this effort, the first
quarter of 1997 was the first quarter in two years that the Company's price per
accession or specimen increased versus the comparable prior year quarter. The
Company is also targeting price increases across most of its business lines,
including specialty and niche testing which have not seen price increases since
the Merger. While such increases may adversely affect volumes, the Company
believes that such measures along with other cost reduction programs, will
improve its overall profitability. Finally, the Company is reviewing its sales
organization and expects to modify its commission structure so that
compensation is tied more directly to the profitability of retained and new
business instead of the current practice of basing commissions primarily on
revenue generated. The Company is also reviewing alternatives relating to
regions of the country and certain businesses where profitability is not
reaching internal goals and may enter into joint ventures, alliances, or asset
swaps with interested parties in order to maximize regional operating
efficiencies.

FOCUSED GROWTH INITIATIVES

The Company plans to increase market share in certain sections of the market
by providing innovative services in three primary areas: (i) hospital
alliances; (ii) specialty and niche businesses; and (iii) direct marketing to
payors.

One of the Company's primary growth strategies is to develop an increasing
number of hospital alliances. These alliances can take several different forms
including laboratory management contracts, reference agreements and joint
ventures. Through these alliances the Company provides testing services as well
as contract management services. As hospitals continue to be impacted by
decreasing fee schedules from third party payors and managed care
organizations, the Company believes that they will seek the most cost-effective
laboratory services for their patients. The Company's economies of scale as
well as its delivery system enable it to assist the hospital in achieving this
goal. These alliances are generally more profitable than the Company's core
business due to the specialized nature of many of the testing services offered
in the alliance program. In 1996, the Company added 6 alliance agreements with
hospitals, physician groups and other care provider organizations representing
approximately $20 million of annual sales. This increased the total number of
alliances to 20 at December 31, 1996 from 14 at December 31, 1995.

Another primary growth strategy for the Company is growth of its specialty
and niche businesses. In general the specialty and niche businesses are
designed to serve two market segments: (i) markets which are not served by the
routine clinical testing laboratory and therefore are subject to less stringent
regulatory and reimbursement constraints; and (ii) markets which are served by
the routine testing laboratory but offer the possibility of adding related
services from the same supplier. The Company's research and development group
continually seeks new and improved technologies for early diagnosis. For
example, the Company believes its Center for Molecular and Biology and
Pathology ("CMBP") is a leader in molecular diagnostics and polymerase chain
reaction ("PCR") technologies which are often able to provide earlier and more
reliable information regarding HIV, genetic diseases, cancer, and many viral
and bacterial diseases. These technologies may represent a significant savings
to managed care organizations by increasing the detection of early stage
(treatable) diseases. Also, the Company recently acquired Genetic Design, Inc.
and management believes it is now the largest provider of identity testing
services in the United States.

agreement patients will be provided with identification cards indicating
beneficiary eligibility for both prescription benefits and the Company's
testing services. The Company will provide the testing services as requested
and bill PCS based on a predetermined fee schedule. The Company will pay PCS
certain percentage and fixed fees for adjudication of claims. One of the
advantages of the PCS agreements is that patient eligibility will be determined
at the time of testing through interface with the PCS information system which
will expedite processing of the claim for reimbursement.

RECENT DEVELOPMENTS

During 1996 and the early part of 1997, the Company has undergone significant
changes in management with Thomas P. Mac Mahon assuming the role of President
and Chief Executive Officer in January 1997 in addition to his position as
Chairman. Prior to such time Mr. Mac Mahon served as Senior Vice President of
Hoffmann--La Roche and President of Roche Diagnostics Group where he was
responsible for the management of all United States operations of the
diagnostic businesses of Hoffmann-- La Roche. In addition to Mr. Mac Mahon, the
Company is led by a new Chief Financial Officer, Wesley R. Elingburg, formerly
Senior Vice President-Finance, and a new management committee.

As part of an examination of the rapid growth of Federal expenditures for
clinical laboratory services, several Federal agencies, including the Federal
Bureau of Investigation, the Office of the Inspector General ("OIG") of HHS and
the Department of Justice (the "DOJ"), have investigated allegations of
fraudulent and abusive conduct by health care providers. On November 21, 1996,
the Company reached a settlement with the OIG and the DOJ regarding the prior
billing practices of various of its predecessor companies (the "1996 Government
Settlement"). See "Business--Regulation and Reimbursement--OIG Investigations
- --1996 Government Settlement". Consistent with this overall settlement, the
Company paid $187 million to the Federal Government (the "Settlement Payment")
in December 1996 with proceeds from a loan from Roche Holdings (the "Roche
Loan"). See "--Relationship with Roche". As a result of negotiations related to
the 1996 Government Settlement, the Company recorded a charge of $185 million
in the third quarter of 1996 (the "Settlement Charge") to increase reserves for
the 1996 Government Settlement and other related expenses of government and
private claims resulting therefrom.

In March 1997, the Company entered into the Sixth Amendment and Waiver (the
"Sixth Amendment") to its credit agreement (the "Existing Credit Agreement").
The Sixth Amendment eliminates amortization payments on its term loan facility
(the "Term Loan Facility") under the Existing Credit Agreement for 1997 and
modifies the interest coverage and leverage ratios for the quarterly periods
through December 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Pursuant to this amendment, the
Company paid an amendment fee of 37.5 basis points on commitments and will pay
an additional fee of 62.5 basis points if the Rights Offering is not completed
by June 30, 1997.

In addition, the Roche Loan was originally due on March 31, 1997. In March
1997, the Company negotiated an amendment to the Roche Loan which provided for
an extension of the due date to March 31, 1998.

The Company also entered into the Amended Credit Agreement with its lenders
under the Existing Credit Agreement which will become effective upon completion
of the Rights Offering following satisfaction of certain conditions precedent.
Upon consummation of the Rights Offering and receipt of $500 million in gross
proceeds, the Amended Credit Agreement makes available to the Company a term
loan facility of $643.8 million (the "Amended Term Loan Facility") and a $450.0
million revolving credit facility (the "Amended Revolving Credit Facility").
See "Description of Amended Credit Agreement" and Note 9 of the Notes to
Consolidated Financial Statements for a complete description of the Amended
Credit Agreement.

RELATIONSHIP WITH ROCHE

In connection with the Merger, HLR Holdings Inc. ("HLR"), and its designee,
Roche Holdings, received 49.9% of the total outstanding Common Stock of the
Company and the Company, HLR, Roche Holdings and Hoffmann--La Roche Inc.
entered into a Stockholder Agreement dated as of April 28, 1995 (the
"Stockholder Agreement"). In December of 1996, HLR was merged with and into
Hoffmann La-Roche Inc. and the Common Stock held by HLR subsequently
transferred from Hoffman La-Roche Inc. to Roche Holdings. As a result of its
ownership interest and its rights under the Stockholder Agreement, Roche
Holdings is able to exercise significant influence on the governance of the
Company and on the composition of its board of directors. See "Certain
Relationships and Related Transactions--The Stockholder Agreement." Roche
Holdings has indicated that it intends to exercise its Basic Subscription
Privilege and Oversubscription Privilege in the Rights Offering in full for
Series B PIK Preferred Stock (subject, in the case of the Oversubscription
Privilege, to reduction in certain circumstances). As a result, if no other
Rights are exercised, Roche Holdings will purchase 10,000,000 shares of Series
B PIK Preferred Stock. Consequently, following conversion of all of the
Preferred Stock, Roche Holdings will own a minimum of 49.9% and a maximum of
approximately 85% of the total outstanding Common Stock of the Company. As
mentioned above, in December, 1996, Roche Holdings loaned $187 million to the
Company to fund the Settlement Payment in the form of a promissory note. Such
note bears interest at a rate of 6.625% per annum and matures on March 31,
1998. A portion of the proceeds of the Rights Offering will be used to repay
such loan. See "Use of Proceeds."

THE RIGHTS OFFERING

Securities Offered.......... A total of up to 10,000,000 shares of Preferred
Stock are being offered in the Rights Offering
pursuant to the exercise of Rights. Once the
Rights are distributed and until the Expiration
Date, the Company will not effect a
reclassification of the Company's equity
securities which could have the effect of
materially altering the value of the Rights. See
"Description of Rights Offering" and "Description
of Preferred Stock."

Basic Subscription
Privilege.................. Recordholders at the close of business on the
Record Date will receive, at no cost,
approximately 0.08134 of a Right for each share
of Common Stock owned of record at the close of
business on such date. Each Right will entitle
the Rights Holder to subscribe for one Underlying
Share at the Subscription Price. Upon exercise of
the Rights, Rights Holders must indicate on their
Rights Certificate whether they wish to receive
either shares of Series A Exchangeable Preferred
Stock or shares of Series B PIK Preferred Stock.
A failure to so indicate on the Rights
Certificate will result in the issuance of Series
A Exchangeable Preferred Stock. No fractional
Rights or cash in lieu thereof will be issued or
paid. Fractional Rights will be rounded to the
nearest whole number, with such adjustments as
may be necessary to ensure that no more than
10,000,000 shares of Preferred Stock are issued
hereunder. ONCE A RIGHT HAS BEEN PROPERLY
EXERCISED, IT CANNOT BE REVOKED. See "Description
of Rights Offering--The Rights" and "--
Subscription Privileges."

Oversubscription
Privilege.................. Each Rights Holder who elects to exercise the
Basic Subscription Privilege in full may also
subscribe at the Subscription Price for Excess
Shares of the same series as purchased pursuant
to such Rights Holder's Basic Subscription
Privilege, subject to availability and proration.
The available Excess Shares will be prorated
among Rights Holders who exercise their
Oversubscription Privilege based upon the
respective number of shares of Preferred Stock
each such Rights Holder shall have subscribed for
pursuant to the Basic Subscription Privilege;
provided, however, that Roche Holdings will not
be allocated any Excess Shares until all other
Rights Holders exercising the Oversubscription
Privilege have been allocated the number of
Excess Shares for which they oversubscribed. All
excess payments shall be returned by mail without
interest or deduction promptly after the
Expiration Date and after all prorations and
adjustments contemplated by the Rights Offering
have been effected. See "Description of Rights
Offering--Subscription Privileges."

Subscription Price.......... $50 per share of Preferred Stock. Payment of the
Subscription Price will be held in a segregated
account to be maintained by the Subscription and
Information Agent and will be applied to the
purchase of Preferred Stock.

Record Date.................
May 29, 1997.

Expiration Date............. The Rights will expire, if not exercised prior to
5:00 p.m., New York time, on June 16, 1997 unless
extended for up to 30 days in the sole discretion
of the Company. The number and length of any such
extensions will be set at the time of any such
extension. See "Description of Rights Offering--
Expiration Date."

The Rights.................. The Rights will be evidenced by transferable
certificates that will be exercisable by a Rights
Holder until the Expiration Date. It is expected
that the Rights will trade on the NYSE until the
close of business on the last trading day prior
to the Expiration Date, at which time they will
cease to have value.

Subscription and
Information Agent.......... American Stock Transfer & Trust Company.

Dealer Manager.............. The Company and Credit Suisse First Boston (the
"Dealer Manager") have entered into a Dealer
Manager Agreement pursuant to which Credit Suisse
First Boston is acting as the dealer manager in
connection with the Rights Offering. The Company
has agreed to pay certain fees to, and expenses
of, the Dealer Manager for its services in the
Rights Offering. See "Plan of Distribution."

Procedure for Exercising The Basic Subscription Privilege and the
Rights..................... Oversubscription Privilege may be exercised by
properly completing the Rights Certificate, and
forwarding it (or following the Guaranteed
Delivery Procedures), with payment of the
Subscription Price for each Underlying Share
subscribed for pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege, to
the Subscription and Information Agent, who must
receive such Rights Certificate or Notice of
Guaranteed Delivery and payment on or prior to
the Expiration Date. If Rights Certificates are
sent by mail, Rights Holders are urged to use
insured, registered mail, return receipt
requested. See "Description of Rights Offering--
Method of Subscription--Exercise of Rights."

If the aggregate Subscription Price paid by an
exercising Rights Holder is insufficient to
purchase the number of Underlying Shares that the
Rights Holder indicates are being subscribed for,
or if no number of Underlying Shares to be
purchased is specified, then the Rights Holder
will be deemed to have exercised the Basic
Subscription Privilege to purchase Underlying
Shares to the full extent of the payment price
tendered. If the aggregate Subscription Price
paid by an exercising Rights Holder exceeds the
amount necessary to purchase the number of
Underlying Shares for which the Rights Holder has
indicated an intention to subscribe, then the
Rights Holder will be deemed to have exercised
the Oversubscription Privilege to the full extent
of the excess payment tendered, and

any amount remaining shall be returned to such
Rights Holder. See "Description of Rights
Offering--Method of Subscription --Exercise of
Rights."

ONCE A RIGHTS HOLDER HAS EXERCISED THE BASIC
SUBSCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION
PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED.
RIGHTS NOT EXERCISED PRIOR TO THE EXPIRATION DATE
WILL EXPIRE.

Persons Holding Common
Stock, or Wishing to
Exercise Rights, Through
Others..................... Persons holding shares of Common Stock
beneficially and receiving the Rights issuable
with respect thereto, through a broker, dealer,
commercial bank, trust company or other nominee,
as well as persons holding certificates for
Common Stock directly, who would prefer to have
such institutions effect transactions relating to
the Rights on their behalf, should contact the
appropriate institution or nominee and request it
to effect such transaction for them. See
"Description of Rights Offering--Method of
Subscription--Exercise of Rights."

Procedure for Exercising
Rights by Stockholders
Outside of the United
States..................... Rights Certificates will not be mailed to holders
of Common Stock whose addresses are outside the
United States or who have an Army Post Office
("APO") or a Fleet Post Office ("FPO") address,
but will be held by the Subscription and
Information Agent for their accounts. To exercise
the Rights represented thereby, such holders must
notify the Subscription and Information Agent and
take all other steps which are necessary to
exercise the Rights on or prior to 5:00 p.m. New
York time on the Expiration Date. If no contrary
instructions have been received by such time, the
Rights of such holders will expire. See
"Description of Rights Offering--Foreign and
Certain Other Stockholders."

Federal Income Tax
Consequences............... In the opinion of Davis Polk & Wardwell, for
United States Federal income tax purposes,
receipt of Rights by a Recordholder pursuant to
the Rights Offering should be treated as a
nontaxable distribution with respect to the
Common Stock. See "Certain Federal Income Tax
Consequences."

Issuance of Preferred
Stock...................... Certificates representing shares of Preferred
Stock purchased pursuant to the exercise of the
Rights will be delivered to subscribers as soon
as practicable after the Expiration Date and
after all prorations and adjustments contemplated
by the terms of the Rights Offering have been
effected.

No Board or Financial
Advisor Recommendations.... An investment in the Preferred Stock must be made
pursuant to each investor's evaluation of such
investor's best interests. Accordingly, neither
the Board of Directors of the Company nor Credit
Suisse First Boston, as financial advisor to the
Company, makes any recommendation to Rights
Holders regarding whether they should exercise
their Rights to purchase Preferred Stock.

Principal Stockholders...... Roche Holdings, the owner of approximately 49.9%
of the Common Stock currently outstanding, has
indicated that it intends to exercise its Basic
Subscription Privilege and Oversubscription
Privilege in full for Series B PIK Preferred
Stock (subject, in the case of the
Oversubscription Privilege, to reduction in
certain circumstances). As a result, if no other
Rights are exercised, Roche Holdings will
purchase 10,000,000 shares of Series B PIK
Preferred Stock.

NYSE Symbol for Common
Stock...................... "LH"

NYSE Symbol for Rights...... "LH RT"

NYSE Symbol for the Series
A Exchangeable Preferred "LH PrA"
Stock......................

NYSE Symbol for the Series
B PIK Preferred Stock...... "LH PrB". While application has been made to list
the Series B PIK Preferred Stock on the NYSE, it
is unlikely that the Series B PIK Preferred Stock
will be accepted for listing as it is expected
that following the Rights Offering the Series B
PIK Preferred Stock will be held by fewer than
100 holders.

Use of Proceeds............. The gross proceeds of the Rights Offering will be
used to (i) repay approximately $294 million
outstanding under the Existing Credit Agreement,
(ii) pay fees and expenses of approximately $13
million related to the Rights Offering and (iii)
repay the $187 million loan from Roche Holdings
in order to fund the Settlement Payment plus
accrued interest thereon of approximately $6
million. See "Use of Proceeds."

THE PREFERRED STOCK

Securities Offered..........
An aggregate of up to 10,000,000 shares of 8 1/2%
Series A Convertible Exchangeable Preferred Stock
and 8 1/2% Series B Convertible Pay-in-Kind
Preferred Stock. Except as described below, the
terms of the Series A Exchangeable Preferred
Stock and the Series B PIK Preferred Stock are
identical in all respects.

Mandatory Redemption........
June 30, 2012.

Dividends...................
Annual cumulative dividends of $4.25 per share on
the Preferred Stock are payable quarterly on each
June 30, September 30, December 31 and March 31,
when, as and if declared by the Board of
Directors.

Annual cumulative dividends in the case of the
Series A Exchangeable Preferred Stock are payable
in cash out of funds legally available therefor,
and in the case of the Series B PIK Preferred
Stock, are payable in shares of Series B PIK
Preferred Stock until June 30, 2003 and cash
thereafter.

The Company may not pay dividends on the
Preferred Stock unless it has paid or declared
and set apart for payment accrued and unpaid
dividends for all dividend payment periods on any
class or series of stock ranking senior to the
Preferred Stock as to dividends and it has paid
or declared and set apart for payment or
contemporaneously pays or declares and sets apart
for payment accrued and unpaid dividends for all
dividend payment periods on any class or series
of stock having parity with the Preferred Stock
as to dividends (which, in the case of the Series
A Exchangeable Preferred Stock, will include the
Series B PIK Preferred Stock and vice versa)
ratably, so that the amount of dividends declared
and paid per share on each series of Preferred
Stock and any such class or series of stock
having parity with the Preferred Stock as to
dividends will bear to each other the same ratio
that the accrued and unpaid dividends to the date
of payment on each such class or series of stock
and each series of Preferred Stock bear to each
other.

Liquidation Preference...... $50 per share of Preferred Stock, plus accrued
and unpaid dividends.

Conversion Rights...........
Each share of Preferred Stock will be convertible
at any time at the option of the holder thereof,
in the case of the Series A Exchangeable
Preferred Stock on or after September 30, 1997
and in the case of the Series B PIK Preferred
Stock on or after June 30, 2000, into 18.1818
shares of Common Stock of the Company, subject to
adjustment in certain events, including a
Fundamental Change (as defined herein). See
"Description of Preferred Stock--Conversion
Rights."

Registration Rights......... In connection with the Rights Offering, the
Company will grant to each Rights Holder
(including Roche Holdings) who upon consummation
of the Rights Offering beneficially owns
Preferred Stock convertible into 10% or more of
the Common Stock outstanding, and who certifies
as such, registration rights with respect to such
Common Stock on the same terms as those granted
to Roche Holdings pursuant to the Stockholder
Agreement.

Exchange for Notes.......... The Series A Exchangeable Preferred Stock will be
exchangeable, subject to certain conditions, at
the option of the Company, in whole (but not in
part), on any dividend payment date on or after
June 30, 2000 for the Company's 8 1/2%
Convertible Subordinated Notes due 2012 in a
principal amount equal to $50 per share of Series
A Exchangeable Preferred Stock. The Notes will be
convertible, at the option of the holder thereof,
into shares of Common Stock initially at the
conversion price for the Series A Exchangeable
Preferred Stock at the time of the exchange.
Holders of Notes will be entitled to the same
conversion rights as holders of Series A
Exchangeable Preferred Stock. The Notes will bear
interest at the rate of 8 1/2% payable quarterly
in arrears on June 30, September 30, December 31
and March 31 of each year, commencing on the
first such interest payment date following the
date of exchange. At the Company's option, on or
after July 7, 2000, the Notes will be redeemable,
in whole or in part, at the redemption prices set
forth herein plus accrued and unpaid interest.
The Notes are not subject to mandatory sinking
fund payments. The Notes will be subordinated to
all Senior Indebtedness (as defined herein) of
the Company.

Optional Redemption......... The Preferred Stock will not be redeemable prior
to July 7, 2000. On and after such date, the
Preferred Stock will be redeemable, in whole or
in part, at the option of the Company, at the
prices set forth herein, plus in each case
accrued and unpaid dividends to the redemption
date.

Ranking..................... The Preferred Stock will rank, with respect to
dividend rights and rights upon liquidation,
winding up or dissolution, senior to all classes
of the Company's common stock, on parity with
each other and any other series or class of stock
that may hereafter be created with the approval
of the holders of Preferred Stock that ranks on
parity with the Preferred Stock and junior to any
other series or class of stock that may hereafter
be created with the approval of the holders of
Preferred Stock that ranks senior to the
Preferred Stock.

Voting Rights............... The holders of Preferred Stock will not have any
voting rights, except as provided by applicable
law and except that, among other things, holders
will be entitled to vote together as a sepa- rate
class (with the holders of shares of any other
series of

preferred stock of the Company having similar
rights) to elect two directors of the Company if
the equivalent of six quarterly dividends payable
on the Preferred Stock are in arrears. In addi-
tion, so long as any Preferred Stock is
outstanding the Company will not, without the
affirmative vote or consent of the holders of at
least (a) 66 2/3% of all outstanding shares of
both series of Preferred Stock and outstanding
Parity Dividend Stock (as defined herein) (voting
as a single class), take certain actions so as
adversely to affect the relative rights,
preferences, qualifications, limitations, or
restrictions of either series of Preferred Stock,
authorize or issue, or increase the authorized
amount of any Senior Dividend Stock, Senior
Liquidation Stock (as such terms are defined
herein) or any security convertible into such
Senior Dividend Stock or Senior Liquidation Stock
or effect any reclassification of either series
of Preferred Stock or (b) a majority of all
outstanding shares of both series of Preferred
Stock and outstanding Parity Dividend Stock
(voting as a single class) authorize or issue or
increase the authorized amount of any additional
class of Parity Stock (as defined herein) or any
security convertible into such Parity Stock.

Each share of Preferred Stock will be entitled to
one vote on matters on which holders of such
shares are entitled to vote.

Federal Income Tax
Consequences............... There are certain Federal income tax consequences
associated with purchasing, holding and disposing
of the Preferred Stock, including the fact that
an exchange of the Series A Exchangeable
Preferred Stock for Notes or a redemption of
shares of Preferred Stock for cash will be a
taxable transaction and may be taxable as a
dividend. See "Certain Federal Income Tax
Consequences."

SUMMARY YEAR END FINANCIAL DATA

Year Ended December 31,
--------------------------------------------------------------------
1996 1996 1995(b) 1994(c) 1993 1992
------------ -------- -------- ------- ------- -------
Pro forma(a) Actual
------------ --------
(Dollars in millions, except per share amounts)

STATEMENT OF OPERATIONS
DATA:
Net sales.................. $1,607.7 $1,607.7 $1,432.0 $872.5 $760.5 $721.4
Cost of sales.............. 1,183.9 1,183.9 1,024.3 597.0 444.5 395.1
-------- -------- -------- ------ ------- -------
Gross profit............... 423.8 423.8 407.7 275.5 316.0 326.3
Selling general and
administrative expenses... 305.0 305.0 238.5 149.3 121.4 117.9
Amortization of intangibles
and other assets.......... 29.6 29.6 27.0 16.3 9.1 8.3
Restructuring and non-
recurring charges......... 23.0(d) 23.0(d) 65.0(e) -- -- --
Provision for settlements
and related expenses...... 185.0(d) 185.0(d) 10.0(e) -- -- 136.0(f)
-------- -------- -------- ------ ------- -------
Operating income (loss).... (118.8) (118.8) 67.2 109.9 185.5 64.1
Litigation settlement and
related expenses.......... -- -- -- (21.0)(g) -- --
Other gains and expenses,
net....................... -- -- -- -- 15.3(h) --
Net interest income
(expense)................. (57.2) (69.5) (64.1) (33.5) (9.7) (2.0)
-------- -------- -------- ------ ------- -------
Earnings (loss) before
income taxes and
extraordinary item........ (176.0) (188.3) 3.1 55.4 191.1 62.1
Provision for income
taxes..................... (29.9) (34.8) 7.1 25.3 78.4 21.5
-------- -------- -------- ------ ------- -------
Earnings (loss) before
extraordinary item........ (146.1) (153.5) (4.0) 30.1 112.7 40.6
Extraordinary item--loss on
early extinguishment of
debt, net(i).............. -- -- (8.3) -- -- --
-------- -------- -------- ------ ------- -------
Net earnings (loss)........ (146.1) (153.5) (12.3) 30.1 112.7 40.6
Less preferred stock
dividend.................. (43.2) -- -- -- -- --
-------- -------- -------- ------ ------- -------
Net earnings (loss)
applicable to common
shares.................... $ (189.3) $ (153.5) $ (12.3) $ 30.1 $ 112.7 $ 40.6
======== ======== ======== ====== ======= =======
Net earnings (loss) per
common share:
Primary
Before extraordinary
loss..................... (1.54) (1.25) (0.03) 0.36 $ 1.26 0.43
Extraordinary loss........ -- -- (0.08) -- -- --
-------- -------- -------- ------ ------- -------
Total................... $ (1.54) $ (1.25) $ (0.11) $ 0.36 $ 1.26 $ 0.43
======== ======== ======== ====== ======= =======
Fully Diluted
Before extraordinary
loss..................... (1.54) (1.25) (0.03) 0.36 $ 1.26 0.43
Extraordinary loss........ -- -- (0.08) -- -- --
-------- -------- -------- ------ ------- -------
Total................... $ (1.54) $ (1.25) $ (0.11) $ 0.36 $ 1.26 $ 0.43
======== ======== ======== ====== ======= =======
Dividends per common
share..................... $ -- $ -- $ -- $ 0.08 $ 0.32 $ 0.31
Weighted average common
shares outstanding
(in thousands)
Primary................... 122,920 122,920 110,579 84,754 89,439 94,468
======== ======== ======== ====== ======= =======
Fully diluted............. 307,696 122,920 110,579 84,754 89,439 94,468
======== ======== ======== ====== ======= =======

1996 1995(b) 1994(c) 1993 1992
------- ------- ------- ------ ------
Actual
-------
(Dollars in millions)

SUPPLEMENTAL DATA:
Net cash provided by (used in)
operating activities(j)...... $(186.8) $ 47.0 $ 14.7 $ 57.2 $102.4
Net cash used in investing
activities................... $ (59.1) $(115.0) $(293.6) $(95.7) $(36.3)
Net cash provided by (used in)
financing activities(j)...... $ 258.8 $ 57.6 $ 293.4 $ 17.4 $(84.0)
Bad debt expense.............. $ 81.4 $ 64.8 $ 29.5 $ 28.0 $ 32.1
Bad debt expense as a % of net
sales........................ 5.1 % 4.5 % 3.4 % 3.7 % 4.4 %
Capital expenditures.......... $ 54.1 $ 75.4 $ 48.9 $ 33.6 $ 34.9
EBITDA(k)..................... $ (34.3) $ 139.6 $ 154.3 $217.7 $ 91.0
EBITDA as a % of net
sales(k)..................... (2.1)% 9.7 % 17.7 % 28.6 % 12.6 %
Adjusted EBITDA(l)............ $ 173.7 $ 214.6 $ 154.3 $217.7 $227.0
Adjusted EBITDA as a % of net
sales(l)..................... 10.8 % 15.0 % 17.7 % 28.6 % 31.5 %
Ratio of earnings to combined
fixed charges and preferred
stock dividends(m)........... NM 1.04x 2.20x 10.16x 5.71x

As of December 31,
----------------------------------------
1996 1995(b) 1994(c) 1993 1992
-------- -------- -------- ------ ------
Actual
--------
(Dollars in millions)

BALANCE SHEET DATA:
Cash and cash equivalents............. $ 29.3 $ 16.4 $ 26.8 $ 12.3 $ 33.4
Working capital....................... 468.7 249.4 90.2 62.4 32.0
Total assets.......................... 1,917.0 1,837.2 1,012.7 585.5 477.4
Total debt(o)......................... 1,308.0 1,034.2 648.9 341.5 154.2
Total stockholders' equity............ 258.1 411.6 166.0 140.8 212.5

- --------
(a) The summary unaudited pro forma statement of operations data for the year
ended December 31, 1996 present the results of operations of the Company
assuming the Roche Loan, the Settlement Payment, the Rights Offering and
the application of the proceeds therefrom and effectiveness of the Amended
Credit Agreement had occurred as of the beginning of 1996. For a complete
description of the assumptions underlying the pro forma amounts, see
"Unaudited Pro Forma Financial Information."
(b) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 2 of the Notes to
Consolidated Financial Statements.
(c) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General" and Note 2 of
the Notes to Consolidated Financial Statements.
(d) In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the
restructuring of operations following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions.
In addition, the Company recorded $10.0 million in non-recurring charges in
the second quarter of 1996 related to the integration of its operations
following the Merger. See Note 3 of the Notes to Consolidated Financial
Statements. As a result of negotiations with the OIG and DOJ related to the
1996 Government Settlement, the Company recorded the Settlement Charge of
$185.0 million in the third quarter of 1996 to increase accruals for
settlements and related expenses of government and private claims resulting
from these investigations. See "Regulation and Reimbursement--1996
Government Settlement."
(e) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements. Also
in 1995, the Company recorded a pre-tax special charge of $10.0 million in
connection with the estimated costs of settling various claims pending
against the Company, substantially all of which were billing disputes with
various third party payors relating to the contention that NHL improperly
included tests for HDL cholesterol and serum ferritin in its basic test
profile without clearly offering an alternative profile that did not
include these medical tests. As of December 31, 1996, the majority of these
disputes have been settled.
(f) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement (as defined herein). See "Regulation and Reimbursement--OIG
Settlement--1992 NHL Government Settlement."
(g) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million plus expenses.
The litigation consisted of two consolidated class action suits filed in
December 1992 and November 1993 and a consolidated shareholder derivative
action brought in Federal and state courts in San Diego, California. The
settlement involved no admission of wrongdoing and all payments under the
settlement agreement have been paid.

(h) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's attempt
to purchase Damon Corporation, a competing independent clinical laboratory,
less related expenses and write-off of certain bank financing costs of $6.3
million.
(i) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities in connection with the Merger, the Company recorded an
extraordinary loss of approximately $13.5 million ($8.3 million, net of
tax), consisting of the write-off of deferred financing costs, related to
the early extinguishment of debt.
(j) The Company made the Settlement Payment in December 1996 with the proceeds
of the Roche Loan.
(k) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principles ("GAAP") (and should
not be considered as an indicator of operating performance or an
alternative to operating income or cash flow (as measured by GAAP)), as a
measure of liquidity, management believes it provides additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements. EBITDA
may not be comparable to other measures of liquidity and excludes
components of net income (loss) which are significant in understanding the
Company's financial performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(l) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization, extraordinary
items, a provision for settlements and related expenses, restructuring
charges and nonrecurring expenses. While Adjusted EBITDA is not intended to
represent cash flow from operations as defined by GAAP (and should not be
considered as an indicator of operating performance or an alternative to
operating income or cash flow (as measured by GAAP)), as a measure of
liquidity, management believes it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Adjusted EBITDA may
not be comparable to other measures of liquidity and excludes components of
net income (loss) which are significant in understanding the Company's
financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

(m) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income before
provision for income taxes and fixed charges and (ii) fixed charges consist
of interest expense and one-third of rental expense which is deemed
representative of an interest factor. For the year ended December 31, 1996,
earnings were insufficient to cover fixed charges and preferred stock
dividends by $188.3 million. For the year ended December 31, 1996, pro
forma earnings would have been insufficient to cover combined fixed charges
and preferred stock dividends by $227.8 million.
(n) The summary unaudited pro forma consolidated balance sheet data as of
December 31, 1996 presents the financial position of the Company adjusted
to give pro forma effect to the Roche Loan, the Settlement Payment, the
Rights Offering and the application of the proceeds therefrom and
effectiveness of the Amended Credit Agreement. For a complete description
of the assumptions underlying the pro forma amounts, see "Unaudited Pro
Forma Financial Information."
(o) Total debt includes a capital lease obligation of $9.8 million, $9.6
million, $9.8 million, $9.7 million and $9.6 million at December 31, 1996,
1995, 1994, 1993 and 1992, respectively. Total debt also includes the
expected value of future contractual and contingent amounts to be paid to
the principals of acquired laboratories. Such payments are principally
based on a percentage of future revenues derived from the acquired customer
lists or specified amounts to be paid over a period of time. At December
31, 1996, 1995, 1994, 1993 and 1992, such amounts were $27.7 million, $23.3
million, $35.1 million, $26.8 million and $4.6 million, respectively. In
December 1996, the Company received a loan of $187 million from Roche
Holdings to fund the Settlement Payment. Such loan bears interest at a rate
of 6.625% per annum and matures on March 31, 1998.

SUMMARY INTERIM FINANCIAL DATA

Three months ended March 31,
------------------------------------
1997 1997 1996
----------- ------------- ----------
Proforma(a) Actual
----------- -------------
(Dollars in millions, except per
share amounts)

STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 391.5 $ 391.5 $ 403.9
Cost of sales............................. 277.2 277.2 303.3
------- ---------- ----------
Gross profit.............................. 114.3 114.3 100.6
Selling, general and administrative
expenses................................. 78.9 78.9 65.5
Amortization of intangibles and other
assets................................... 7.6 7.6 7.3
------- ---------- ----------
Operating income.......................... 27.8 27.8 27.8
Net interest income (expense)............. (14.6) (21.9) (16.0)
------- ---------- ----------
Earnings before income taxes.............. 13.2 5.9 11.8
Provision for income taxes................ 6.4 3.5 5.9
------- ---------- ----------
Net earnings.............................. 6.8 2.4 5.9
Less preferred stock dividend............. (10.6) -- --
------- ---------- ----------
Net (loss) earnings applicable to common
shares................................... $ (3.8) $ 2.4 $ 5.9
======= ========== ==========
Net (loss) earnings per common share:
Primary................................. $ (0.03) $ 0.02 $ 0.05
======= ========== ==========
Fully Diluted........................... $ (0.03) $ 0.02 $ 0.05
======= ========== ==========
Dividends per common share................ $ -- $ -- $ --
======= ========== ==========
Weighted average common shares outstanding
(in thousands)
Primary................................. 122,935 122,935 122,909
Fully Diluted........................... 304,753 122,935 122,909

1997 1996
------------- ----------
Actual
------------------------
(Dollars in millions)

SUPPLEMENTAL DATA:
Net cash provided by operating activities............. 10.4 19.2
Net cash used in investing activities................. (3.1) (18.1)
Net cash used in financing activities................. (7.1) (1.8)
Bad debt expense...................................... 22.9 15.4
Bad debt expense as a % of net sales.................. 5.8% 3.8%
Capital expenditures.................................. 3.1 14.9
EBITDA(b)............................................. 49.3 48.4
EBITDA as % of net sales.............................. 12.6% 12.0%
Ratio of earnings to combined fixed charges and
preferred stock dividends(c)......................... 1.21x 1.52x

As of March 31,
------------------------
1997 1997
------------- ----------
Proforma(d) Actual
------------- ----------
(Dollars in millions)

BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 29.5 $ 29.5
Working capital....................................... 502.2 179.7
Total assets.......................................... 1,911.9 1,911.9
Total debt(e)......................................... 819.2 1,300.5
Total stockholders' equity............................ 246.0 260.5

- --------

(a) The summary unaudited pro forma statement of operations data for the three
months ended March 31, 1997 presents the results of operations of the
Company assuming the Roche Loan, the Settlement Payment, the Rights
Offering and the application of the proceeds therefrom and effectiveness of
the Amended Credit Agreement had occurred as of the beginning of 1997. For
a complete description of the assumptions underlying the pro forma amounts,
see "Unaudited Pro Forma Financial Information."

(b) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from operations
as defined by GAAP (and should not be considered as an indicator of
operating performance or an alternative to operating income or cash flow
(as measured by GAAP)), as a measure of liquidity, management believes it
provides additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA may not be comparable to other measures of liquidity
and excludes components of net income (loss) which are significant in
understanding the Company's financial performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

(c) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income before
provision for income taxes and fixed charges and (ii) fixed charges consist
of interest expense and one-third of rental expense which is deemed
representative of an interest factor. For the three months ended March 31,
1997, pro forma earnings would have been insufficient to cover combined
fixed charges and preferred stock dividends by $7.4 million.

(d) The summary unaudited pro forma consolidated balance sheet data as of March
31, 1997 presents the financial position of the Company adjusted to give
pro forma effect to the Roche Loan, the Settlement Payment, the Rights
Offering and the application of the proceeds therefrom and effectiveness of
the Amended Credit Agreement. For a complete description of the assumptions
underlying the pro forma amounts, see "Unaudited Pro Forma Financial
Information."

(e) Total debt includes a capital lease obligation of $9.8 million, at March
31, 1997. Total debt also includes the expected value of future contractual
and contingent amounts to be paid to the principals of acquired
laboratories. Such payments are principally based on a percentage of future
revenues derived from the acquired customer lists or specified amounts to
be paid over a period of time. At March 31, 1997, such amounts were $25.9
million. In December 1996, the Company received a loan of $187 million from
Roche Holdings to fund the Settlement Payment. Such loan bears interest at
a rate of 6.625% per annum and matures on March 31, 1998.

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
securities offered hereby.

SUBSTANTIAL LEVERAGE. Following the Rights Offering, the Company will
continue to be highly leveraged. As of March 31, 1997, after giving pro forma
effect to the Rights Offering and the application of the proceeds therefrom,
the Company would have had total indebtedness of $819.2 million and
stockholders' equity of $246.0 million. For the three months ended March 31,
1997 and for the year ended December 31, 1996, pro forma earnings would have
been insufficient to cover combined fixed charges and preferred stock
dividends by $7.4 million and $227.8 million, respectively. Pro forma net
interest expense for the three months ended March 31, 1997 and for the fiscal
year ended December 31, 1996 would have been $14.6 million and $57.2 million,
respectively. The Company may incur additional indebtedness in the future,
including as a result of the exchange of the Series A Exchangeable Preferred
Stock for Notes, subject to limitations imposed by the Amended Credit
Agreement. See "Capitalization" and "Unaudited Pro Forma Financial
Statements." As a result of potential defaults under the Existing Credit
Agreement resulting from, among other things, the Company's performance and
higher than projected debt levels, the Settlement Charge and the Roche Loan,
the Company has entered into various amendments and obtained waivers of
certain covenants thereunder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Borrowings under the Company's
revolving credit facility of $450.0 million (the "Revolving Credit Facility")
under the Existing Credit Agreement were $384.0 million as of March 31, 1997.
Cash and cash equivalents on hand, cash flow from operations and additional
borrowing capabilities of $66.0 million as of March 31, 1997 under the
Revolving Credit Facility are expected to be sufficient to meet anticipated
operating requirements and provide funds for capital expenditures and working
capital through 1997. The Company's ability to meet anticipated operating
requirements, debt repayments, including the Roche Loan which matures on March
31, 1998, and other anticipated cash outlays beyond 1997 is substantially
dependent upon the completion of the Rights Offering. Failure to complete the
Rights Offering by the end of February 1998 will require additional waivers or
amendments to the Existing Credit Agreement and an extension of the Roche
Loan. There can be no assurance that such waivers or amendments or extension
can be obtained. Therefore, the failure to complete the Rights Offering by the
end of February 1998 could have a material adverse effect on the Company's
financial condition and liquidity.

The level of the Company's indebtedness could have important consequences to
holders of the Company's securities, including but not limited to the
following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital and capital expenditures
could be limited; (iii) the Company may be more vulnerable to extended
economic downturns and may be restricted in exploiting business opportunities;
(iv) the Amended Credit Agreement contains financial and restrictive covenants
that limit the ability of the Company to, among other things, borrow
additional funds, dispose of assets, pay cash dividends in the event of a
default, including dividends on the Preferred Stock and pay interest on the
Notes, and failure by the Company to comply with such covenants could result
in an event of default which, if not cured or waived, could have a material
adverse effect on the Company and (v) the Company's level of indebtedness
could limit its flexibility in planning for, or reacting to, changes in market
conditions, including adverse governmental regulations (including reductions
in the amounts reimbursable to the Company under Medicare and Medicaid). See
"--Limitations on Third Party Payor Reimbursement of Health Care Costs." In
addition, pursuant to the terms of the Preferred Stock, if dividends on the
Series A Exchangeable Preferred Stock were to be limited pursuant to the
Amended Credit Agreement prior to June 30, 2003, the Company's ability to pay
dividends in kind on the Series B PIK Preferred Stock would also be limited.
Furthermore, the ability of the Company to satisfy its obligations will be
dependent upon its future performance and market conditions, which will be
subject to prevailing economic conditions and to financial, business and other
factors, including factors beyond the Company's control. In addition, because
the borrowings outstanding under the Amended

Credit Agreement bear interest at a floating rate, the Company's financial
performance may be adversely affected by increases in interest rates. The
Amended Credit Agreement provides that in the event of a reduction of the
percentage of Common Stock held by Roche Holdings and its affiliates (other
than the Company and its subsidiaries) below 25%, the applicable interest
margins and facility fees on borrowings outstanding under the Amended Credit
Agreement will increase. The amount of the increase will depend, in part, on
the leverage ratio of the Company at the time of such reduction. In addition,
pursuant to the Amended Credit Agreement, the applicable interest margins on
borrowings outstanding thereunder are based upon the leverage ratio. See
"Description of Amended Credit Agreement".

In addition, Notes issued upon exchange of the Preferred Stock will be
subordinated to all Senior Indebtedness. Following the Rights Offering,
approximately $802.8 million of Senior Indebtedness will be outstanding. There
will be no restrictions on the creation of Senior Indebtedness in the
Indenture.

LIMITATIONS ON THIRD PARTY PAYOR REIMBURSEMENT OF HEALTH CARE COSTS. The
health care industry is undergoing significant change as third party payors,
such as Medicare and Medicaid and insurers, increase their efforts to control
the cost of health care services. During the year ended December 31, 1996, the
Company derived approximately 18% and 5% of its net revenues from tests
performed for beneficiaries of Medicare and Medicaid programs, respectively.
The Company's business depends significantly on continued participation in
these programs and the Company is required by law to accept reimbursement from
Medicare and Medicaid as payment in full for covered tests performed for
Medicare and Medicaid beneficiaries. In an effort to address the problem of
increasing health care costs, legislation has been proposed at both Federal and
state levels to further regulate health care delivery in general and clinical
laboratories in particular and legislation has been enacted that reduces the
amounts reimbursable to the Company and other independent clinical laboratories
under Medicare and Medicaid, the levels of which have declined steadily since
1984. See "Regulation and Reimbursement--General--Regulation Affecting
Reimbursement of Clinical Laboratory Services." Such reductions have negatively
impacted the Company's net sales, cost of sales as a percentage of net sales
and selling, general and administrative expenses as a percentage of net sales.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Congress passed a bill (the Medicare Preservation Act) that would
have further reduced the amounts reimbursable to the Company and other clinical
laboratories, but the bill was vetoed by the President. In addition, 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. HCFA
retains the authority to expand in the future the list of tests included in a
panel. 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 commonly ordered tests. The Company has incurred and expects to
continue to incur additional reimbursement reductions and additional costs
associated with the implementation of these requirements of HCFA and Medicare
carriers. These and other proposed changes affecting the reimbursement policy
of Medicare and Medicaid programs could have a material adverse effect on the
business, results of operations or financial condition of the Company. In
particular, the Company has experienced lower collection rates beginning in the
second quarter of 1996 as a result of these more stringent medical necessity
requirements. See "--Collection Rates from Third Party Payors."

COLLECTION RATES FROM THIRD PARTY PAYORS. During the fourth quarter of 1995
and the second quarter of 1996, the Company recorded pre-tax special charges of
$15.0 million and $10.0 million, respectively, based on the Company's
determination that additional reserves were needed to cover potentially lower
collection rates from several third-party payors. In addition, the Company
increased its monthly provision for doubtful accounts beginning in the third
quarter of 1996. Increased medical necessity and related diagnosis code
requirements of the Medicare program were placed on the Company by certain

third party carriers in late 1995 and additional requirements were placed on
the Company at the beginning of 1996. The Company expects accounts receivable
balances to continue to exceed 1995 levels as a result of these more stringent
requirements. In addition, increased difficulty in collecting amounts due from
private insurance including certain managed care plans has negatively impacted
operating cash flow. Finally, Merger related integration issues have also
resulted in increased accounts receivable balances as a result of the Company
maintaining multiple billing information systems. Although the Company
currently has plans in place to improve the collection of accounts receivable
and stabilize collection rates, to date, collection rates continue to decline
despite these measures. Moreover, additional changes in requirements of third-
party payors could increase the difficulties in collections. There can be no
assurance that such trends will be reversed or that additional reserves will
not be required. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

ROLE OF MANAGED CARE. Managed care organizations play a significant role in
the health care industry and their role is expected to increase over the next
several years. Managed care organizations typically negotiate capitated
payment contracts, whereby a clinical laboratory receives a fixed monthly fee
per covered individual, regardless of the number or cost of tests performed
per covered individual and regardless of the number or cost of tests performed
during the month (excluding certain tests, such as esoteric tests and anatomic
pathology services). Laboratory services agreements with managed care
organizations have historically been priced aggressively due to competitive
pressure and the expectation that a laboratory would capture not only the
volume of testing to be covered under the contract, but also the additional
fee-for-services 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 increase in managed care has also
resulted in declines in the utilization of laboratory testing services. See
"Business-- Clients and Payors" and "Business--The Clinical Laboratory Testing
Industry." During the year ended December 31, 1996, services to managed care
organizations under capitated rate agreements accounted for approximately 4%
of the Company's net revenues from clinical laboratory testing and
approximately 10% of the volume of specimens or accessions tested by the
Company. As discussed below, the Company has begun an active effort to improve
the profitability of new and existing business. The Company has experienced
some volume declines as a result of this effort, however, the first quarter of
1997 was the first quarter in two years that the Company's price per accession
or specimen increased versus the comparable prior year quarter. There can be
no assurance however of the timing or success of such measures or that the
Company will not lose market share to other clinical laboratories who continue
to aggressively price laboratory services agreements with managed care
organizations. In addition, despite such efforts, the Company may experience
declines in per test revenue as managed care organizations continue to
increase their share of the health care insurance market.

IMPLEMENTATION OF NEW BUSINESS STRATEGY. During the third quarter of 1996,
management began implementing a new business strategy in response to the
Company's declining performance. See "Business--Strategy." Management believes
this new business strategy may result in lower volumes as a result of
selectively repricing or discontinuing business with existing accounts which
perform below Company expectations. However, management also believes that
such measures along with other cost reduction programs will improve the
Company's overall profitability. The Company's future results and financial
condition are dependent on the successful implementation of this new business
strategy. While the Company believes that this strategy will enable it to
improve its financial results, there can be no assurance that this new
strategy will be successful, that the anticipated benefits of this new
strategy will be realized, that management will be able to implement such
strategy on a timely basis, that the Company will return to profitability
levels experienced prior to 1995 or that losses will not continue in the
future.

RECENT OPERATING LOSSES. Following the Merger, the Company experienced a loss
in 1995 and 1996. While such losses are largely attributable to costs incurred
in connection with the Merger, the related restructuring described below and
the Settlement Charge, there can be no assurance that losses will not continue
in the future. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Result of Operations." As a
result, the Company had an accumulated deficit of $0.6 million and $154.1
million as of December 31, 1995 and December 31, 1996, respectively.

RECENT RESTRUCTURING. In connection with the Merger, the Company recorded a
second quarter pre-tax special charge of $65.0 million in 1995 and $23.0
million in 1996 relating to the restructuring and integration of its operations
following the Merger. In addition, in the second quarter of 1995, the Company
had an extraordinary loss of $8.3 million, net of taxes, related to early
extinguishment of debt in connection with the Merger. While the Company
believes that these charges should be sufficient to cover all expenses
associated with the Merger and related restructuring, in the event such costs
are higher than anticipated, or additional restructuring charges are taken,
either in connection with the Merger or otherwise, this could have a material
adverse effect on the Company's results of operations or financial condition.

INTENSE COMPETITION. The independent clinical laboratory industry in the
United States is intensely competitive. 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 in 1996
approximately 50% of the revenues of the clinical laboratory testing industry
were generated by hospital-affiliated laboratories, approximately 35% by
independent clinical laboratories and 15% by thousands of individual physicians
in their offices and laboratories. Independent clinical laboratories fall into
two separate categories: (1) smaller, generally local, laboratories that
generally offer fewer tests and services and have less capital than the larger
laboratories, and (2) larger laboratories such as the Company that provide a
broader range of tests and services. The Company has two major competitors that
operate in the national market--SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline") and Quest Diagnostics Incorporated, formally known as Corning
Clinical Laboratories ("Quest"). There are also many independent clinical
laboratories that operate regionally and that compete with the Company in these
regions. In addition, hospitals are in general both competitors and clients of
independent clinical laboratories. The independent clinical laboratory testing
industry has experienced intense price competition over the past several years,
which has negatively impacted the Company's profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
There can be no assurance that the Company will be able to compete successfully
with its existing or any new competitors or that competitive pressures faced by
the Company will not materially and adversely affect its results of operations
or financial condition. See "Business Competition."

GOVERNMENTAL REGULATION. The clinical laboratory industry is subject to
significant governmental regulation at the Federal, state and local levels. The
Company's laboratories are required to be certified or licensed under the
Clinical Laboratory Improvement Act of 1967 and the Clinical Laboratory
Improvement Amendments of 1988 (collectively, as amended, "CLIA"), and approved
to participate in the Medicare and Medicaid programs. Currently, all clinical
laboratories, including most physician-office laboratories ("POLs"), are
required to comply with CLIA. However, the Medicare Preservation Act, passed in
1995 by both Houses of Congress, would have largely exempted POLs from having
to comply with CLIA (except with respect to pap smear tests). Although this
provision was not maintained by the House Senate conference and was not
included in the subsequent legislation, it could be reintroduced at any time.
The exemption of POLs from CLIA would significantly reduce their costs, making
them more financially viable and a greater competitive challenge to the Company
and would more likely encourage physicians to establish laboratories in their
offices.

A wide array of Medicare/Medicaid fraud and abuse provisions apply to
clinical laboratories participating in such programs. Penalties for violations
of these Federal laws include exclusion from participation in the
Medicare/Medicaid programs, asset forfeitures and other civil and criminal
penalties. Civil penalties for a wide range of offenses may be up to $10,000
per item plus three times the amount claimed. In the case of certain offenses,
exclusion from participation in Medicare and Medicaid is a mandatory
administrative penalty. The OIG interprets these fraud and abuse
administrative provisions liberally and enforces them aggressively. Provisions
in a bill enacted in August 1996 are likely to expand the Federal government's
involvement in curtailing fraud and abuse due to the establishment of (i) an
anti-fraud and abuse trust fund funded through the collection of penalties and
fines for violations of such laws and (ii) a health care anti-fraud and abuse
task force. As part of an examination of the rapid growth of Federal
expenditures for clinical laboratory services, several Federal agencies,
including the Federal Bureau of Investigation, the OIG and the DOJ, have
investigated allegations of fraudulent and abusive conduct by health care
providers. On November 21, 1996, the Company reached a settlement with the OIG
and the DOJ regarding the prior billing practices of various of its
predecessor companies. Consistent with this overall settlement, the Company
paid $187 million to the Federal Government in December 1996 with proceeds
from a loan from Roche Holdings. Additional investigations by the OIG in 1992
and 1994 were settled for $111.4 million in 1992 and $4.9 million in 1995,
respectively. See "Regulation and Reimbursement--OIG Investigations."

The Company is also subject to licensing and regulation under Federal, state
and local laws and regulations relating to the protection of the environment
and human health and safety, including those relating to the handling,
transportation and disposal of medical specimens, infectious and hazardous
waste and radioactive materials as well as to the safety and health of
laboratory employees. The sanction for failure to comply with these
regulations may be denial of the right to conduct business, significant fines
and criminal penalties. The loss of a license, imposition of a fine,
incurrence of liability under, 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 and its
subsidiaries.

PROFESSIONAL LIABILITY LITIGATION. As a general matter, providers of
clinical laboratory testing services may be subject to lawsuits alleging
negligence or other similar legal claims, which suits could involve claims for
substantial damages. Damages assessed in connection with, and the costs of
defending any such actions could be substantial. Litigation could also have an
adverse impact on the Company's client base. The Company maintains liability
insurance (subject to maximum limits and self-insured retentions) for
professional liability claims. This insurance does not cover liability for the
Settlement Payment. While there can be no assurance, the Company's management
believes that the levels of coverage 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.

NO ASSURANCE OF DIVIDENDS-RECEIVED DEDUCTION. There is no assurance that the
Company will have earnings and profits for Federal income tax purposes.
Dividends paid to corporate holders that are in excess of the Company's
earnings and profits would not qualify for the intercorporate dividends-
received deduction. See "Certain Federal Income Tax Consequences."

SUBSTANTIAL STOCKHOLDER; ABILITY OF SUBSTANTIAL STOCKHOLDER TO INCREASE
OWNERSHIP. As a result of the Merger, HLR and Roche Holdings received 49.9% of
the total outstanding Common Stock of the Company. In connection with the
Merger, the Company, HLR, Roche Holdings and Hoffmann--La Roche Inc. entered
into the Stockholder Agreement. In December of 1996, HLR was merged with and
into Hoffmann La-Roche Inc. and the Common Stock held by HLR subsequently
transferred from Hoffmann La-Roche Inc. to Roche Holdings. As a result of its
ownership interest and its rights under the Stockholder Agreement, Roche
Holdings is able to exercise significant influence on the governance of the
Company

and on the composition of its board of directors. Pursuant to the Stockholder
Agreement, the Board of Directors of the Company (subject to specified
exceptions) is comprised of seven members, consisting of three designees of
Roche Holdings (the "Roche Directors") and four Independent Directors (as
defined therein) nominated by the Nominating Committee of the board of
directors. The Nominating Committee consists of one Roche Director and two
Independent Directors and acts by a majority vote of the entire committee.
There can be no assurance that the interests of Roche Holdings will be the same
as those of the other stockholders of the Company. Pursuant to the Stockholder
Agreement, Roche Holdings and its affiliates (other than the Company and its
subsidiaries) have the right to acquire Equity Securities (as defined therein)
to the extent that, after giving effect thereto, their Total Voting Power would
not exceed 75%. Moreover, Roche Holdings and its affiliates (other than the
Company and its subsidiaries) may acquire additional Equity Securities
notwithstanding the fact that after giving effect thereto, their Total Voting
Power would exceed 75%, if Roche Holdings and its affiliates (other than the
Company and its subsidiaries) or any one of them offers, prior to consummation
of such purchase, to purchase all outstanding Equity Securities and holders of
Equity Securities totaling more than 50% of the outstanding Equity Securities
(excluding Equity Securities held by Roche Holdings and its affiliates (other
than the Company and its subsidiaries)) accept such offer. After the third
anniversary of the Merger, the Stockholder Agreement does not restrict
purchases by Roche Holdings or its affiliates of Equity Securities. Certain
provisions of the Stockholder Agreement described above, including provisions
limiting Roche Holding's representation on the Board of Directors of the
Company to three of seven members, would be suspended if the Total Voting Power
of Roche Holdings and its affiliates (other than the Company and its
subsidiaries) were to be increased to over 50%. Roche Holdings has indicated
that it intends to exercise its Basic Subscription Privilege and
Oversubscription Privilege in the Rights Offering in full for Series B PIK
Preferred Stock (subject, in the case of the Oversubscription Privilege, to
reduction in certain circumstances). As a result, if no other Rights are
exercised, Roche Holdings will purchase 10,000,000 shares of Series B PIK
Preferred Stock. Consequently, following conversion of all of the Preferred
Stock, Roche Holdings will own a minimum of 49.9% and a maximum of
approximately 85% of the total outstanding Common Stock of the Company. See
"Certain Relationships and Related Transactions--The Stockholder Agreement." In
addition, as Roche Holdings will own a minimum of 49.9% of the Preferred Stock,
it will be in a position to exert significant influence on any matter on which
the Preferred Stock is entitled to vote. See "Description of Preferred Stock--
Voting Rights."

SPECIAL MAJORITY BOARD APPROVAL REQUIRED FOR CERTAIN ACTIONS. Under the
Stockholder Agreement, for so long as the Total Voting Power of Roche Holdings
and its affiliates (other than the Company and its subsidiaries) or any one of
them is at least 30%, a significant number of types of major corporate actions
cannot be taken without the approval of a Special Majority of the Board of
Directors (which is defined in the Stockholder Agreement as a majority of the
entire Board of Directors that includes a majority of the Roche Directors and
at least one Independent Director). These actions include, among others,
certain executive officer appointments, certain business combinations,
acquisitions or sales of assets, amendments to the Company's Certificate of
Incorporation or by-laws, settlements of material litigation, changes in Board
or committee composition, material capital expenditures, issuance of securities
and incurrence of indebtedness.

EQUITY MARKET CONSIDERATIONS. There can be no assurance that the market price
of the Common Stock will not decline during or after the subscription period or
that, following the issuance of the Rights and the sale of the Preferred Stock
upon exercise of Rights, a subscribing Rights Holder will be able to sell
shares purchased in the Rights Offering at a price greater than the
Subscription Price. The election of a Rights Holder to exercise Rights in the
Rights Offering is irrevocable. Moreover, until certificates are delivered,
subscribing Rights Holders may not be able to sell the Preferred Stock that
they have purchased in the Rights Offering. In addition, the Company reserves
the right to extend the period for the Rights Offering to a date not later than
July 16, 1997. Certificates representing shares of Preferred Stock purchased in
the Rights Offering will be delivered as soon as practicable after the
Expiration Date. There can be no assurance that the market price of the
Preferred Stock purchased pursuant to the Rights

Offering will not decline below the Subscription Price before the certificates
representing such shares have been delivered. No interest will be paid to any
subscriber in the Rights Offering.

NO PRIOR MARKET FOR THE RIGHTS, THE PREFERRED STOCK OR THE NOTES. The
Rights, Series A Exchangeable Preferred Stock and Series B PIK Preferred Stock
constitute new issues of securities with no established trading market.
Application has been made to have the Preferred Stock approved for listing on
the New York Stock Exchange. It is unlikely, however, that the Series B PIK
Preferred Stock will be accepted for listing on the NYSE as it is expected
that following the Rights Offering the Series B PIK Preferred Stock will be
held by fewer than 100 holders. In addition, there can be no assurance that an
active market for the Rights or the Series A Exchangeable Preferred Stock will
develop or be sustained in the future on the New York Stock Exchange. Although
Credit Suisse First Boston has indicated to the Company that it intends to
make a market in the Rights, and, following the Rights Offering, the Preferred
Stock, as permitted by applicable laws and regulations, it is not obligated to
do so and may discontinue any such market-making at any time without notice.
Accordingly, no assurance can be given as to the liquidity of, or trading
market for, the Rights or the Preferred Stock, particularly the Series B PIK
Preferred Stock.

There is currently no market for the Notes. The Company does not intend to
apply for listing of the Notes on any national securities exchange. The
Company has been advised by Credit Suisse First Boston that, following
exchange of the Series A Exchangeable Preferred Stock for Notes, they
presently intend to make a market in the Notes although they are under no
obligation to do so and may discontinue market-making activities at any time
without notice. Accordingly, there can be no assurance as to whether an active
public market for the Notes will develop or, if a public market develops, as
to the liquidity of the trading market for the Notes.

INSUFFICIENT AUTHORIZED CAPITAL TO PERMIT CONVERSION AND PAYMENT OF
DIVIDENDS ON SERIES B PIK PREFERRED STOCK; DILUTION. There are currently
insufficient shares of Common Stock authorized to permit conversion of all of
the Preferred Stock issued upon the exercise of Rights or as dividends on the
Series B PIK Preferred Stock and insufficient shares of Preferred Stock
authorized to permit the payment of dividends on the Series B PIK Preferred
Stock. In connection with the next annual meeting of shareholders, the Board
of Directors will propose amending the Company's Certificate of Incorporation
to increase (i) the authorized number of shares of Common Stock to permit the
conversion of all of the Preferred Stock and the Notes, if applicable and (ii)
the authorized number of shares of Preferred Stock to permit the payment of
dividends on the Series B PIK Preferred Stock. Roche Holdings and the
directors and executive officers of the Company have indicated to the Company
that they intend to vote in favor of such amendment. Rights Holders may
experience dilution of their percentage of equity ownership interest and
voting power in the Company if and when all of the shares of Preferred Stock
are converted into shares of Common Stock in accordance with their terms, if
they do not exercise the Basic Subscription Privilege. Even if the Rights
Holders exercise their Basic Subscription Privilege in full, they may
nevertheless still experience dilution in their voting rights and in their
proportional interest in any future net earnings of the Company if other
holders of Rights exercise the Oversubscription Privilege and such Rights
Holders elect not to exercise the Oversubscription Privilege, if and when all
of the shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms. In addition, Rights Holders who exercise Rights
for Series A Exchangeable Preferred Stock will experience dilution as
dividends on the Series B PIK Preferred Stock will be paid in shares of Series
B PIK Preferred Stock until June 30, 2003.

SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE. In accordance with the
Sharing and Call Option Agreement dated as of December 13, 1994 (the "Sharing
and Call Option Agreement") among HLR, Mafco Holdings Inc. ("Mafco"), all of
the capital stock of which is owned by Mr. Ronald O. Perelman, and National
Healthcare Group, Inc., ("NHCG"), a wholly owned subsidiary of Mafco, the
Company has filed with the Commission a registration statement on Form S-3
which has been declared effective by the Commission and includes a resale
prospectus that permits NHCG (or any of its pledgees)

to sell shares of Common Stock and Warrants received by NHCG in the Merger
without restriction. Moreover, pursuant to the Stockholder Agreement and the
Sharing and Call Option Agreement, Roche Holdings and NHCG have been granted
demand and piggy-back registration rights with respect to the shares of Common
Stock owned by them. In addition, in connection with the Rights Offering, the
Company will grant to each Rights Holder (including Roche Holdings) who upon
consummation of the Rights Offering beneficially owns Preferred Stock
convertible into 10% or more of the Common Stock outstanding, and who certifies
as such, registration rights with respect to such Common Stock on the same
terms as those granted to Roche Holdings pursuant to the Stockholder Agreement.
Roche Holdings on the one hand and NHCG on the other hand currently own 49.9%
and 11.8%, respectively, of the outstanding Common Stock of the Company.
Although the Company cannot make any prediction as to the effect, if any, that
sales in the public market of shares of Common Stock owned by Roche Holdings
and NHCG would have on the market price for the Preferred Stock or Common Stock
prevailing from time to time, sales of substantial amounts of Common Stock or
the availability of such shares for sale could adversely affect prevailing
market prices.

VOLATILITY OF PRICE OF COMMON STOCK. The market price of the Company's Common
Stock has been highly volatile in recent years and on January 7, 1997 reached a
52-week low of $2 1/2. Factors such as quarter-to-quarter variations in the
Company's revenues and earnings have caused and are expected to continue to
cause the market price of the Company's securities to fluctuate significantly.
In addition, in recent years the stock markets have experienced significant
volatility, which often may be unrelated to the operating performance of the
affected companies. Such volatility may also adversely affect the market price
of the Company's securities. See "Common Stock Price Range."

FORWARD LOOKING STATEMENTS

This Prospectus contains certain forward looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, forward looking statements regarding the Company's expectation
of future performance following implementation of its new business strategy,
consummation of the Rights Offering and effectiveness of the Amended Credit
Agreement. Such statements are subject to various risks and uncertainties.
Actual results could differ materially from those currently anticipated due to
a number of factors, including those identified under "Risk Factors," under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus.

USE OF PROCEEDS

The gross proceeds of the Rights Offering will be used to (i) repay
approximately $294 million outstanding under the Existing Credit Agreement
which bears interest at LIBOR plus 1.0% per annum, (ii) pay fees and expenses
of approximately $13 million related to the Rights Offering and (iii) repay
the $187 million loan from Roche Holdings in order to fund the Settlement
Payment, which bears interest at 6.625% per annum and matures on March 31,
1998 plus accrued interest thereon of approximately $6 million.

COMMON STOCK PRICE RANGE

The Company's Common Stock is traded publicly on the New York Stock Exchange
under the symbol "LH." The following table sets forth for the calendar periods
indicated the high and low sales prices for the Common Stock reported on the
NYSE Composite Tape.

High Low
------ ------

1995
First Quarter................................................... 15 1/2 12 5/8
Second Quarter.................................................. 15 1/4 11 3/4
Third Quarter................................................... 14 9 1/8
Fourth Quarter.................................................. 10 8 1/8
1996
First Quarter................................................... 9 3/8 7 1/4
Second Quarter.................................................. 9 7 3/8
Third Quarter................................................... 7 5/8 3 1/4
Fourth Quarter.................................................. 3 7/8 2 3/8
1997
First Quarter................................................... 4 2 1/2
Second Quarter (through May 14, 1997)........................... 3 3/8 2 3/4

On May 1, 1997 there were approximately 959 holders of record of the Common
Stock.

DIVIDEND POLICY

In connection with the Allied Acquisition in June 1994, the Company
discontinued its dividend payments for the foreseeable future. The Amended
Credit Agreement will expressly permit cash dividends including cash dividends
on the Preferred Stock in the absence of a default. However, pursuant to the
terms of the Preferred Stock, if dividends on the Series A Exchangeable
Preferred Stock were to be limited pursuant to the Amended Credit Agreement
prior to June 30, 2003, the Company's ability to pay dividends in kind on the
Series B PIK Preferred Stock would also be limited.

CAPITALIZATION

The following table sets forth as of March 31, 1997, (i) the cash and cash
equivalents and total capitalization of the Company and (ii) cash and cash
equivalents and total capitalization, adjusted to give pro forma effect to the
Rights Offering, the execution of the Amended Credit Agreement, the Roche Loan
and the Settlement Payment. The proceeds of the Rights Offering are assumed to
be applied as set forth under "Use of Proceeds." See also "Unaudited Pro Forma
Financial Statements." This table should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere and
incorporated by reference herein.

As of March 31, 1997
---------------------
Actual As Adjusted
-------- -----------
(in millions)

Cash and cash equivalents................................ $ 29.5 $ 29.5
======== ========
Short-term debt:
Current portion of long-term debt(1)................... $ 131.3 $ --
Current portion of acquisition contingent payments..... 11.8 11.8
Loan from affiliate(2)................................. 187.0 --
-------- --------
Total short-term debt................................ 330.1 11.8
Long-term debt:
Revolving credit facility.............................. 384.0 139.7
Long-term debt, less current portion................... 562.5 643.8
Capital lease obligations.............................. 9.8 9.8
Acquisition contingent payments, less current portion.. 14.1 14.1
-------- --------
Total long-term debt................................. 970.4 807.4
Mandatorily redeemable preferred stock, $0.10 par value,
10,000,000 shares authorized, none issued and
outstanding actual; 10,000,000 shares issued and
outstanding as adjusted(3).............................. -- 500.0
Stockholders' equity:
Common stock, par value $0.01 per share, 220,000,000
shares authorized; 122,935,080 shares issued and
outstanding(3)........................................ 1.2 1.2
Additional paid-in capital............................... 411.0 411.0
Accumulated deficit(4)................................... (151.7) (166.2)
-------- --------
Total stockholders' equity........................... 260.5 246.0
-------- --------
Total capitalization................................. $1,561.0 $1,565.2
======== ========

- --------

(1) In accordance with the Amended Credit Agreement, which will become
effective upon completion of the Rights Offering, the amortization
schedule for the Amended Term Loan Facility does not require debt
repayments in 1997 or 1998.
(2) In December 1996, the Company received a loan of $187 million from Roche
Holdings to fund the Settlement Payment.

(3) There are currently insufficient shares of Common Stock authorized to
permit conversion of all of the Preferred Stock issued upon the exercise
of Rights or as dividends on the Series B PIK Preferred Stock and
insufficient shares of Preferred Stock authorized to permit the payment of
dividends on the Series B PIK Preferred Stock. In connection with the next
annual meeting of shareholders, the Board of Directors will propose
amending the Company's Certificate of Incorporation to increase (i) the
authorized number of shares of Common Stock to permit the conversion of
all of the Preferred Stock and the Notes, if applicable and (ii) the
authorized number of shares of Preferred Stock to permit the payment of
dividends on the Series B PIK Preferred Stock. Roche Holdings and the
directors and executive officers of the Company have indicated to the
Company that they intend to vote in favor of such amendment.

(4) The change in accumulated deficit reflects the estimate of costs to be
incurred in connection with the Rights Offering and additional interest on
the Roche Loan. See "Unaudited Pro Forma Financial Statements."

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements for the three
months ended March 31, 1997 and for the year ended December 31, 1996 present
the results of operations of the Company assuming that the Roche Loan, the
Settlement Payment, the Rights Offering and effectiveness of the Amended
Credit Agreement had occurred as of the beginning of the period, in the case
of the pro forma statement of operations, or March 31, 1997, in the case of
the pro forma balance sheet. The proceeds of the Rights Offering have been
assumed to be applied as set forth under "Use of Proceeds". In the opinion of
management, the unaudited pro forma financial statements for the three months
ended March 31, 1997 and for the year ended December 31, 1996 include all
material adjustments necessary to restate the Company's historical results.
The adjustments required to reflect such assumptions are described in the
Notes to the unaudited pro forma financial statements and are set forth in the
"Pro Forma Adjustments" columns.

The pro forma financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere and
incorporated by reference herein. The pro forma financial statements presented
are for informational purposes only and may not necessarily reflect the future
results of operations or financial position or what the results of operations
or financial position would have been had the Roche Loan, the Settlement
Payment, the Rights Offering and effectiveness of the Amended Credit Agreement
occurred as assumed herein.

PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS

Three Months ended March 31, 1997

(Dollars in millions, except share data)

(Unaudited)

Pro Forma
Historical Adjustments
---------- ---------------
Company Rights Offering Pro Forma Combined
---------- --------------- ------------------

Net sales....................... $ 391.5 $ 391.5
Cost of sales................... 277.2 277.2
------- -------
Gross profit.................... 114.3 114.3
Selling, general and
administrative expenses........ 78.9 78.9
Amortization of intangibles and
other assets................... 7.6 7.6
------- -------
Operating income.............. 27.8 27.8
Other income (expenses):
Investment income............. 0.8 0.8
Interest expense.............. (22.7) $ 7.3 (1) (15.4)
------- ------ -------
Earnings before income taxes.... 5.9 7.3 13.2
Provision for income taxes...... 3.5 2.9 (2) 6.4
------- ------ -------
Net earnings.................... 2.4 4.4 6.8
Less preferred stock
dividend(4).................... -- (10.6) (10.6)
------- ------ -------
Net earnings (loss) applicable
to common shares............... $ 2.4 $ (6.2) $ (3.8)
======= ====== =======
Primary earnings (loss) per
common share(5)................ $ 0.02 $ (0.03)
======= =======
Fully diluted earnings (loss)
per common share(5)............ $ 0.02 $ (0.03)
======= =======
Weighted average common shares
outstanding (thousands)(5):
Primary....................... 122,935 122,935
Fully diluted................. 122,935 304,753
Ratio of earnings to combined
fixed charges and preferred
stock dividends(6)............. 1.21x NM

See accompanying Notes to Pro Forma Condensed Combined Consolidated Statements
of Operations.

PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1996
(Dollars in millions, except share data)
(Unaudited)

Historical Pro Forma Adjustments
---------- ------------------------------
Company Roche Loan(3) Rights Offering Pro Forma Combined
---------- ------------- --------------- ------------------

Net sales............... $1,607.7 $1,607.7
Cost of sales........... 1,183.9 1,183.9
-------- --------
Gross profit............ 423.8 423.8
Selling, general and
administrative
expenses............... 305.0 305.0
Amortization of
intangibles and other
assets................. 29.6 29.6
Restructuring and other
non-recurring charges.. 23.0 23.0
Provisions for
settlements and related
expenses............... 185.0 185.0
-------- --------
Operating loss........ (118.8) (118.8)
Other income (expenses):
Investment income..... 2.2 2.2
Interest expense...... (71.7) $(12.4) $ 24.7 (1) (59.4)
-------- ------ ------ --------
Loss before income
taxes.................. (188.3) (12.4) 24.7 (176.0)
Provision for income
taxes.................. (34.8) (5.0)(2) 9.9 (2) (29.9)
-------- ------ ------ --------
Net loss................ (153.5) (7.4) 14.8 (146.1)
Less preferred stock
dividend(4)............ -- -- (43.2) (43.2)
-------- ------ ------ --------
Net loss applicable to
common shares.......... $ (153.5) $ (7.4) $(28.4) $ (189.3)
======== ====== ====== ========
Primary loss per common
share(5)............... $ (1.25) $ (1.54)
======== ========
Fully diluted loss per
common share(5)........ $ (1.25) $ (1.54)
======== ========
Weighted average common
shares outstanding
(thousands)(5):
Primary............... 122,920 122,920
Fully diluted......... 122,920 307,696
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(6)........... NM NM

- --------

See accompanying Notes to Pro Forma Condensed Combined Consolidated Statements
of Operations.

NOTES TO PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

(1) Assumes the sale of approximately $250 million in Series B PIK Preferred
Stock to Roche Holdings and approximately $250 million in Series A
Exchangeable Preferred Stock to all other Rights Holders and the
application of the proceeds therefrom to (i) repay the Roche Loan, (ii)
pay fees and expenses of $13 million related to the Rights Offering and
(iii) repay approximately $244 million under the Revolving Credit Facility
and $50 million under the Term Loan Facility. The pro forma adjustment to
interest expenses (based on the interest rate assumptions shown below)
reflects the following:

Three
months ended Year ended
3/31/97 12/31/96
------------ ----------
(in millions)

Paydown of Roche Loan........................... $ 3.1 $12.4
Paydown of Revolving Credit Facility............ 3.8 15.1
Paydown of Term Loan Facility................... 0.8 3.2
Incremental interest under Amended Credit
Agreement...................................... -- (4.2)
Amortization of deferred financing costs........ (0.2) (0.7)
Commitment fee on Amended Credit Agreement...... (0.2) (1.1)
----- ------
$7.3 $24.7
==== =====

The interest rate assumptions used in the foregoing were as follows:

Three
months ended Year ended
3/3/97 12/31/96
------------ ----------

Roche Loan...................................... 6.625% 6.625%
Term Loan Facility.............................. 6.531% 6.451%
Revolving Credit Facility....................... 6.281% 6.201%
Incremental interest under Amended Credit
Agreement...................................... -- 0.625%
Commitment fee on Amended Credit Agreement...... -- 0.250%

Incremental interest under the Amended Credit Agreement is calculated
based on (i) an average Revolving Credit Facility balance outstanding
during the year ended December 31, 1996 of $309.0 million times 0.625% and
(ii) 0.625% times the actual balance outstanding under the Term Loan
Facility of $783.3 million on January 1, 1996 less principal payments of
$16.7 million on January 31, 1996, $16.7 million on April 30, 1996, $18.7
million on July 31, 1996 and $18.7 million on October 31, 1996.

The amortization of deferred financing costs is calculated based on total
deferred financing costs of $4.3 million and a weighted average life under
the Amended Credit Agreement of 6.3 years.

The commitment fee on the Amended Credit Agreement is calculated based on
a commitment of $450 million under the Amended Revolving Credit Facility
times 0.25%.

An increase or decrease in the interest rate of one-quarter of one
percent (0.25%) with respect to the pro forma debt capitalization of the
Company would increase or decrease interest expense as follows:

Three
months ended Year ended
3/31/97 12/31/96
------------ ----------
(in millions)

Revolving Credit Facility......................... $0.1 $0.3
Term Loan Facility................................ 0.4 1.7

(2) Reflects the change in the provision for income taxes as a result of the
pro forma adjustments. Such tax adjustments were based on the historical
effective tax rates used for the Company's consolidated financial
statements.

(3) In December 1996, Roche Holdings loaned $187.0 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such note
bears interest at a rate of 6.625% per annum and matures on March 31,
1998. For the year ended December 31, 1996 such note is assumed to be
outstanding at the beginning of the period and then repaid with proceeds
from the Rights Offering. See Note 2 below.

(4) Dividends on Series B PIK Preferred Stock and Series A Exchangeable
Preferred Stock are calculated as follows:

Three months ended 3/31/97 Year ended 12/31/96
------------------------------- ----------------------
Series B Series A Series B Series A
PIK Exchangeable PIK Exchangeable
Preferred Preferred Preferred Preferred
Stock Stock Stock(a) Stock
------------- -------------- --------- ------------
(in millions)

Total liquidation
preference............. $ 250.0 $ 250.0 $250.0 $250.0
Assumed dividend rate... 8.5% 8.5% 8.5% 8.5%
Dividends: Quarter ended
March 31, 1997........ $ 5.3 $ 5.3 $ -- $ --
Quarter ended March
31, 1996.......... -- -- 5.3 5.3
Quarter ended June
30, 1996.......... -- -- 5.4 5.3
Quarter ended
September 30,
1996.............. -- -- 5.6 5.3
Quarter ended
December 31,
1996.............. -- -- 5.7 5.3
------------- ------------- ------ ------
$ 5.3 $ 5.3 $ 22.0 $ 21.2
============= ============= ====== ======

(5) The primary and fully diluted shares assuming that Roche Holdings
purchases approximately $250 million of Series B PIK Preferred Stock and
that the remaining Rights Holders purchase approximately $250 million in
Series A Exchangeable Preferred Stock, are calculated as follows:

Three
months ended Year ended
3/31/97 12/31/96
------------ ----------
(in thousands)

Historical weighted average shares outstanding..... 122,935 122,920
Weighted average shares used for primary earnings
per share......................................... 122,935 122,920
Common Stock issuable upon conversion of Preferred
Stock............................................. 181,818 181,818
Common Stock issuable upon conversion of PIK
dividend.......................................... -- 2,958
Weighted average shares used for diluted earnings
per share......................................... 304,753 307,696

The primary and fully diluted shares, assuming that Roche Holdings
purchases $500 million of Series B PIK Preferred Stock, are calculated as
follows:

Three
months ended Year ended
3/31/97 12/31/96
------------ ----------
(in thousands)

Historical weighted average shares outstanding..... 122,935 122,920
Weighted average shares used for primary earnings
per share......................................... 122,935 122,920
Common Stock issuable upon conversion of Preferred
Stock............................................. 181,818 181,818
Common Stock issuable upon conversion of PIK
dividend.......................................... -- 5,916
Weighted average shares used for diluted earnings
per share......................................... 304,753 310,654

(6) For the three months ended March 31, 1997, pro forma earnings would have
been insufficient to cover combined fixed charges and preferred stock
dividends by $7.4 million. For the year ended December 31, 1996, actual
and pro forma earnings would have been insufficient to cover combined
fixed charges and preferred stock dividends by $188.3 million and $227.8
million, respectively.

PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET

As of March 31, 1997
(Dollars in millions)
(Unaudited)

Pro Forma Pro Forma
Actual Adjustments Combined
-------- ----------- ---------

ASSETS
Current assets:
Cash and cash equivalents.................. $ 29.5 $ 29.5
Accounts receivable, net................... 519.2 519.2
Inventories................................ 43.1 43.1
Prepaid expenses and other................. 22.5 22.5
Deferred income taxes...................... 64.6 64.6
Income taxes receivable.................... 53.1 53.1
-------- ------- --------
Total current assets..................... 732.0 732.0
Property, plant and equipment, net........... 272.0 272.0
Intangible assets, net....................... 882.1 882.1
Other assets, net............................ 25.8 25.8
-------- ------- --------
$1,911.9 $ -- $1,911.9
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 64.1 $ 64.1
Accrued expenses and other................. 169.9 $ 1.5 (1) 165.7
(5.7)(2)
Current portion of long-term debt.......... 131.3 (131.3)(3) --
Loan from affiliate........................ 187.0 (187.0)(2) --
-------- ------- --------
Total current liabilities................ 552.3 (322.5) 229.8
Revolving credit facility.................... 384.0 (244.3)(2) 139.7
Long-term debt, less current portion......... 562.5 (50.0)(2) 643.8
131.3 (3)
Capital lease obligation..................... 9.8 9.8
Other liabilities............................ 142.8 142.8
Mandatorily redeemable preferred stock....... -- 500.0 (2) 500.0
Stockholders' equity:
Common stock............................... 1.2 1.2
Additional paid-in capital................. 411.0 411.0
Accumulated deficit........................ (151.7) (1.5)(1) (166.2)
(13.0)(4)
-------- ------- --------
Total stockholders' equity............... 260.5 (14.5) 246.0
-------- ------- --------
$1,911.9 $ -- $1,911.9
======== ======= ========

See accompanying Notes to Pro Forma Condensed Combined Consolidated Balance
Sheet

NOTES TO PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET

(1) In December 1996, Roche Holdings loaned $187.0 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such note
bears interest at a rate of 6.625% per annum and matures on March 31, 1998.
The principal amount of such note, together with accrued interest of $3.1
at March 31, 1997 and estimated accrued interest of $2.6 million ($1.5
million net of tax) for the period from April 1, 1997 through June 15, 1997
are assumed to be repaid with a portion of the proceeds from the Rights
Offering.

(2) Reflects the issuance of approximately $500 million of Preferred Stock in
the Rights Offering and the application of the proceeds therefrom.

(3) Reflects adjustment to the amortization schedule of the Term Loan Facility
in connection with the effectiveness of the Amended Credit Agreement.

(4) Reflects estimated fees and expenses of $13.0 million in connection with
the Rights Offering. These are deemed to be stock offering costs and are
charged against accumulated deficit.

SELECTED HISTORICAL YEAR END FINANCIAL DATA

The following table presents selected historical financial data of the
Company at the dates and for each of the periods indicated. The selected
financial data as of and for each of the years ended December 31, 1996, 1995
and 1994 have been derived from the Consolidated Financial Statements and the
notes thereto included elsewhere and incorporated by reference herein. See
also "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Year Ended December 31,
--------------------------------------------------------------
1996 1995(a) 1994(b) 1993 1992
---------- ----------- ----------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 1,607.7 $ 1,432.0 $ 872.5 $ 760.5 $ 721.4
Cost of sales........... 1,183.9 1,024.3 597.0 444.5 395.1
---------- ---------- -------- -------- --------
Gross profit............ 423.8 407.7 275.5 316.0 326.3
Selling general and
administrative
expenses............... 305.0 238.5 149.3 121.4 117.9
Amortization of
intangibles and other
assets................. 29.6 27.0 16.3 9.1 8.3
Restructuring and non-
recurring charges...... 23.0(c) 65.0(d) -- -- --
Provision for
settlements and related
expenses............... 185.0(c) 10.0(d) -- -- 136.0(e)
---------- ---------- -------- -------- --------
Operating income
(loss)................. (118.8) 67.2 109.9 185.5 64.1
Litigation settlement
and related expenses... -- -- (21.0)(f) -- --
Other gains and
expenses, net.......... -- -- -- 15.3(g) --
Net interest income
(expense).............. (69.5) (64.1) (33.5) (9.7) (2.0)
---------- ---------- -------- -------- --------
Earnings (loss) before
income taxes and
extraordinary item..... (188.3) 3.1 55.4 191.1 62.1
Provision for income
taxes.................. (34.8) 7.1 25.3 78.4 21.5
---------- ---------- -------- -------- --------
Earnings (loss) before
extraordinary item..... (153.5) (4.0) 30.1 112.7 40.6
Extraordinary item--loss
on early extinguishment
of debt, net(h)........ -- (8.3) -- -- --
---------- ---------- -------- -------- --------
Net earnings (loss)..... $ (153.5) $ (12.3) $ 30.1 $ 112.7 $ 40.6
========== ========== ======== ======== ========
Weighted average common
shares outstanding (in
thousands)............. 122,920 110,579 84,754 89,439 94,468
Earnings (loss) per
common share before
extraordinary loss..... $ (1.25) $ (0.03) $ 0.36 $ 1.26 $ 0.43
Extraordinary loss per
common share........... -- (0.08) -- -- --
========== ========== ======== ======== ========
Net earnings (loss) per
common share........... $ (1.25) $ (0.11) $ 0.36 $ 1.26 $ 0.43
========== ========== ======== ======== ========
Dividends per common
share.................. -- -- $ 0.08 $ 0.32 $ 0.31

SUPPLEMENTAL DATA:
Net cash provided by (used in)
operating activities(i).......... $(186.8) $ 47.0 $ 14.7 $ 57.2 $102.4
Net cash used in investing
activities....................... $ (59.1) $(115.0) $(293.6) $(95.7) $(36.3)
Net cash provided by (used in)
financing activities(i).......... $(258.8) $ 57.6 $ 293.4 $ 17.4 $(84.0)
Bad debt expense.................. $ 81.4 $ 64.8 $ 29.5 $ 28.0 $ 32.1
Bad debt expense as a % of net
sales............................ 5.1% 4.5% 3.4% 3.7% 4.4%
Capital expenditures.............. $ 54.1 $ 75.4 $ 48.9 $ 33.6 $ 34.9
EBITDA(j)......................... $ (34.3) $ 139.6 $ 154.3 $217.7 $ 91.0
EBITDA as a % of net sales(j)..... (2.1)% 9.7% 17.7% 28.6% 12.6%
Adjusted EBITDA(k)................ $ 173.7 $ 214.6 $ 154.3 $217.7 $227.0
Adjusted EBITDA as a % of net
sales(k)......................... 10.8% 15.0% 17.7% 28.6% 31.5%
Ratio of earnings to combined
fixed charges and preferred stock
dividends(l)..................... NM 1.04x 2.20x 10.16x 5.71x

As of December 31,
------------------------------------------
1996 1995(a) 1994(b) 1993 1992
------- ------- ------- ------ ------
(DOLLARS IN MILLIONS)

BALANCE SHEET DATA:
Cash and cash equivalents......... $ 29.3 $ 16.4 $ 26.8 $ 12.3 $ 33.4
Working capital(m)................ 468.7 249.4 90.2 62.4 32.0
Total assets...................... 1,917.0 1,837.2 1,012.7 585.5 477.4
Total debt(m)..................... 1,308.0 1,034.2 648.9 341.5 154.2
Total stockholders' equity........ 258.1 411.6 166.0 140.8 212.5

- --------
(a) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 2 of the Notes to
Consolidated Financial Statements.
(b) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General" and Note 2 of
the Notes to Consolidated Financial Statements.
(c) In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the
restructuring of operations following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions.
In addition, the Company recorded $10.0 million in non-recurring charges
in the second quarter of 1996 related to the integration of its operations
following the Merger. See Note 3 of the Notes to Consolidated Financial
Statements. As a result of negotiations with the OIG and DOJ related to
the 1996 Government Settlement, the Company recorded a special charge of
$185.0 million in the third quarter of 1996 to increase accruals for
settlements and related expenses of government and private claims
resulting from these investigations. See "Regulation and Reimbursement--
1996 Government Settlement."
(d) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements. Also
in 1995, the Company recorded a pre-tax special charge of $10.0 million in
connection with the estimated costs of settling various claims pending
against the Company, substantially all of which are billing disputes, with
various third party payors relating to the contention that NHL improperly
included tests for HDL cholesterol and serum ferritin in its basic test
profile without clearly offering an alternative profile that did not
include these medical tests. As of December 31, 1996, the majority of
these disputes have been settled.
(e) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement. See "Regulation and Reimbursement--OIG Settlement--1992 NHL
Government Settlement."
(f) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million plus
expenses. The litigation consisted of two consolidated class action suits
filed in December 1992 and November 1993 and a consolidated shareholder
derivative action brought in Federal and state courts in San Diego,
California. The settlement involved no admission of wrongdoing and all
payments under the settlement agreement have been paid.
(g) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's attempt
to purchase Damon Corporation, a competing independent clinical
laboratory, less related expenses and write-off of certain bank financing
costs of $6.3 million.
(h) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities in connection with the Merger, the Company recorded
an extraordinary loss of approximately $13.5 million ($8.3 million, net of
tax), consisting of the write-off of deferred financing costs, related to
the early extinguishment of debt.
(i) The Company made the Settlement Payment in December 1996 with the proceeds
of the Roche Loan.
(j) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from operations
as defined by GAAP (and should not be considered as an indicator of
operating

performance or an alternative to operating income or cash flow (as measured
by GAAP)), as a measure of liquidity, management believes it provides
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements. EBITDA may not be comparable to other measures of liquidity
and excludes components of net income (loss) which are significant in
understanding the Company's financial performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
(k) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization, extraordinary
items, a provision for settlements and related expenses, restructuring
charges and nonrecurring expenses. While Adjusted EBITDA is not intended
to represent cash flow from operations as defined by GAAP (and should not
be considered as an indicator of operating performance or an alternative
to operating income or cash flow (as measured by GAAP)), as a measure of
liquidity, management believes it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Adjusted EBITDA may
not be comparable to other measures of liquidity and excludes components
of net income (loss) which are significant in understanding the Company's
financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(l) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before provision for income taxes and fixed charges and (ii) fixed charges
consist of interest expense and one-third of rental expense which is
deemed representative of an interest factor. For the year ended December
31, 1996, earnings were insufficient to cover fixed charges and preferred
stock dividends by $188.3 million.
(m) Total debt includes a capital lease obligation of $9.8 million, $9.6
million, $9.8 million, $9.7 million and $9.6 million at December 31, 1996,
1995, 1994, 1993 and 1992, respectively. Total debt also includes the
expected value of future contractual and contingent amounts to be paid to
the principals of acquired laboratories. Such payments are principally
based on a percentage of future revenues derived from the acquired
customer lists or specified amounts to be paid over a period of time. At
December 31, 1996, 1995, 1994, 1993 and 1992, such amounts were $27.7
million, $23.3 million, $35.1 million, $26.8 million and $4.6 million,
respectively. In December 1996, the Company received a loan of $187
million from Roche Holdings to fund the Settlement Payment. Such loan
bears interest at a rate of 6.625% per annum and matures on March 31,
1998.

SELECTED HISTORICAL INTERIM FINANCIAL DATA

The following table presents selected historical financial data of the
Company at the dates and for each of the periods indicated. The selected
financial data as of and for each of the three month periods ended March 31,
1997 and 1996 have been derived from the Unaudited Consolidated Condensed
Financial Statements and the notes thereto included elsewhere and incorporated
by reference herein. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Three months
ended March 31,
-----------------
1997 1996
-------- -------
(Actual)

STATEMENT OF OPERATIONS DATA:
Net sales.................................................. $ 391.5 $ 403.9
Cost of sales.............................................. 277.2 303.3
------- -------
Gross profit............................................... 114.3 100.6
Selling, general and administrative expenses............... 78.9 65.5
Amortization of intangibles and other assets............... 7.6 7.3
------- -------
Operating income........................................... 27.8 27.8
Net interest income (expense).............................. (21.9) (16.0)
------- -------
Earnings before income taxes............................... 5.9 11.8
Provision for income taxes................................. 3.5 5.9
------- -------
Net earnings............................................... $ 2.4 $ 5.9
======= =======
Net earnings per common share.............................. $ 0.02 $ 0.05
======= =======
Dividends per common share................................. $ -- $ --
======= =======
Weighted average common shares outstanding (in thousands).. 122,935 122,909
======= =======

1997 1996
-------- -------
(Dollars in
millions)

SUPPLEMENTAL DATA:
Net cash provided by operating activities.................. $ 10.4 $ 19.2
Net cash used in investing activities...................... $ (3.1) $ (18.1)
Net cash used in financing activities...................... $ (7.1) $ (1.8)
Bad debt expense........................................... $ 22.9 $ 15.4
Bad debt expense as a % of net sales....................... 5.8% 3.8%
Capital expenditures....................................... $ 3.1 $ 14.9
EBITDA(a).................................................. $ 49.3 $ 48.4
EBITDA as % of net sales................................... 12.6% 12.0%
Ratio of earnings to combined fixed charges and preferred
stock dividends(b)........................................ 1.21x 1.52x

As of March 31,
1997
---------------------
(Dollars in millions)

BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 29.5
Working capital......................................................... 179.7
Total assets............................................................ 1,911.9
Total debt(c)........................................................... 1,300.5
Total stockholders' equity.............................................. 260.5

- --------

(a) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from operations
as defined by GAAP (and should not be considered as an indicator of
operating performance or an alternative to operating income or cash flow
(as measured by GAAP)), as a measure of liquidity, management believes it
provides additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA may not be comparable to other measures of liquidity
and excludes components of net income (loss) which are significant in
understanding the Company's financial performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

(b) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before provision for income taxes and fixed charges and (ii) fixed charges
consist of interest expense and one-third of rental expense which is
deemed representative of an interest factor.

(c) Total debt includes a capital lease obligation of $9.8 million, at March
31, 1997. Total debt also includes the expected value of future
contractual and contingent amounts to be paid to the principals of
acquired laboratories. Such payments are principally based on a percentage
of future revenues derived from the acquired customer lists or specified
amounts to be paid over a period of time. At March 31, 1997, such amounts
were $25.9 million. In December 1996, the Company received a loan of $187
million from Roche Holdings to fund the Settlement Payment. Such loan
bears interest at a rate of 6.625% per annum and matures on March 31,
1998.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company has grown significantly over the last several years, a
substantial portion of which growth has been achieved through acquisitions. In
June 1994, the Company acquired Allied for approximately $191.5 million in
cash plus the assumption of $24.0 million of Allied indebtedness. In April
1995, the Company completed the Merger with RBL. In connection with the
Merger, the Company issued 61,329,256 shares of Common Stock to HLR and Roche
Holdings in exchange for all outstanding shares of RBL and $135.7 million in
cash. The exchange consideration of approximately $558.0 million for the
purchase of RBL consisted of the value of the stock issued to HLR and Roche
Holdings, as well as other cash costs of the Merger, net of cash received from
HLR. The Allied Acquisition and the Merger have been accounted for under the
purchase method of accounting; as such, the acquired assets and liabilities
were recorded at their estimated fair values on the date of acquisition.
Allied's and RBL's results of operations have been included in the Company's
results of operations since June 23, 1994 and April 28, 1995, respectively.
See Note 2 of Notes to Consolidated Financial Statements. In addition to the
Merger and the Allied Acquisition, since 1993 the Company has acquired a total
of 57 small clinical laboratories with aggregate sales of approximately $182.4
million.

Following the Merger in 1995, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where both NHL and RBL facilities or
functions existed at the time of the Merger. The Company recorded
restructuring charges of $65.0 million in connection with these plans in 1995.
In addition, in the second quarter of 1995, the Company had an extraordinary
loss of $8.3 million, net of taxes, related to early extinguishment of debt
related to the Merger. In the second quarter of 1996, the Company recorded
certain additional charges related to the restructuring of operations
following the Merger. The Company recorded a restructuring charge totaling
$13.0 million for the shutdown of its La Jolla, California administrative
facility and other workforce reductions and $10.0 million in non-recurring
charges related to the integration of its operations following the Merger. See
Note 3 of the Notes to Consolidated Financial Statements. Future cash payments
under the restructuring plan are expected to be $16.1 million in the year
ended December 31, 1997 and $9.1 million thereafter.

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

Management expects that price erosion and utilization declines will continue
to negatively impact net sales and results of operations for the foreseeable
future, particularly as a result of anticipated growth in managed care. Since
the third quarter of 1996, the Company has expanded its efforts to improve the
profitability of new and existing business in an attempt to counter the
effects of such price erosion. To date this effort has focused primarily on
reviewing existing contracts, including those with managed care organizations,
and selectively repricing or discontinuing business with existing accounts
which perform below Company expectations. The Company believes that as a
result of this effort, the first quarter of 1997 was the first quarter in two
years that the Company's price per accession increased versus the comparable
prior year quarter. The Company is also targeting price increases in certain
areas, such as specialty and niche testing, which have not seen price
increases since 1995. While such increases have adversely affected volumes,
the Company believes that such measures along with other cost reduction
programs, will improve its overall profitability. There can be no assurance,
however, of the timing or success of such measures or that the Company will
not lose market share as a result of these measures. Also, the Company is
reviewing its sales organization and expects to modify its commission
structure so that compensation is

tied more directly to the profitability of retained and new business instead
of the current practice of basing commissions primarily on revenue generated.
Finally, it is the objective of management to partially offset any increases
in cost of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales through cost savings the
Company expects to realize through comprehensive cost reduction programs. The
Company is reviewing alternatives relating to regions of the country and
certain businesses where profitability is not reaching internal goals and may
consolidate operations or enter into joint ventures, alliances, or asset swaps
with interested parties in order to maximize regional operating efficiencies.

Many market-based changes in the clinical laboratory business have occurred,
most involving the shift away from traditional, fee-for-service medicine to
managed-cost health care. The growth of the managed care sector presents
various challenges to the Company and other independent clinical laboratories.
Managed care providers typically contract with a limited number of clinical
laboratories and negotiate discounts to the fees charged by such laboratories
in an effort to control costs. Such discounts have resulted in price erosion
and have negatively impacted the Company's operating margins. In addition,
managed care providers have used capitated payment contracts in an attempt to
promote more efficient use of laboratory testing services. Under a capitated
payment contract, the clinical laboratory and the managed care provider agree
to a per month payment to cover all laboratory tests during the month,
regardless of the number or cost of the tests actually performed. Such
contracts also shift the risks of additional testing beyond that covered by
the capitated payment to the clinical laboratory. For the year ended December
31, 1996, such contracts accounted for approximately $64.5 million in net
sales. The increase in managed-cost health care has also resulted in declines
in the utilization of laboratory testing services.

In addition, Medicare (which principally serves patients 65 and older) and
Medicaid (which principally serves indigent patients) and insurers, have
increased their efforts to control the cost, utilization and delivery of
health care services. Measures to regulate health care delivery in general and
clinical laboratories in particular have resulted in reduced prices and added
costs and decreasing test utilization for the clinical laboratory industry by
increasing complexity and adding new regulatory and administrative
requirements. From time to time, Congress has also considered changes to the
Medicare fee schedules in conjunction with certain budgetary bills. Any future
changes to the Medicare fee schedules cannot be predicted at this time and
management, therefore, cannot predict the impact, if any, such proposals, if
enacted, would have on the results of operations or financial condition of the
Company.

As a result of the Merger, the Company has realized and is expected to
continue to achieve substantial savings in operating costs through the
consolidation of certain operations and the elimination of redundant expenses.
Such savings are being realized over time as the consolidation process is
completed. Since the Merger, the Company has been able to effect substantial
operating cost reductions in the combined businesses and expects that the full
effect of these savings (in excess of $120 million per year when compared to
the businesses' costs immediately prior to the Merger) will be realized during
1997. Such savings include an annualized reduction of $4.7 million in
corporate, general and administrative expenses including the consolidation of
administrative staff. Combining the NHL sales force with the RBL sales force
where duplicate territories existed has added approximately $17.8 million of
annualized synergies. Operational savings have resulted in approximately $94.8
million of annualized synergies. These include closing of overlapping
laboratories and other facilities and savings realized from additional buying
power by the larger Company. The Company has also realized annualized savings
of approximately $14.2 million relating to employee benefits as a result of
changes to certain benefit arrangements. In 1996, the realization of the
savings were partially offset by increased temporary help and overtime
expenses during the consolidation process. These costs are expected to reduce
to normal levels at the conclusion of the consolidation process in the second
quarter of 1997. In addition, these savings have been largely offset by price
erosion and utilization declines resulting from the increase in managed care
and to a lesser extent from increases in other expenses such as bad debt
expenses as discussed below. The effects of price

erosion and utilization declines on the Company's results of operations,
however, would have been greater but for savings achieved through the synergy
program. In addition, the Company is focused on additional initiatives which
are expected to achieve incremental cost savings in 1997. These plans include
further regional laboratory consolidation, a new agreement with a supplier of
telecommunications services and additional supply savings primarily due to
increased efficiency. There can be no assurance that the estimated additional
cost savings expected to be achieved will be realized or achieved in a timely
manner or that improvements, if any, in profitability will be achieved or that
such savings will not be offset by increases in other expenses.

As part of an examination of the rapid growth of Federal expenditures for
clinical laboratory services, several Federal agencies, including the Federal
Bureau of Investigation, the OIG and the DOJ, have investigated allegations of
fraudulent and abusive conduct by health care providers. On November 21, 1996,
the Company reached a settlement with the OIG and the DOJ regarding the prior
billing practices of various of its predecessor companies. See "Regulation and
Reimbursement--OIG Investigations--1996 Government Settlement." Consistent
with this overall settlement the Company paid $187.0 million to the Federal
Government in December 1996, with proceeds from the Roche Loan. As a result of
negotiations related to the 1996 Government Settlement, the Company recorded a
charge of $185.0 million in the third quarter of 1996 to increase accruals for
the 1996 Government Settlement, and other related expenses of government and
private claims resulting therefrom.

In March 1997, the Company entered into the Sixth Amendment which eliminates
amortization payments on the Term Loan Facility for 1997 and modifies the
interest coverage and leverage ratios for the quarterly periods through
December 31, 1997. Pursuant to this amendment, the Company paid an amendment
fee of 37.5 basis points on commitments and will pay an additional fee of 62.5
basis points if the Rights Offering is not completed by June 30, 1997. In
addition, the Roche Loan which originally matured on March 31, 1997 was
amended to extend the maturity thereof to March 31, 1998.

The Company also entered into the Amended Credit Agreement which will become
effective upon completion of the Rights Offering following satisfaction of
certain conditions precedent. Upon consummation of the Rights Offering and the
receipt of $500 million in gross proceeds, the Amended Credit Agreement makes
available to the Company a term loan facility of $643.8 million and a $450.0
million revolving credit facility. See "Description of Amended Credit
Agreement" below and Note 9 of the Notes to Consolidated Financial Statements
for a complete description of the Amended Credit Agreement.

SEASONALITY

Volume of testing generally declines during the summer months, year-end
holiday periods and other major holidays, resulting in net revenues and cash
flows in the third and fourth quarter below the annual average. In addition,
volume declines due to inclement weather may reduce net revenues and cash
flows. Therefore, comparison of the results of successive quarters may not
accurately reflect trends or results for the full year.

RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 compared with Three Months Ended March 31,
1996

Net sales for the three months ended March 31, 1997 were $391.5 million, a
decrease of approximately 3.1% from $403.9 million reported in the comparable
1996 period. Sales declined approximately 4.7% as a result of lower testing
volume which is a result of industry wide trends as well as the Company's
program of selectively eliminating unprofitable accounts and carefully
evaluating the acceptability of new business. The decline in sales resulting
from volume declines was partially offset by an increase in price per
accession of approximately 1.6% from the comparable 1996 period. The increase
in the price per accession was a direct result of the Company's effort to
negotiate better pricing on new contracts, raising prices on existing
contracts which do not meet Company profitability targets and other price
increases.

Cost of sales, which includes primarily laboratory and distribution costs,
was $277.2 million for the three months ended March 31, 1997 compared to
$303.3 million in the corresponding 1996 period, a decrease of $26.1 million.
Cost of sales decreased approximately $14.0 million due to the decrease in
volume, approximately $15.1 million due to a decrease in salaries and benefits
and approximately $5.6 million in several other expense categories as a result
of the Company's cost reduction programs. These decreases were partially
offset by an increase in salaries due to scheduled salary increases and an
increase in outside reference testing expenses and supply costs resulting
primarily from an increase in volume in the Company's specialty and niche
testing areas. Cost of sales as a percentage of net sales was 70.8% for the
three months ended March 31, 1997 and 75.1% in the corresponding 1996 period.
The decrease in the cost of sales percentage of net sales primarily resulted
from the cost reduction efforts mentioned above.

Selling, general and administrative expenses increased to $78.9 million for
the three months ended March 31, 1997 from $65.5 million in the same period in
1996. The primary reason for the increase in these expenses is due to
additional costs, primarily salaries, consulting fees and the provision for
doubtful accounts, incurred to address billing issues. The provision for
doubtful accounts increased approximately $7.4 million or 2% of net sales,
from the comparable 1996 period. The increase is primarily a result of the
growth in accounts receivable resulting from increased medical necessity and
related diagnosis code requirements of the Medicare program and various third
party payors and integration issues following the merger with RBL primarily
resulting from maintaining and consolidating multiple billing systems. See
"Liquidity and Capital Resources". These increases were partially offset by
decreases in selling expenses resulting from the decrease in net sales. As a
percentage of net sales, selling, general and administrative expenses were
20.2% and 16.2% for the three months ended March 31, 1997 and 1996,
respectively. The increase in the selling, general and administrative
percentage primarily resulted from the factors noted above.

The increase in amortization of intangibles and other assets to $7.6 million
for the three months ended March 31, 1997 from $7.3 million in the
corresponding period in 1996 primarily resulted from small acquisitions
completed in 1996.

Interest expense was $22.7 million for the three months ended March 31, 1997
compared with $16.7 million for the same period in 1996. The change resulted
primarily from increased borrowings resulting from lower collection rates on
accounts receivable and the Roche Loan, which was used to make the Settlement
Payment. See "Liquidity and Capital Resources".

The provision for income taxes as a percentage of earnings before taxes was
59.3% for the three months ended March 31, 1997 compared to 50.0% for the
three months ended March 31, 1996. The Company's effective tax rate is
significantly impacted by non-deductible amortization of intangible assets. As
earnings before income taxes decreases, this non-deductible amortization
increases in proportion to such earnings resulting in an increase in the
effective tax rate.

Year Ended December 31, 1996 compared with Year Ended December 31, 1995

Net sales increased by $175.7 million to $1,607.7 million in 1996, an
increase of 12.3% from $1,432.0 million reported in 1995. The inclusion of RBL
as a result of the Merger increased net sales by approximately $243.5 million
or 17.0%. Acquisitions of small clinical laboratory companies increased net
sales by approximately 1.8%. Also contributing to the increases in net sales
was growth in new accounts and price increases in selective markets. Such
increases were partially offset by price erosion in the industry as a whole,
lower utilization of laboratory testing and lost accounts. Price erosion and
lower utilization of laboratory testing primarily resulted from continued
changes in payor mix brought on by the increase in managed care. A reduction
in Medicare fee schedules from 80% to 76% of the national limitation amounts
on January 1, 1996, reduced net sales by approximately 1.3%. Severe weather in
January and February of 1996 also negatively impacted net sales.

Cost of sales increased to $1,183.9 million in 1996 from $1,024.3 million in
1995. Of the $159.6 million increase, approximately $181.9 million or 17.8%
was due to the inclusion of the cost of sales of RBL. Cost of sales increased
(i) approximately $23.8 million as a result of wage increases prior to the
implementation of a six-month deferral on wage rate increases implemented on
July 1, 1996, (ii) approximately $5.0 million as a result of higher overtime
and temporary employee expenses related to the acceleration of the Company's
synergy program and other operational factors, (iii) approximately $7.5
million due to higher depreciation and maintenance of lab equipment as a
result of the Company's purchase in 1996 of more sophisticated equipment to
improve efficiency, and (iv) approximately $8.0 million in outside collection
and reference testing fees. These increases were partially offset by decreases
due to lower volume of approximately $14.7 million. Additional decreases in
salaries and benefits of $49.5 million, and several other expense categories
aggregating approximately $2.4 million were primarily a result of the
Company's synergy and cost reduction programs. Cost of sales as a percentage
of net sales was 73.6% in 1996 and 71.5% in 1995. The increase in the cost of
sales percentage of net sales primarily resulted from a reduction in net sales
due to price erosion and utilization declines, each of which provided little
corresponding reduction in costs, and, to a lesser extent, due to severe
weather in January and February of 1996 and a reduction in Medicare fee
schedules.

Selling, general and administrative expenses increased to $305.0 million in
1996 from $238.5 million in the same period in 1995 representing an increase
of $66.5 million or 27.9%. The inclusion of the selling, general and
administrative expenses of RBL since April 28, 1995 increased expenses by
approximately $36.5 or 15.3%. Increases in salaries, overtime and temporary
employee expenses, primarily related to billing issues, and related telephone
and data processing costs, aggregated approximately $24.8. Also, increased
medical necessity and related diagnosis code requirements of third-party
payors placed on the Company in late 1995 and additional requirements placed
on the Company at the beginning of 1996 have resulted in lower collection
rates. As a result the provision for doubtful accounts for 1996 increased
approximately $16.6 million, including a charge of $10.0 million in the second
quarter of 1996 compared to 1995 which included a $15.0 million charge in the
fourth quarter of 1995. The 1995 charge was necessitated by the deterioration
in the Company's accounts receivable collection rates in the fourth quarter of
1995 primarily due to the effect of increased medical necessity and diagnosis
code requirements of third party payors placed on the Company in the second
half of 1995. Additional such requirements were placed on the Company at the
beginning of 1996, which resulted in a further deterioration in accounts
receivable collection rates in the second quarter of 1996. As a result of this
further deterioration, the Company recorded the special charge of $10.0
million in the second quarter of 1996. In addition, the Company increased its
monthly provision for doubtful accounts beginning in the third quarter of 1996
as a result of continued lower collection rates. These increases were
partially offset by decreases in legal expenses, excluding settlement
expenses, insurance and several other expense categories aggregating
approximately $1.9 million. Selling, general and administrative expenses were
19.0% and 16.7% as a percentage of net sales in 1996 and 1995, respectively.
The increase in the selling, general and administrative percentage primarily
resulted from increased employee expenses related to billing and collection
activities, the increases in the provision for doubtful accounts discussed
above and to a lesser extent, from a reduction in net sales due to price
erosion and utilization declines, each of which provided little corresponding
reduction in costs.

In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the restructuring
of operations. The Company recorded a restructuring charge totaling $13.0
million for the shutdown of its La Jolla, California administrative facility
and other workforce reductions. In addition, the Company recorded $10.0
million of non-recurring charges in the second quarter of 1996 related to the
abandonment of certain data processing systems, relocation of its principal
drug testing facility and various other items including the write-off of
certain laboratory testing supplies related to changes in testing
methodologies to increase efficiency.

As a result of negotiations related to the 1996 Government Settlement, the
Company recorded the Settlement Charge of $185.0 million in the third quarter
of 1996 to increase reserves for the 1996

Government Settlement described above, and other related expenses of
government and private claims resulting therefrom.

The increase in amortization of intangibles and other assets to $29.6
million in 1996 from $27.0 million in 1995 primarily resulted from the Merger
in April 1995.

Net interest expense was $69.5 million in 1996 compared to $64.1 million in
1995. The increase resulted primarily from increased borrowings due to higher
accounts receivable balances and a higher effective borrowing rate as a result
of an amendment to the Company's credit agreement. See "Liquidity and Capital
Resources."

As a result of the restructuring and non-recurring charges in 1996 and 1995,
the provision for income taxes is not comparable between periods. However,
before charges, the Company's effective income tax rate in 1996 has increased
from 1995 as a result of increased non-deductible amortization and lower
earnings before income taxes.

Year Ended December 31, 1995 compared with Year Ended December 31, 1994.

Net sales increased by $559.5 million to $1,432.0 million in 1995, an
increase of 64.1% from $872.5 million reported in 1994. Net sales from the
inclusion of RBL increased net sales by approximately $514.7 million or 59.0%.
Also, net sales from the inclusion of Allied, which was acquired on June 23,
1994, increased net sales by approximately $56.6 million or 6.5%. Growth in
new accounts and acquisitions of small clinical laboratory companies increased
net sales by approximately 8.6% and 2.8%, respectively. Lower utilization of
laboratory testing and price erosion in the industry as a whole decreased net
sales by approximately 5.0%. A reduction in Medicare fee schedules from 84% to
80% of the national limitation amounts on January 1, 1995, plus changes in
reimbursement policies of various third-party payors, reduced net sales by
approximately 1.5%. Other factors, including accounts terminated by
management, comprised the remaining reduction in net sales.

Cost of sales increased to $1,024.3 million in 1995 from $597.0 million in
1994. Of the $427.3 million increase, approximately $368.8 million was due to
the inclusion of the cost of sales of RBL and approximately $44.8 million was
due to the inclusion of the cost of sales of Allied. Cost of sales increased
by approximately $26.1 million due to higher testing volume unrelated to the
Merger or acquisition of Allied and approximately $4.5 million due to
increases in other expenses. Reductions in compensation and benefit expense of
$9.2 million, insurance of $4.8 million, and other expense categories of $2.9
million decreased cost of sales an aggregate of approximately $16.9 million.
These decreases resulted from the consolidation of operations as a result of
the Merger and the Company's on-going cost-reduction program. As a percentage
of net sales, cost of sales increased to 71.5% in 1995 from 68.4% in 1994. The
increase in the cost of sales percentage primarily resulted from a reduction
in net sales due to a reduction in Medicare fee schedules, pricing pressures
and utilization declines, each of which provided little corresponding
reduction in costs.

Selling, general and administrative expenses increased to $238.5 million in
1995 from $149.3 million in 1994, an increase of $89.2 million. Approximately
$74.3 million of the increase was due to the inclusion of the selling, general
and administrative expenses of RBL and approximately $7.7 million due to the
inclusion of the selling, general and administrative expenses of Allied. In
the fourth quarter of 1995, the Company recorded an additional $15.0 million
of provision for doubtful accounts which reflects the Company's determination,
based on trends that became evident in the fourth quarter, that additional
reserves were needed primarily to cover potentially lower collection rates
from several third-party payors. The increase in selling, general and
administrative expenses was partially offset by decreases in other expense
categories, including reductions in selling expenses, as a result of the
elimination of duplicative functions in connection with the Merger and the
Company's on-going cost-reduction program. Before the increase to the
provision for doubtful accounts, selling, general and administrative expenses
as a percentage of net sales was 15.6% in 1995 and 17.1% in 1994. The decrease
in the selling, general and administrative percentage primarily resulted from
reductions in expenses as discussed above.

The increase in amortization of intangibles and other assets to $27.0
million in 1995 from $16.3 million in 1994 primarily resulted from the Merger
in April 1995 and the acquisition of Allied in June 1994.

See Note 3 of the Notes to Consolidated Financial Statements which sets
forth the Company's restructuring activities for the year ended December 31,
1995.

In the second quarter of 1995, the Company took a pre-tax special charge of
$10.0 million in connection with the estimated costs of settling various
claims pending against the Company, substantially all of which were billing
disputes with various third party payors relating to the contention that NHL
improperly included tests for HDL cholesterol and serum ferritin in its basic
test profile without clearly offering an alternative profile that did not
include these medical tests. As of December 31, 1996, the majority of these
disputes have been settled.

Net interest expense was $64.1 million in 1995 compared to $33.5 million in
1994. The change resulted primarily from increased borrowings used to finance
the Merger with RBL and the acquisition of Allied and, to a lesser extent, due
to a higher effective borrowing rate in the first four months of 1995.

In connection with the repayment of the Company's existing revolving credit
and term loan facilities at the time of the Merger, the Company recorded an
extraordinary loss from the early extinguishment of debt of approximately
$13.5 million ($8.3 million net of tax) consisting of the write-off of
deferred financing costs.

As a result of the restructuring charges and extraordinary loss, the
provision for income taxes as a percentage of earnings before income taxes for
1995 is not comparable to prior periods.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities (after payment of settlements and
related expenses of $1.3 million and $0.3 million for the three months ended
March 31,1997 and 1996, respectively) was $10.4 million and $19.2 million for
the three months ended March 31, 1997 and 1996, respectively. Net cash (used
for) provided by operating activities (after payment of settlements and
related expenses of $188.9 million, $32.1 million and $29.8 million,
respectively) was $(186.8) million, $47.0 million and $14.7 million, for the
years ended December 31, 1996, 1995 and 1994, respectively. The decrease in
cash flow from operations in 1996 primarily resulted from the Settlement
Payment, an increase in accounts receivable related to increased medical
necessity and related diagnosis code requirements of third-party payors placed
on the Company at the beginning of 1996 and reflects the lower collection
rates experienced beginning in the second quarter as a result of the more
stringent requirements as discussed above.

Capital expenditures were $3.1 million and $14.9 million for the three
months ended March 31, 1997 and 1996, respectively and $54.1 million, $75.4
million and $48.9 million for the years ended December 31, 1996, 1995 and
1994, respectively. The Company expects capital expenditures to be
approximately $70.0 million in 1997 and $70.0 million in 1998 to further
automate laboratory processes and to improve efficiency. Such expenditures are
expected to be funded by cash flow from operations as well as borrowings under
the Company's credit facilities.

Increased medical necessity and related diagnosis code requirements of the
Medicare program were placed on the Company by certain third party carriers in
late 1995 and additional requirements were placed on the Company at the
beginning of 1996. The Company has experienced lower collection rates as a
result of these more stringent requirements. In addition, increased difficulty
in collecting amounts due from private insurance carriers, including certain
managed care plans, has negatively impacted cash flow from operations.
Finally, Merger related integration issues have also resulted in increased
accounts receivable balances as a result of the Company maintaining and
consolidating multiple billing information systems. The Company currently has
plans in place to stabilize collection rates and improve the collection of
accounts receivable. See "Business--Billing". To date, however, collection
rates have continued to decline and additional changes in requirements of
third-party payors could increase the difficulty in collections. There

can be no assurance of the success of the Company's plans to improve
collections and, due to changes in medical necessity requirements, the Company
expects accounts receivable balances to continue to exceed 1995 levels.

In connection with the Merger, the Company entered into the Existing Credit
Agreement, with the banks named therein (the "Banks") and an administrative
agent (the "Bank Agent"), which made available to the Company the Term Loan
Facility of $800.0 million and the Revolving Credit Facility of $450.0
million. On April 28, 1995, the Company borrowed $800.0 million under the Term
Loan Facility and $184.0 million under the Revolving Credit Facility (i) to
pay the cash payment to shareholders in connection with the Merger; (ii) to
repay in full the existing revolving credit and term loan facilities of a
wholly owned subsidiary of the Company of approximately $640.0 million
including interest and fees; (iii) to repay approximately $50.0 million of
existing indebtedness of RBL; and (iv) for other transaction costs in
connection with the Merger and for use as working capital and general
corporate purposes of the Company and its subsidiaries. Availability of funds
under the Existing Credit Agreement is conditioned on certain customary
conditions, and the Existing Credit Agreement, as amended, contains customary
representations, warranties, covenants and events of default.

As a result of potential defaults under the Existing Credit Agreement
resulting from among other things, the Company's performance and higher than
projected debt levels, the Settlement Charge, and the Roche Loan, the Company
has obtained several amendments and waivers to the Existing Credit Agreement.
In September 1996, the Company negotiated an amendment (the "Fourth
Amendment") to the Existing Credit Agreement. The Fourth Amendment modified
the interest coverage and leverage ratios applicable to the quarters ending
September 30 and December 31, 1996. The Fourth Amendment also increased the
interest rate margin on its revolving credit facility from 0.25% to 0.875% and
increased the interest rate margin on its term loan facility from 0.375% to
1.00%. As a result of the Settlement Charge in the third quarter of 1996, as
described above, the Company obtained a waiver (the "Third Waiver") which
excluded the special charge from covenant calculations for the periods covered
by the most recent amendment until 30 days after the 1996 Government
Settlement. As a result of the Roche Loan and the 1996 Government Settlement,
the Company negotiated a Fifth Amendment and Fourth Waiver (the "Fifth
Amendment") to the Existing Credit Agreement. The Fifth Amendment extended the
Third Waiver until January 31, 1997 and excluded the Roche Loan from covenant
calculations for the quarters ending December 31, 1996 and March 31, 1997. On
January 27, 1997, the Company negotiated a waiver (the "Fifth Waiver") which
further extended the Third Waiver until March 31, 1997.

As mentioned above, in March 1997, the Company entered into the Sixth
Amendment which eliminates amortization payments on the Term Loan Facility for
1997 and modifies the interest coverage and leverage ratios for the quarterly
periods through December 31, 1997. As a result of the Sixth Amendment certain
amounts outstanding under the Revolving Credit Facility and Term Loan Facility
that were classified as current liabilities in the September 30, 1996
financial statements have been reclassified to long-term debt in the December
31, 1996 financial statements. Under the Sixth Amendment, maturities under the
term loan facility aggregate $243.8 million, $162.5 million, $187.5 million
and $100.0 million in 1998 through 2001, respectively.

In March 1997 the Company also entered into the Amended Credit Agreement
which will become effective upon completion of the Rights Offering following
satisfaction of certain conditions precedent. Upon consummation of the Rights
Offering and receipt of $500 million in gross proceeds, the Amended Credit
Agreement makes available to the Company the Amended Term Loan Facility of
$643.8 million and the Amended Revolving Credit Facility of $450.0 million.

Credit Agreement maturity dates are extended approximately three years for the
Amended Term Loan Facility to March 31, 2004 and approximately two years for
the Amended Revolving Credit Facility to March 31, 2002. See "Description of
Amended Credit Agreement."

Borrowings under the Revolving Credit Facility were $384.0 million as of
March 31, 1997. In addition, in December 1996, the Company received a loan of
$187.0 million from Roche Holdings to fund the Settlement Payment in the form
of a promissory note which bears interest at 6.625% per annum and originally
matured on March 31, 1997. As discussed above, in late March 1997, the Company
obtained an extension of the Roche Loan to March 31, 1998. The Company
subsequently made the Settlement Payment in December 1996. The Roche Loan is
expected to be repaid with a portion of the proceeds from the Rights Offering.

Cash and cash equivalents on hand, cash flow from operations and additional
borrowing capabilities of $66.0 million under the Revolving Credit Facility as
of March 31, 1997 are expected to be sufficient to meet anticipated operating
requirements and provide funds for capital expenditures and working capital
through 1997. The Company's ability to meet anticipated operating
requirements, debt repayments, including the Roche Loan, and other anticipated
cash outlays beyond 1997 is substantially dependant upon the completion of the
Rights Offering. Failure to complete the Rights Offering or to complete it by
the end of February 1998 will require additional waivers or amendments to the
Existing Credit Agreement and an extension of the Roche Loan. There can be no
assurance that such waivers or amendments or extension can be obtained.
Therefore, the failure to complete the Rights Offering or complete it by the
end of February 1998 could have a material adverse effect on the Company's
financial condition and liquidity.

At December 31, 1996, the Company was a party to interest rate swap
agreements with certain major financial institutions, rated A or better by
Moody's Investor Service, solely to manage its interest rate exposure with
respect to $600.0 million of its floating rate debt under the Term Loan
Facility. The agreements effectively changed the interest rate exposure on
$600.0 million of floating rate debt to a weighted average fixed interest
rate, of 6.01%, through requiring that the Company pay a fixed rate in
exchange for the financial institutions paying a floating rate amount. Amounts
paid by the Company in 1996 were $2.0 million. The notional amounts of the
agreements are used to measure the interest to be paid or received and do not
represent the amount of exposure to credit loss. These agreements mature in
September 1998. The estimated cost at which the Company could terminate such
agreements was $1.9 million at April 30, 1997.

The gross proceeds of the Rights Offering will be used to (i) repay
approximately $294 million outstanding under the Existing Credit Agreement,
(ii) pay fees and expenses of approximately $13 million related to the Rights
Offering and (iii) repay the $187 million loan from Roche Holdings made in
December 1996 in order to fund the Settlement Payment plus accrued interest
thereon of approximately $6 million. See "Use of Proceeds."

CHANGES IN ACCOUNTING STANDARDS

On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share," replacing Accounting
Principles Board ("APB") Opinion No. 15, "Earnings per Share." SFAS No. 128
replaces "primary" and "fully diluted" earnings per share ("EPS") under APB
Opinion No. 15 with "basic" and "diluted" EPS. Unlike primary EPS, basic EPS
excludes the dilutive effects of options, warrants and other convertible
securities. Dilutive EPS reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted EPS. SFAS
No. 128 is effective for years ending after December 15, 1997. The Company
does not anticipate a significant impact on the calculation of earnings per
share as a result of the implementation of SFAS No. 128.

FORWARD LOOKING STATEMENTS

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 provides a new "safe
harbor" for forward-looking statements 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. Included herein are
certain forward-looking statements concerning the Company's operations,
economic performance and financial condition, including, in particular,
forward-looking statements regarding the Company's expectation of future
performance following implementation of its new business strategy. Such
statements are subject to various risks and uncertainties. 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, estimated, or budgeted by the Company in such forward-looking
statements.

(a) Heightened competition, including intensification of price competition.

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

(c) Adverse actions by governmental or other third-party payors, including
unilateral reduction of fee schedules payable to the Company.

(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies including specifically the HCFA's recent
requirement that laboratories performing certain automated blood
chemistry profiles to obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare
beneficiary.

(e) Adverse results from investigations of clinical laboratories by the
Federal Bureau of Investigation and the OIG including specifically
significant monetary damages and/or exclusion from the Medicare and
Medicaid programs.

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

(g) Adverse results in significant litigation matters.

(h) Denial of certification or licensure of any of the Company's clinical
laboratories under CLIA, by Medicare and Medicaid programs or other
Federal, state or local agencies.

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

(j) Inability to carry out marketing and sales plans.

(k) Inability to successfully integrate the operations of or fully realize
the costs savings expected from the consolidation of certain operations
and the elimination of duplicative expenses resulting from the April
28, 1995 merger of the Company and RBL or risk that declining revenues
or increases in other expenses will offset such savings.

(l) Ability of the Company to attract and retain experienced and qualified
personnel.

(m) Changes in interest rates causing an increase in the Company's
effective borrowing rate.

(n) The effect of the Company's effort to improve account profitability by
selectively repricing or discontinuing business with existing accounts
which perform below Company expectations.

(o)The failure to consummate the Rights Offering by the end of the second
quarter of 1997.

BUSINESS

OVERVIEW

Laboratory Corporation of America Holdings is one of the three largest
independent clinical laboratory companies in the United States based on 1996
net revenues. Through a national network of laboratories, the Company offers a
broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the year ended December 31, 1996, the Company had net sales of $1,607.7
million and EBITDA before a provision for settlements and related expenses,
restructuring charges and non-recurring expenses of $173.7 million. See
footnote (j) to "Selected Financial Data" for a discussion of certain matters
related to EBITDA. Primarily as a result of the Settlement Charge, operating
loss and net loss during such period were $118.8 million and $153.5 million,
respectively.

The Company has achieved a substantial portion of its growth through
acquisitions. In June 1994 the Company acquired Allied Clinical Laboratories,
Inc., then the sixth largest independent clinical laboratory testing company
in the United States (based on 1993 net revenues). On April 28, 1995, the
Company completed a merger with RBL, an indirect subsidiary of Roche pursuant
to an Agreement and Plan of Merger dated as of December 13, 1994. In
connection with the Merger, the Company changed its name from National Health
Laboratories Holdings Inc. to Laboratory Corporation of America Holdings. In
addition to the Merger and the Allied Acquisition, since 1993, the Company has
acquired a total of 57 small clinical laboratories with aggregate sales of
approximately $182.4 million.

During 1996 and the early part of 1997, the Company has undergone
significant changes in management with Thomas P. Mac Mahon assuming the role
of President and Chief Executive Officer in January 1997 in addition to his
position as Chairman. Prior to such time Mr. Mac Mahon served as Senior Vice
President of Roche and President of Roche Diagnostics Group where he was
responsible for the management of all United States operations of the
diagnostic businesses of Roche. In addition to Mr. Mac Mahon, the Company is
led by a new Chief Financial Officer, Wesley R. Elingburg, formerly Senior
Vice President--Finance, and a new management committee.

THE CLINICAL LABORATORY TESTING INDUSTRY

OVERVIEW

Laboratory tests and procedures are used generally by hospitals, physicians
and other health care providers and commercial clients to assist in the
diagnosis, evaluation, detection, monitoring and treatment of diseases and
other medical conditions through the examination of substances in blood,
tissues and other specimens. Clinical laboratory testing is generally
categorized as either clinical testing, which is performed on body fluids
including 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 in connection with the diagnosis and
treatment of illnesses. Certain of these tests and procedures are used
principally as tools in the diagnosis and treatment of a wide variety of
medical conditions such as cancer, AIDS, endocrine disorders, cardiac
disorders and genetic disease. The most frequently requested tests include
blood chemistry analyses, urinalyses, blood cell counts, PAP smears, AIDS
tests, microbiology cultures and procedures and alcohol and other substance-
abuse tests.

physicians in their offices and laboratories and approximately 35 percent went
to independent clinical laboratories. The HCFA has estimated that in 1996
there were over 5,000 independent clinical laboratories in the United States.

EFFECT OF MARKET CHANGES ON THE CLINICAL LABORATORY BUSINESS

Many market-based changes in the clinical laboratory business have occurred,
most involving the shift away from traditional, fee-for-service medicine to
managed-cost health care. The growth of the managed care sector presents
various challenges to the Company and other independent clinical laboratories.
Managed care providers typically contract with a limited number of clinical
laboratories and negotiate discounts to the fees charged by such laboratories
in an effort to control costs. Such discounts have resulted in price erosion
and have negatively impacted the Company's operating margins. In addition,
managed care providers have used capitated payment contracts in an attempt to
promote more efficient use of laboratory testing services. Under a capitated
payment contract, the clinical laboratory and the managed care provider agree
to a per month payment to cover all laboratory tests during the month,
regardless of the number or cost of the tests actually performed. Such
contracts also shift the risks of additional testing beyond that covered by
the capitated payment to the clinical laboratory. For the year ended December
31, 1996 such contracts accounted for approximately $64.5 million in net
sales. The increase in managed-cost health care has also resulted in declines
in the utilization of laboratory testing services.

In addition, Medicare and Medicaid and insurers, have increased their effort
to control the cost, utilization and delivery of health care services.
Measures to regulate health care delivery in general and clinical laboratories
in particular have resulted in reduced prices and added costs and decreasing
test utilization for the clinical laboratory industry by increasing complexity
and adding new regulatory and administrative requirements. From time to time,
Congress has also considered changes to the Medicare fee schedules in
conjunction with certain budgetary bills. Any future changes to the Medicare
fee schedules cannot be predicted at this time and management, therefore,
cannot predict the impact, if any, such proposals, if enacted, would have on
the results of operations of the Company.

The Company believes that the volume of clinical laboratory testing will be
positively influenced by several factors, including primarily: an expanded
base of scientific knowledge which has led to the development of more
sophisticated specialized tests and increased the awareness of physicians of
the value of clinical laboratory testing as a cost-effective means of
prevention, early detection of disease and monitoring of treatment. Additional
factors which have contributed to recent volume growth include: 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; expanded substance-abuse testing by corporations and governmental
agencies; increased testing for sexually transmitted diseases such as AIDS;
and the general aging of the population in the United States. The impact of
these factors is expected to be partially offset by declines in volume as a
result of increased controls over the utilization of laboratory services by
Medicare and other third party payors, particularly managed care
organizations.

BUSINESS STRATEGY

During 1996, management began implementing a new business strategy in
response to the Company's declining performance. These new strategic
objectives are as follows: remaining a low cost provider of clinical testing
services; providing high quality customer service to its clients; and
improving account profitability. In addition, the Company is focused on
certain growth initiatives beyond routine clinical laboratory testing. The
Company believes that as a result of this change in focus it is well
positioned to achieve its goal of leading the clinical laboratory industry by
providing its customers with innovative, responsive, and high quality
services.

LOW COST PROVIDER

The Company has also developed and implemented sophisticated management
information systems to monitor operations and control costs. All financial
functions are centralized in Burlington, North Carolina including purchasing
and accounting. Management believes this provides greater control over
spending as well as increased supervision and monitoring of results of
operations.

CLIENT SERVICE

The Company competes primarily on the basis of the quality of its testing,
reporting and information systems, its reputation in the medical community,
the pricing of its services and its ability to employ qualified personnel. The
Company believes it is a leading provider of laboratory testing in terms of
its menu and quality of testing services. As a result of the required focus on
the consolidation process related to the Merger, however, the Company believes
that its level of client service has been negatively impacted. Therefore, in
1997, with the consolidation process substantially completed, one of the
Company's goals is to improve client service. An important factor in improving
client service includes the Company's initiatives to improve its billing
process. See "--Billing."

ACCOUNT PROFITABILITY

Since the third quarter of 1996, the Company has begun an active effort to
improve the profitability of new and existing business. To date this effort
has focused primarily on reviewing existing contracts, including those with
managed care organizations, and selectively repricing or discontinuing
business with existing accounts which perform below Company expectations. The
Company believes that as a result of this effort, the first quarter of 1997
was the first quarter in two years that the Company's price per accession or
specimen increased versus the comparable prior year quarter. The Company is
also targeting price increases across most of its business lines, including
specialty and niche testing which have not seen price increases since the
Merger. While such increases may adversely affect volumes, the Company
believes that such measures along with other cost reduction programs, will
improve its overall profitability. Finally, the Company is reviewing its sales
organization and expects to modify its commission structure so that
compensation is tied more directly to the profitability of retained and new
business instead of the current practice of basing commissions primarily on
revenue generated. The Company is also reviewing alternatives relating to
regions of the country and certain businesses where profitability is not
reaching internal goals and may enter into joint ventures, alliances, or asset
swaps with interested parties in order to maximize regional operating
efficiencies.

FOCUSED GROWTH INITIATIVES

One of the Company's primary growth strategies is to develop an increasing
number of hospital alliances. These alliances can take several different forms
including laboratory management contracts, reference agreements and joint
ventures. Through these alliances the Company provides testing services as
well as contract management services. As hospitals continue to be impacted by
decreasing fee schedules from third party payors and managed care
organizations, the Company believes that they will seek the most cost-
effective laboratory services for their patients. Management believes the
Company's economies of scale as well as its delivery system will enable it to
assist the hospital in achieving this goal. These alliances are generally more
profitable than the Company's core business due to the specialized nature of
many of the testing services offered in the alliance program. In 1996, the
Company added 6 alliance agreements with hospitals, physician groups and other
care provider organizations representing approximately $20 million of annual
sales. This increased the total number of alliances to 20 at December 31, 1996
from 14 at December 31, 1995.

Another primary growth strategy for the Company is growth of its specialty
and niche businesses. In general the specialty and niche businesses are
designed to serve two market segments: (i) markets which are not served by the
routine clinical testing laboratory and therefore are subject to less
stringent regulatory and reimbursement constraints; and (ii) markets which are
served by the routine testing laboratory but offer the possibility of adding
related services from the same supplier. The Company's research and
development group continually seeks new and improved technologies for early
diagnosis. For example, the Company believes its Center for Molecular and
Biology and Pathology is a leader in molecular diagnostics and polymerase
chain reaction technologies which are often able to provide earlier and more
reliable information regarding HIV, genetic diseases, cancer and many viral
and bacterial diseases. These technologies may represent a significant savings
to managed care organizations by increasing the detection of early stage
(treatable) diseases. Also, the Company recently acquired Genetic Design, Inc.
and management believes it is now the largest provider of identity testing
services in the United States.

Finally, in 1996 the Company also began to focus efforts on selling its
services directly to payors of laboratory services. As a result of that focus,
the Company entered into an agreement with PCS Health Systems, Inc., a leading
pharmacy benefit management company with 58 million covered lives, to provide
laboratory services as an extension of the PCS prescription card services.
Through this agreement patients will be provided with identification cards
indicating beneficiary eligibility for both prescription benefits and the
Company's testing services. The Company will provide the testing services as
requested and bill PCS based on a predetermined fee schedule. The Company will
pay PCS certain percentage and fixed fees for adjudication of claims. One of
the advantages of the PCS agreements is that patient eligibility will be
determined at the time of testing through interface with the PCS information
system which will expedite processing of the claim for reimbursement.

LABORATORY TESTING OPERATIONS AND SERVICES

The Company has 28 major laboratories, and approximately 1,500 service sites
consisting of branches, patient service centers and STAT laboratories. A
"branch" is a central office which collects specimens in a region for shipment
to one of the Company's laboratories for testing. Test results can be printed
at a branch and conveniently delivered to the client. A branch also is used as
a base for sales staff. A "patient service center" generally is a facility
maintained by the Company to serve the physicians in a medical professional
building or other strategic locations. The patient service center collects the
specimens as requested by the physician. The specimens are sent, principally
through the Company's in-house courier system (and, to a lesser extent,
through independent couriers), to one of the Company's major laboratories for
testing. Some of the Company's patient service centers also function as "STAT
labs", which are laboratories that have the ability to perform certain routine
tests quickly and report results to the physician immediately. The Company
processed an average of approximately 250,000 patient specimens per day in
1996. Patient specimens are delivered to the Company accompanied by a test
request form. These forms, which are completed by the client, indicate the
tests to be performed and provide the necessary billing information.

Each specimen and related request form is checked for completeness and then
given a unique identification number. The unique identification number
assigned to each specimen helps to assure that the results are attributed to
the correct patient. The test request forms are sent to a data entry terminal
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 tests and the type
of equipment involved. Most of the Company's computerized testing equipment is
directly linked with the Company's information systems. Most routine testing
is completed by early the next morning, and test results are printed and
prepared for distribution by service representatives that day. Some clients
have local printer capability and have reports printed out directly in their
offices. Clients who request that they be called with a result are so notified
in the morning. It is Company policy to notify the client immediately if a
life-threatening result is found at any point during the course of the testing
process.

TESTING SERVICES

ROUTINE TESTING

The Company currently offers over 1,700 different clinical laboratory tests
or procedures. Several hundred of these are frequently used in general patient
care by physicians to establish or support a diagnosis, to monitor treatment
or medication or to search for an otherwise undiagnosed condition. The most
frequently requested routine tests include blood chemistry analyses,
urinanalyses, blood cell counts, pap smears and AIDS tests. These routine
procedures are most often used by practicing physicians in their outpatient
office practices. Physicians may elect to send such procedures to an
independent laboratory or they may choose to establish an in-house laboratory
to perform some of the tests.

The Company performs this core group of routine tests in each of its 28
major regional laboratories, which constitutes a majority of the testing
performed by the Company. The Company generally performs and reports most
routine procedures within 24 hours, utilizing a variety of sophisticated and
computerized laboratory testing instruments.

SPECIALTY AND NICHE TESTING

While the information provided by many routine tests may be used by nearly
all physicians, regardless of specialty, many other procedures are more
specialized in nature. Certain types of unique testing capabilities and/or
client requirements have been developed into specialty or niche businesses by
the Company which have become a primary growth strategy for the Company. In
general the specialty and niche businesses are designed to serve two market
segments; (i) markets which are not served by the routine clinical testing
laboratory and therefore are subject to less stringent regulatory and
reimbursement constraints; and (ii) markets which are served by the routine
testing laboratory and offer the possibility of adding related services from
the same supplier. The following are specialty and niche businesses in which
the Company offers testing and related services:

Allergy Testing............... The Company offers an extensive range of
allergen testing services as well as
computerized analysis and a treatment program
that enables primary care physicians to diagnose
and treat many kinds of allergic disorders.
Ambulatory Monitoring......... The Company performs a computer assisted
analysis of electrocardiograms and blood
pressure measurements. Many of these analyses
are submitted by physicians who require extended
(up to 24 hours) monitoring of these parameters
for patients.

Clinical Research Testing.... The Company regularly performs clinical
laboratory testing for pharmaceutical companies
conducting clinical research trials on new
drugs. This testing often involves periodic
testing of patients participating in the trial
over several years.
Diagnostic Genetics.......... The Company offers cytogenetic, biochemical and
molecular genetic tests.
Identity Testing............. The Company provides forensic identity testing
used in connection with criminal proceedings and
parentage evaluation services which are used to
assist in the resolution of disputed parentage
in child support litigation. Parentage testing
involves the evaluation of immunological and
genetic markers in specimens obtained from the
child, the mother and the alleged father.
Industrial Hygiene Testing... The Company maintains a separate testing
facility in Richmond, Virginia, dedicated to the
analysis of potentially toxic substances in the
workplace environment.
Kidney Stone Analysis........ The Company offers specialized patient analysis
assessing the risk of kidney stones based on
laboratory measurements and patient history.
Oncology Testing............. The Company offers an extensive series of
testing technologies that aid in diagnosing and
monitoring certain cancers and predicting the
outcome of certain treatments.
Substance Abuse Testing...... The Company provides urinalysis testing for the
detection of drugs of abuse for private and
government customers, and also provides blood
testing services for the detection of drugs of
abuse and alcohol. These testing services are
designed to produce "forensic" quality test
results that satisfy the rigorous requirements
for admissibility as evidence in legal
proceedings.
Veterinary Testing........... The Company offers clinical laboratory testing
of animal specimens for veterinarians which
require specialized testing procedures and
handling due to their differing characteristics.

The specialized or niche testing services noted above, as well as other
complex procedures, are sent to designated facilities where the Company has
concentrated the people, instruments and related resources for performing such
procedures so that quality and efficiency can be most effectively monitored.
The Company's Center for Molecular Biology and Pathology in Research Triangle
Park, North Carolina, also specializes in new test development and education
and training related thereto.

CLIENTS

The Company provides testing services to a broad range of health care
providers. During the year ended December 31, 1996, no client or group of
clients under the same contract accounted for more than two percent of the
Company's net sales. The primary client groups serviced by the Company
include:

Independent Physicians and Physician Groups

Physicians requiring testing for their patients who are unaffiliated with a
managed care plan are one of the Company's primary sources of testing
services. Fees for clinical laboratory testing services rendered for these
physicians are billed either to the physician, to the patient or the patient's
third party payor such as insurance companies, Medicare and Medicaid. Billings
are typically on a fee-for-service basis. If the billings are to the
physician, they are based on the wholesale or customer fee schedule and
subject to negotiation. Otherwise, the patient is billed at the laboratory's
retail or patient fee schedule and subject to third party payor limitations
and negotiation by physicians on behalf of their patients. Medicare and
Medicaid billings are based on government set fee schedules.

Hospitals

The Company serves hospitals with services ranging from routine and
specialty testing to contract management services. Hospitals generally
maintain an on-site laboratory to perform immediately needed testing on
patients receiving care. However, they also refer less time sensitive
procedures, less frequently needed procedures and highly specialized
procedures to outside facilities, including independent clinical laboratories
and larger medical centers. The Company typically charges hospitals for any
such tests on a fee-for-service basis which is derived from the Company's
customer fee schedule.

HMOs and Other Managed Care Groups

The Company serves HMOs and other managed care organizations. These medical
service providers typically contract with a limited number of clinical
laboratories and then designate the laboratory or laboratories to be used for
tests ordered by participating physicians. Testing is mostly performed on a
capitated basis for managed care organizations. Under a capitated payment
contract, the Company agrees to cover all laboratory tests during a given
month for which the managed care organization agrees to pay a flat monthly
fee. The tests covered under agreements of this type are negotiated for each
contract, but usually include mostly routine tests and exclude highly
specialized tests. Many of the national and large regional managed care
organizations prefer to use large independent clinical labs such as the
Company because they can service them on a national basis.

Other Institutions

The Company serves other institutions, including governmental agencies,
large employers and other independent clinical laboratories that do not have
the breadth of the Company's testing capabilities. The institutions typically
pay on a negotiated or bid fee-for-service basis.

PAYORS

Most testing services are billed to a party other than the "client" that
ordered the test. In addition, tests performed by a single physician may be
billed to different payors depending on the medical benefits of a particular
patient. Payors other than the direct patient, include, among others,
insurance companies, managed care organizations, Medicare and Medicaid. Based
on the year ended December 31, 1996 billings to the Company's respective
payors based on the total volume of accessions are as follows:

Accession Volume
as a % of Total
----------------
Revenue per
1996 Accession
---------------- -----------

Private Patients................................ 3-5% $65-75
Medicare, Medicaid and Insurance................ 25-30% $25-35
Commercial Clients.............................. 45-50% $15-25
Managed Care.................................... 15-20% $10-30

AFFILIATIONS AND ALLIANCES

The Company provides management services in a variety of health care
settings. The Company generally supplies the laboratory manager and other
laboratory personnel, as well as, equipment and testing supplies, to manage a
laboratory that is owned by a hospital, managed care organization or other
health care provider. In addition, the Company maintains a data processing
system to organize and report test results and to provide billing and other
pertinent information related to the tests performed in the managed
laboratory. Under the typical laboratory management agreement, the laboratory
manager, who is employed by the Company, reports to the hospital or clinic
administration. Thus, the hospital or clinic ("Provider") maintains control of
the laboratory. A pathologist designated by the Provider serves as medical
director for the laboratory.

An important advantage the Company offers to its clients is the flexibility
of the Company's information systems used in contract management services. In
addition to the ability to be customized for a particular user's needs, the
Company's information systems also interface with several hospital and clinic
systems, giving the user more efficient and effective information flow.

The Company's management service contracts typically have terms between
three and five years. However, most contracts contain a clause that permits
termination prior to the contract expiration date. The termination terms vary
but they generally fall into one of the following categories: (i) termination
without cause by either the Company or the contracted Provider after written
notice (generally 60 to 90 days prior to termination); (ii) termination by the
contracted Provider only if there are uncorrected deficiencies in the
Company's performance under the contract after notice by the contracted
Provider; or (iii) termination by the contracted Provider if there is a loss
of accreditation held by any Company laboratory that services the contracted
Provider, which accreditation is not reinstated within 30 days of the loss, or
up to 30 days' notice if there is a decline in the quality of services
provided under such contract which remains uncorrected after a 15-day period.
While the Company believes that it will maintain and renew its existing
contracts, there can be no assurance of such maintenance or renewal.

As part of its marketing efforts, and as a way to focus on a contract
management client's particular needs, the Company has developed several
different pricing formulas for its management services agreements. In certain
cases, profitability may depend on the Company's ability to accurately predict
test volumes, patient encounters or the number of admissions in the case of an
inpatient facility.

One of the Company's primary growth strategies is to develop an increasing
number of hospital alliances. See "Growth Strategies."

PCS HEALTH SYSTEMS, INC.

In 1996, the Company began to focus efforts on selling its services directly
to payors of laboratory services. As a result of that focus, the Company
entered into an agreement with PCS to provide laboratory services as an
extension of its prescription card services. PCS, a wholly-owned subsidiary of
Eli Lilly and Company, is one of the leading pharmacy benefit management
companies in the United States with 58 million members covered by its programs
and services. The arrangement with PCS is modeled after the current PCS
prescription benefit plan. Patients will be provided with identification cards
indicating beneficiary eligibility for both PCS prescription benefits and
Company testing services. The Company will provide testing services as
requested and bill PCS based on a predetermined fee schedule. The Company will
pay PCS certain percentage and fixed fees for adjudication of claims.

The process begins when a test sample is collected at the physician's office
or local Company service center. Patient eligibility will be determined at the
time of testing through interface with the PCS information system which will
expedite processing of the claim for reimbursement. The laboratory sample will
be sent via the courier to the Company testing facility. After tests are
completed, the results are forwarded to the

physician and the billing information regarding the tests performed are sent
to PCS for plan processing and claim remittance.

The benefits to the client under the PCS arrangement include the ability to
tailor the program to meet the specific needs of client companies and their
employees and the ability to provide (i) combined utilization reporting for
potential outcomes measurement and disease management and (ii) consistent,
cost effective, quality laboratory services to employees in several geographic
locations through the Company's national presence. The benefits to the Company
are the ability to ensure eligibility at the time of specimen collection,
pricing above the Company's current composite price per accession despite a
significant discount to the client and improved cash flow through contracted
reimbursement. The Company expects to begin to realize revenues from this
agreement beginning in the second half of 1997.

SALES AND MARKETING AND CLIENT SERVICE

The Company offers its services through a combination of direct sales
generalists and specialists. Sales generalists market the mainstream or
traditional routine laboratory services primarily to physicians, while
specialists concentrate on individual market segments, such as hospitals or
managed care organizations, or on testing niches, such as identity testing or
genetic testing. Specialist positions are established when an in-depth level
of expertise is necessary to effectively offer the specialized services. When
the need arises, specialists and generalists work cooperatively to address
specific opportunities. At December 31, 1996, the Company employed
approximately 267 generalists and 81 specialists. The Company's sales
generalists and specialists are compensated through a combination of salaries,
commissions and bonuses, at levels commensurate with each individual's
qualifications and responsibilities. Commissions are primarily based upon the
individual's productivity in generating new business for the Company.

The Company also employs customer service associates ("CSAs") to interact
with clients on an ongoing basis. CSAs monitor the status of the services
being provided to clients, act as problem-solvers, provide information on new
testing developments and serve as the client's regular point of contact with
the Company. At December 31, 1996, the Company employed approximately 370
CSAs. CSAs are compensated with a combination of salaries and bonuses
commensurate with each individual's qualifications and responsibilities.

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, insurance plans, employers and increasingly by
patients themselves. In view of these changes, the Company has adapted its
sales and marketing structure to more appropriately address the new
opportunities. For example, the Company has expanded its specialists sales
positions in both its primary business and its niche businesses in order to
maximize the Company's competitive strengths of advanced technology and
marketing focus. Additionally, the Company has begun to integrate selected
traditional sales and customer support functions into a new position, the
Account Manager, which will have responsibility for certain sales, service and
daily operational contact with physician-clients.

The Company competes primarily on the basis of the quality of its testing,
reporting and information systems, its reputation in the medical community,
the pricing of its services and its ability to employ qualified personnel. As
a result of the required focus on the consolidation process related to the
Merger, however, the Company believes that its level of client service has
been negatively impacted. Therefore, in 1997, with the consolidation process
substantially completed, one of the Company's goals is to improve client
service. An important factor in improving client service includes the
Company's initiatives to improve its billing process. See "--Billing."

INFORMATION SYSTEMS

The Company has developed and implemented sophisticated management
information systems to monitor operations and control costs. All financial
functions are centralized in Burlington, North Carolina including purchasing
and accounting. Management believes this provides greater control over
spending as well as increased supervision and monitoring of results of
operations.

The Company believes that the health care provider's need for data will
continue to place high demands on its information systems staff. The Company
operates several systems to handle laboratory, billing and financial data and
transactions. The Company believes that the efficient handling of information
involving clients, patients, payors and other parties will be a critical
factor in the Company's future success. The Corporate Information Systems
Division manages its information resources and programs on a consolidated
basis in order to achieve greater efficiency and economies of scale. In
addition, as a key part of its response to these challenges, the Company
employs a Chief Information Officer, whose responsibility is to integrate,
manage and develop the Company's information systems.

In 1996, information systems activities have been focused on selection and
consolidation of the Company's multiple laboratory and billing systems to
standardized laboratory testing and billing systems. The Company has also been
focused on the establishment of regional data centers to handle all of the
information processing needs of the Company. The Company believes that it can
benefit from the conversion of its multiple billing systems into a centralized
system which it plans to implement once problems with the collection of
accounts receivable balances resulting from increased medical necessity and
diagnosis code requirements are corrected. These conversions are expected to
be completed within two years. 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.

BILLING

Billing for laboratory services is a complicated process. Laboratories must
bill many different payors such as doctors, patients, hundreds of different
insurance companies, Medicare, Medicaid and employer groups, all of whom have
different billing requirements. The Company believes that a majority of its
bad debt expense is the result of 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. The Company
believes that this experience is similar to that of its primary competitors.
The Company performs the requested tests and returns 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 or rectify any incorrect billing information received from the
health care provider. Among the many other factors complicating the billing
process are more complicated billing arrangements due to contracts with third-
party administrators, 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.

The Company's bad debt expense has increased since the Merger principally
due to three developments that have further complicated the billing process:
(1) increased complexities in the billing process due to requirements of
managed care payors; (2) increased medical necessity and diagnosis code
requirements; and (3) existence of multiple billing information systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

During the fourth quarter of 1995 and the second quarter of 1996, the
Company recorded pre-tax special charges of $15 million and $10 million,
respectively, based on the Company's determination that additional reserves
were needed to cover potentially lower collection rates from several third-
party payors. The 1995 charge was necessitated by the deterioration in the
Company's accounts receivable collection rates in the fourth quarter of 1995
primarily due to the effect of increased medical necessity and diagnosis

code requirements of third party payors placed on the Company in the second
half of 1995. Additional such requirements were placed on the Company at the
beginning of 1996, which resulted in a further deterioration in accounts
receivable collection rates in the second quarter of 1996. As a result of this
further deterioration, the Company recorded the special charge of $10.0
million in the second quarter of 1996. In addition, the Company increased its
monthly provision for doubtful accounts beginning in the third quarter of 1996
as a result of continued lower collection rates. To date, accounts receivable
balances have continued to grow even though revenues have not increased.
Although there can be no assurance of success, the Company has recently
developed a number of initiatives to address the complexity of the billing
process and to improve collection rates. These initiatives include:
reorganization of departments to allow for more focus on specific issues;
retention of management consultants to assess the situation and assist in re-
engineering the billing process; establishment of a project group to address
inaccurate and missing billing information captured when the specimen is
received; addition of staff in each operating division to train field
personnel in billing matters and to review and approve contracts with third-
party payors to ensure that contracts can be properly billed; and training of
clients related to limited coverage tests and the importance of providing
diagnosis codes pertaining to such tests. Additionally, the Company believes
that it can benefit from the conversion of its multiple billing systems into a
centralized system which it plans to implement once the growth in accounts
receivable is stabilized.

QUALITY ASSURANCE

The Company considers the quality of its tests to be of critical importance,
and it has established a comprehensive quality assurance program for all of
its laboratories and other facilities, designed to help assure accurate and
timely test results. In addition to the compulsory external inspections and
proficiency programs demanded by HCFA and other regulatory agencies, Company-
wide systems and procedures are in place to emphasize and monitor quality
assurance. All of the Company's regional laboratories are subject to on-site
evaluations, the College of American Pathologists ("CAP") proficiency testing
program, state surveys and the Company's own internal quality control
programs.

External Proficiency/Accreditations. The Company participates in numerous
externally-administered, blind quality surveillance programs, including the
CAP program. The blind programs supplement all other quality assurance
procedures and give Company management the opportunity to review its technical
and service performance from the client's perspective.

Internal Quality Control. The Company regularly performs internal quality
control testing by running quality control samples with known values with
patient samples submitted for testing. All quality control sample test results
are entered into the Company's national laboratory computer, which connects
the Company's facilities nationwide to a common on-line quality control
database. This system helps technologists and technicians check quality
control values and requires further prompt verification if any quality control
value is out of range. The Company has an extensive, internally administered
program of blind sample proficiency testing (i.e. the testing laboratory does
not know the sample being tested is a quality control sample), as part of
which the Company's locations receive specimens from the Company's Quality
Assurance and Corporate Technical Services departments for analysis.

The CAP accreditation program involves both on-site inspections of the
laboratory and participation in the CAP's proficiency testing program for all
categories in which the laboratory is accredited by the CAP. The CAP is an
independent non-governmental organization of board certified pathologists
which offers an accreditation program to which laboratories can voluntarily
subscribe. The CAP has been accredited by HCFA to inspect clinical
laboratories to determine CLIA standards. A laboratory's receipt of
accreditation by the CAP satisfies the Medicare requirement for participation
in proficiency testing programs administered by an external source. All of the
Company's major laboratories are accredited by the CAP.

COMPETITION

The clinical laboratory business is intensely competitive. The Company
believes that in 1996 the entire United States clinical laboratory testing
industry had revenues exceeding $36 billion; approximately 50% of such
revenues were attributable to hospital-affiliated laboratories, approximately
35% were attributable to independent clinical laboratories and approximately
15% were attributable to physicians in their offices and laboratories. As
recently as 1993, there were seven laboratories that provided clinical
laboratory testing services on a national basis: NHL, RBL, Quest, SmithKline,
Damon Corporation, Allied and Nichols Institute. Apart from the Merger and the
Allied Acquisition, Quest acquired Nichols Institute in August 1994 and Damon
Corporation 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; Quest, 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.

In addition to the two other 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 believes that the following factors, among others, are often used by
health care providers in selecting a laboratory: (i) pricing of the
laboratory's test 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 "--Clients" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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 laboratories 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
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.

PROPERTIES

The following table summarizes certain information as to the Company's
principal operating and administrative facilities as of December 31, 1996.

APPROXIMATE
AREA (IN
NATURE OF LOCATION SQUARE FEET) NATURE OF OCCUPANCY
------------------ ------------ -------------------------------------------

OPERATING FACILITIES:
Birmingham, Alabama..... 100,000 Lease expires 2005
Phoenix, Arizona........ 43,000 Lease expires 2001; one 5 year renewal
option
San Diego, California... 54,000 Lease expires 2007
Denver, Colorado........ 20,000 Lease expires 2001; two 5 year renewal
options
Tampa, Florida.......... 95,000 Lease expires 2009; one 5 year renewal
option
Chicago, Illinois....... 40,000 Lease expires 2003; two 5 year renewal
options
Louisville, Kentucky.... 60,000 Lease expires 2002; three 5 year renewal
options
Detroit, Michigan....... 32,000 Lease expires 2004; two 5 year renewal
options
Kansas City, Missouri... 78,000 Owned
Reno, Nevada............ 16,000 Owned
14,000 Lease expires 1999; 2 year renewal option
Raritan, New Jersey..... 186,000 Owned
Uniondale, New York..... 108,000 Lease expires 2007; two 5 year renewal
options
Burlington, North 205,000 Owned
Carolina...............
Charlotte, North 25,000 Lease expires 1997; renewal option every 3
Carolina............... years
Research Triangle Park,
North Carolina......... 74,000 Lease expires 2008, three 5 year renewal
options
111,000 Lease expires 2011; three 5 year renewal
options
Winston-Salem, North 73,000 Lease expires 2009; one 5 year renewal
Carolina............... option
Dublin, Ohio............ 82,000 Owned
Memphis, Tennessee...... 30,000 Lease expires 1999; one 5 year renewal
option
Dallas, Texas........... 54,000 Lease expires 2004; one 5 year renewal
option
Houston, Texas.......... 32,000 Lease expires 1997
San Antonio, Texas...... 44,000 Lease expires 2004; one 5 year renewal
option
Salt Lake City, Utah.... 20,000 Lease expires 2002; two 5 year renewal
options
Chesapeake, Virginia.... 21,000 Lease expires 2002; two 5 year renewal
options
Herndon, Virginia....... 64,000 Leases expire 1999, 2004; one 5 year
renewal option, one five year renewal
option
Richmond, Virginia...... 57,000 Lease expires 2001; one 5 year renewal
option
Seattle, Washington..... 42,000 Lease expires 1998; two 5 year renewal
options
Fairmont, West 25,000 Lease expires 2005; three 5 year renewal
Virginia............... options
ADMINISTRATIVE
FACILITIES:
Burlington, North 160,000 Owned
Carolina...............
188,000 Leases expire 1997-2008; various options to
purchase or renew

All of the major laboratory facilities have been built or improved for the
single purpose of providing clinical laboratory testing services. The Company
believes that these facilities are suitable and adequate and have sufficient
production capacity for its currently foreseeable level of operations. The
Company believes that if it were to lose the lease on any of the facilities it
presently leases, it could find alternate space at competitive market rates
and readily relocate its operations to such new locations without material
disruption to its operations.

EMPLOYEES

At December 31, 1996, the Company employed approximately 22,000 people.
These include approximately 18,000 full-time employees and approximately 4,000
part-time employees, which represents the equivalent of approximately 19,300
persons full-time. Of the approximately 19,300 full-time equivalent employees,
approximately 400 are sales personnel, approximately 17,000 are laboratory and
distribution personnel and approximately 1,900 are administrative and data
processing personnel. A subsidiary of the Company has one collective
bargaining agreement which covers approximately 20 employees. The Company
believes that its overall relations with its employees are good.

LEGAL PROCEEDINGS

The Company is involved in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, based upon the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the financial position or results of operations of
the Company. In addition, the Company has recently been contacted by
representatives of certain insurance companies, and individuals in a purported
class action, who have asserted claims for private reimbursement which are
similar to the Government claims recently settled. The Company is carefully
evaluating these claims, and although there can be no assurance, based upon
the information currently available to it, management does not believe that
the ultimate outcome of these claims will have a material adverse effect on
its financial condition. However, due to the early stage of such claims,
management cannot make an estimate of loss or predict whether or not such
claims will have a material adverse effect on the Company's results of
operations in any particular period.

REGULATION AND REIMBURSEMENT

GENERAL

The clinical laboratory industry is subject to significant governmental
regulation at the Federal, state and local levels. Under CLIA, virtually all
clinical laboratories, including those owned by the Company, must be certified
by the Federal government. Many clinical laboratories must also meet
governmental standards, undergo proficiency testing and are subject to
inspection. Certifications or licenses are also required by various state and
local laws.

The health care industry is undergoing significant change as third-party
payors, such as Medicare and Medicaid and insurers, 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 will 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 LABORATORIES

CLIA extends Federal oversight to virtually all clinical laboratories by
requiring that laboratories be certified by the government. Many clinical
laboratories must also meet 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.

In 1992, HHS published regulations implementing CLIA. The quality standards
and enforcement procedure regulations became effective in 1992, although
certain personnel, quality control and proficiency testing requirements are
currently being phased in by HHS. The quality standards regulations divide all
tests into three categories (waivered, moderate complexity and high
complexity) and establish varying requirements depending upon the complexity
of the test performed. A laboratory that performs high complexity tests must
meet more stringent requirements than a laboratory that performs only moderate
complexity tests, while those that perform only one or more of approximately
twelve routine "waivered" tests may apply for a waiver from most requirements
of CLIA. All major and many smaller company facilities are certified by CLIA
to perform high complexity testing. The remaining smaller testing sites of the
Company are certified by CLIA to perform moderate complexity testing or have
obtained a waiver from most requirements of CLIA. Generally, the HHS
regulations require, for laboratories that perform high complexity or moderate
complexity tests, the implementation of systems that ensure the accurate
performance and reporting of test results, establishment of quality control
systems, proficiency testing by approved agencies and biennial inspections.

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 and 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 provides that a state
may adopt more stringent regulations than Federal law. For example, state law
may require that laboratory personnel meet certain

qualifications, specify certain quality controls, maintain certain records and
undergo proficiency testing. For example, certain of the Company's
laboratories are subject to the State of New York's clinical laboratory
regulations, which contain provisions that are more stringent than Federal
law.

The Company's laboratories have continuing programs to ensure that their
operations meet all applicable regulatory requirements.

REGULATION AFFECTING REIMBURSEMENT OF 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 can be
paid under the fee schedule. Laboratories bill the program directly and must
accept the scheduled amount as payment in full for covered tests performed on
behalf of Medicare beneficiaries. In addition, state Medicaid programs are
prohibited from paying more than the Medicare fee schedule amount for clinical
laboratory services furnished to Medicaid recipients. In 1996 and 1995 the
Company derived approximately 23% and 28%, respectively, of its net sales from
tests performed for beneficiaries of Medicare and Medicaid programs. 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 testing services. Since 1984, Congress has
periodically reduced the ceilings on Medicare reimbursement to clinical
laboratories from previously authorized levels. In 1993, pursuant to
provisions in the Omnibus Budget and Reconciliation Act of 1993 ("OBRA '93"),
Congress reduced, effective January 1, 1994, the Medicare national limitations
from 88% of the 1984 national median to 76% of the 1984 national median, which
reductions were implemented on a phased-in basis from 1994 through 1996 (to
84% in 1994, 80% in 1995 and 76% in 1996). The 1996 reduction to 76% was
implemented as scheduled on January 1, 1996. OBRA '93 also eliminated the
provision for annual fee schedule increases based upon the consumer price
index for 1994 and 1995. These reductions were partially offset, however, by
annual consumer price index fee schedule increases of 3.2% and 2.7% in 1996
and 1997, respectively. Because a significant portion of the Company's costs
are relatively fixed, these 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.

On January 1, 1993, numerous changes in the Physicians' Current Procedural
Terminology ("CPT") were published. The CPT is a coding system that is
published by the American Medical Association. It lists descriptive terms and
identifying codes for reporting medical and medically related services. The
Medicare and Medicaid programs require suppliers, including laboratories, to
use the CPT codes when they bill the programs for services performed. HCFA
implemented these CPT changes for Medicare on August 1, 1993. The CPT changes
have altered the way the Company bills third-party payors for some of its
services, thereby reducing the reimbursement the Company receives from those
programs for some of its services. For example, certain codes for
calculations, such as LDL cholesterol, were deleted and are no longer a
payable service under Medicare and Medicaid.

Moreover, Medicare denied reimbursement to NHL for claims submitted for HDL
cholesterol and serum ferritin (a measure of iron in the blood) tests from
September 1993 to December 1993, at which time NHL removed such tests from its
basic test profiles.

In 1996, the HCFA implemented changes in the policies used to administer
Medicare payments to clinical laboratories for the most frequently performed
automated blood chemistry profiles. Among other things, the changes
established a consistent standard nationwide for the content of the automated
chemistry profiles. Another change incorporated in the HCFA policy requires
laboratories performing certain automated blood chemistry profiles to obtain
and provide documentation of the medical necessity of tests included in the
profiles for each Medicare beneficiary. The Company expects to incur
additional

costs associated with the implementation of these requirements. The amount of
additional costs and potential reductions in reimbursement for certain
components of chemistry profiles and the impact on the Company's financial
condition and results of operations have not yet been determined.

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 intentionally paying
anything of value to influence the referral of Medicare and Medicaid business.
HHS has published safe harbor regulations which specify certain business
activities that, although literally covered by the laws, will not violate the
Medicare/Medicaid anti-kickback laws. Failure to fall within a safe harbor
does not constitute a violation of the anti-kickback laws if all conditions of
the safe harbor are met; rather, the arrangement would remain subject to
scrutiny by HHS.

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 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 such 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 the arrangements 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.

According to the 1995 work plan of the OIG, its recently established Office
of Civil Fraud and Administrative Adjudication ("OCFAA") will be responsible
for protecting the government-funded health care programs and deterring
fraudulent conduct by health care providers through the negotiation and
imposition of civil monetary penalties, assessments and program exclusions.
The OCFAA works very closely with the Department of Justice, the Office of
General Counsel and the OIG investigative and audit offices in combating fraud
and abuse. In addition, the OIG has stated in its 1995 work plan that it will
determine the extent to which laboratories supply physicians' offices with
phlebotomists (blood-drawing technicians), offer management services or
medical waste pick-up to physicians, provide training to physicians or engage
in other financial arrangements with purchasers of laboratories' services. The
OIG will assess the potential benefits of such arrangements as well as the
extent to which such arrangements might be unlawful.

In March 1992, HCFA published proposed regulations to implement the Medicare
statute's prohibition (with certain exceptions) on referrals by physicians who
have an investment interest in or a compensation arrangement with
laboratories. The prohibition on referrals also applies where an immediate
family member of a physician has an investment interest or compensation
arrangement with a laboratory. The proposed regulations would define
remuneration that gives rise to a compensation arrangement as including
discounts granted by a laboratory to a physician who sends testing business to
the laboratory and who pays the laboratory for such services. If that
definition of remuneration were to have become effective, it

could have had an impact on the way the Company prices its services to
physicians. However, in August 1993, the referenced Medicare statute was
amended by OBRA '93. One of these amendments makes it clear that day-to-day
transactions between laboratories and their customers, including, but not
limited to, discounts granted by laboratories to their customers, are not
affected by the compensation arrangement provisions of the Medicare statute.

ENVIRONMENTAL AND OCCUPATIONAL SAFETY

The Company is subject to licensing and regulation under Federal, state and
local laws and regulations relating to the protection of the environment and
human health and safety, including laws and regulations relating to the
handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials as well as to the safety and health
of laboratory employees. All Company laboratories are subject to applicable
Federal and state laws and regulations relating to biohazard disposal of all
laboratory specimens and the Company utilizes outside vendors for disposal of
such specimens. In addition, the Federal Occupational Safety and Health
Administration 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, and
transmission of, blood-borne pathogens. Although the Company is not aware of
any current material non-compliances with such Federal, state and local laws
and regulations, failure to comply could subject the Company to denial of the
right to conduct business, fines, criminal penalties and/or other enforcement
actions.

DRUG TESTING

Drug testing for public sector employees is regulated by the Substance Abuse
and Mental Health Services Administration ("SAMSHA") (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 as meeting SAMSHA standards. The
Company's Research Triangle Park, North Carolina; Memphis, Tennessee; Raritan,
New Jersey; Seattle, Washington; Herndon, Virginia and Reno, Nevada
laboratories are SAMSHA certified.

CONTROLLED SUBSTANCES

The use of controlled substances in testing for drugs of abuse is regulated
by the Federal Drug Enforcement Administration.

OIG INVESTIGATIONS

Several Federal agencies are responsible for investigating allegations of
fraudulent and abusive conduct by health care providers, including the Federal
Bureau of Investigation, the OIG and the DOJ. In its published work plan for
1992-1993, the OIG indicated its intention to target certain laboratory
practices for investigation and prosecution. Pursuant to one such project
described in such work plan, entitled "Laboratory Unbundle," laboratories that
offer packages of tests to physicians and "unbundle" them into several "tests
to get higher reimbursement when billing Medicare and Medicaid" will be
identified and "suitable cases will be presented for prosecution." Under
another project described in such work plan, laboratories "that link price
discounts to the volume of physician referrals, "unbundle' tests in order to
bill Medicare at a higher total rate, and conduct unnecessary tests . . . will
be identified to coordinate investigations through the country."

1996 GOVERNMENT SETTLEMENT

In August 1993, RBL and Allied each received a subpoena from the OIG
requesting documents and information concerning pricing and billing practices.
In September 1993, NHL received a subpoena from

the OIG which required NHL to provide documents to the OIG concerning its
regulatory compliance procedures. Among other things, the OIG subpoena
received by RBL and Allied called for the production of documents regarding 14
blood chemistry tests which were being or had been performed by certain
independent clinical laboratories in conjunction with automated chemistry
profiles and which were being or had been billed separately to Medicare or
Medicaid. An automated chemistry profile is a grouping of tests that can be
performed together on a single specimen and that Medicare and Medicaid pay
under the Medicare fee schedule. The government's investigations covered
billings for tests performed by NHL, RBL and Allied from 1988 to 1994. These
tests were deemed by regulators to be medically unnecessary. The
investigations were part of a broad-based federal inquiry into Medicare and
related billings that have resulted in financial settlements with a number of
other clinical laboratories. The inquiries have also prompted the imposition
of more stringent regulatory compliance requirements industry-wide. In
November 1996, the Company agreed to enter into a comprehensive Corporate
Integrity Agreement and to pay $182 million to settle civil claims involving
Medicare and related government billings for tests performed by NHL, RBL and
Allied. These claims arose out of the government's contention that
laboratories offering profiles containing certain test combinations had the
obligation to notify ordering physicians how much would be billed to the
government for each test performed for a patient whose tests are paid for by
Medicare, Medicaid or other government agency. The government contended claims
submitted for tests ordered by physicians and performed by the laboratories
were improper. The Company settled these allegations without an admission of
fault. The Corporate Integrity Agreement, among other things, requires that
detailed notifications be made to physicians. In addition, as part of the
overall settlement, a San Diego laboratory that was formerly part of Allied
agreed to plead guilty to a charge of filing a false claim with Medicare and
Medicaid in 1991 and to pay $5 million to the Federal government. The assets
of the San Diego laboratory were sold by Allied in 1992, two years before the
Allied Acquisition. As is customary with asset sales, Allied retained the
liability for conduct preceding the sale--a liability the Company later
succeeded to, following the Allied Acquisition and Merger. As a result of
negotiations related to the 1996 Government Settlement, the Company recorded a
charge of $185.0 million in the third quarter of 1996 to increase reserves for
the 1996 Government Settlement described above and other related expenses of
government and private claims resulting therefrom. In addition, the Company
has recently been contacted by representatives of certain insurance companies,
and individuals in a purported class action, who have asserted claims for
private reimbursement which are similar to the Government claims recently
settled. The Company is carefully evaluating these claims, and although there
can be no assurance, based upon the information currently available to it,
management does not believe that the ultimate outcome of these claims will
have a material adverse effect on its financial condition. However, due to the
early stage of such claims, management cannot make an estimate of loss or
predict whether or not such claims will have a material adverse effect on the
Company's results of operations in any particular period.

Pursuant to the 1996 Government Settlement, the Company paid $187 million in
December 1996. The Settlement Payment was paid from the proceeds of a $187
million loan made by Roche to the Company in December 1996. See "Certain
Relationships and Related Transactions Other Transactions with Roche."

1992 NHL GOVERNMENT SETTLEMENT

In November 1990, NHL became aware of a grand jury inquiry relating to its
pricing practices being conducted by the United States Attorney for the San
Diego area (the Southern District of California) with the assistance of the
OIG. On December 18, 1992, NHL entered into a settlement with the United
States Attorney (the "1992 NHL Government Settlement"), which related to the
government's contention that NHL improperly included tests for HDL cholesterol
and serum ferritin in its basic test profile, without clearly offering an
alternative profile that did not include these medical tests. The government
also contended that, in certain instances, physicians were told that these
additional tests would be included in the basic test profile at no extra
charge. As a result, the government contended, NHL's marketing activities
denied physicians the ability to exercise their judgment as to the medical
necessity of these tests.

Pursuant to the 1992 NHL Government Settlement, NHL pleaded guilty to the
charge of presenting two false claims to the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS") and paid a $1 million fine. In
connection with pending and threatened civil claims, NHL also agreed to pay
$100 million to the Federal Government in installments. As of December 31,
1995, all such payments due to the government under the 1992 NHL Government
Settlement had been made. Concurrent with the 1992 NHL Government Settlement,
NHL settled related Medicaid claims with states that account for over 99.5% of
its Medicaid business and paid $10.4 million to the settling states.

1994 ALLIED GOVERNMENT SETTLEMENT

In April 1994, Allied received a subpoena from the OIG requesting documents
and certain information regarding the Medicare billing practices of its
Cincinnati, Ohio clinical laboratory with respect to certain cancer screening
tests. In March 1995, Allied resolved the issues raised by the April 1994
subpoena and a related qui tam action commenced in Cincinnati, Ohio Federal
court by entering into agreements with, among others, HHS, the United States
Department of Justice and the relators in the qui tam action pursuant to which
it agreed to pay $4.9 million to settle all pending claims and inquiries
regarding these billing practices and certain others. NHL had previously
established reserves that were adequate to cover such settlement payments. In
connection with the settlement, Allied agreed with HHS, among other things, to
implement a corporate integrity program to ensure that Allied and its
representatives remain in compliance with applicable laws and regulations and
to provide certain reports and information to HHS regarding such compliance
efforts.

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 factor throughout
the clinical laboratory industry. The Company has implemented a comprehensive
company-wide compliance program. The objective of the program is to develop,
implement and update as necessary aggressive and reliable compliance
safeguards. Emphasis is placed on developing training programs for personnel
to attempt to assure the strict implementation of all rules and regulations.
Further, in-depth reviews of procedures, personnel and facilities are
conducted to assure regulatory compliance throughout the Company. Such
sharpened focus on regulatory standards and procedures will continue to be a
priority for the Company in the future.

The Company believes that it is in compliance in all material respects with
all statutes, regulations and other requirements applicable to its clinical
laboratory operations. The clinical laboratory testing industry is, however,
subject to extensive regulation, and many of these statutes and regulations
have not been interpreted by the courts. There can be no assurance therefore
that applicable statutes and 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.

MANAGEMENT

The following table sets forth the directors and executive officers of the
Company:

NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------

Thomas P. Mac Mahon................. 50 Chairman of the Board, President, Chief
Executive Officer and Director
Jean-Luc Belingard.................. 48 Director
Wendy E. Lane....................... 46 Director
Robert E. Mittelstaedt, Jr. ........ 53 Director
James B. Powell, M.D. .............. 58 Director
David B. Skinner, M.D. ............. 62 Director
Andrew G. Wallace, M.D. ............ 62 Director
Wesley R. Elingburg................. 40 Executive Vice President, Chief Financial
Officer and Treasurer
Larry L. Leonard.................... 56 Executive Vice President
Richard L. Novak.................... 56 Executive Vice President
Bradford T. Smith................... 43 Executive Vice President, General Counsel,
Corporate Compliance Officer and Secretary
Stevan R. Stark..................... 49 Executive Vice President
Ronald B. Sturgill.................. 60 Executive Vice President
William M. Meilahn.................. 56 Senior Vice President, Chief Information
Officer

Thomas P. Mac Mahon has served as Chairman of the Board and Director since
April 28, 1996. Prior to such date and since April 28, 1995 he served as Vice
Chairman and Director. Mr. Mac Mahon has been President and Chief Executive
Officer since January 1997. Mr. Mac Mahon was Senior Vice President of
Hoffmann-La Roche Inc. from 1993 to January 1997 and President of Roche
Diagnostics Group and a Director and member of the Executive Committee of
Hoffmann-La Roche Inc. from 1988 to January 1997. Mr. Mac Mahon was also a
Director of HLR until December 1996. As Senior Vice President of Hoffmann-La
Roche Inc. and President of Roche Diagnostics Group, Mr. Mac Mahon was
responsible for the management of all United States operations of the
diagnostic business of Hoffmann-La Roche Inc. Mr. Mac Mahon is also Chairman
of the Board of AutoCyte, Inc. ("AutoCyte"). Mr. Mac Mahon is a member of the
management committee of the Company.

Jean-Luc Belingard has served as a Director of the Company since the Merger.
Mr. Belingard is Director General of the Diagnostics Division and member of
the Executive Committee of F. Hoffmann-La Roche Ltd ("F. Hoffmann-La Roche"),
Basel, Switzerland, a subsidiary of Roche. He joined F. Hoffmann-La Roche in
1982, and held various positions prior to being named to his current positions
in 1990. His current responsibilities include the management of the worldwide
diagnostic business of F. Hoffmann-La Roche. Mr. Belingard is also a director
of Perkin-Elmer Corporation, Norwalk, Connecticut and a Foreign Trade Advisor
to the French Government.

Wendy E. Lane has been a Director of the Company since November 1996. Ms.
Lane has been Chairman of Lane Holdings, Inc., a private investment firm,
since 1992. Prior to forming Lane Holdings, Inc., Ms. Lane was a Principal and
Managing Director of Donaldson, Lufkin & Jenrette, an investment banking firm,
serving in these and other positions from 1980 to 1992. Ms. Lane also serves
as a director of Watts Industries, Inc.

Robert E. Mittelstaedt, Jr. has been a Director of the Company since
November 1996. Mr. Mittelstaedt is Vice Dean of The Wharton School of the
University of Pennsylvania, Director of the Aresty Institute of Executive
Education. Mr. Mittelstaedt has held these and other positions with the
Wharton school since 1973, with the exception of the period from 1985 to 1989
when he founded, served as President and Chief Executive Officer, and sold
Intellego, Inc., a company engaged in practice management, systems

development and service bureau billing operations in the medical industry. Mr.
Mittelstaedt is also a director of A.G. Simpson Automotive Systems, Inc. and
IS&S Inc.

James B. Powell, M.D. has served as a Director of the Company since the
Merger. From the Merger to January 1997, Dr. Powell served as President and
Chief Executive Officer. Previously, Dr. Powell was President of RBL from 1982
until the Merger. Dr. Powell has been President, Chief Executive Officer and
Director of AutoCyte, Inc. since January 1997. AutoCyte is a newly formed
company specializing in the development of advanced, automated pap-smear
testing technologies. Dr. Powell is a principal investor in AutoCyte. He is a
medical doctor and became certified in anatomic and clinical pathology in
1969.

David B. Skinner, M.D. has served as a Director of the Company since the
Merger. Dr. Skinner has been President and Chief Executive Officer of New York
Hospital and Professor of Surgery at Cornell Medical School since 1987. He was
the Chairman of the Department of Surgery and Professor of Surgery at the
University of Chicago Hospitals and Clinics from 1972 to 1987.

Andrew G. Wallace, M.D. has served as a Director of the Company since the
Merger. Dr. Wallace has served as both the Dean of Dartmouth Medical School
and Vice President for Health Affairs at Dartmouth College since 1990. He was
the Vice Chancellor for Health Affairs at Duke University and the Chief
Executive Officer of Duke Hospital from 1981 to 1990.

Wesley R. Elingburg has served as Executive Vice President, Chief Financial
Officer and Treasurer since October 24, 1996. Prior to this date and since the
Merger, Mr. Elingburg was Senior Vice President, Finance. Mr. Elingburg is
responsible for the day to day supervision of the finance function of the
Company, including treasury functions. Previously, Mr. Elingburg served as
Senior Vice President-Finance and Treasurer of RBL from 1988 through April
1995 and Assistant Vice President of Hoffmann-La Roche from 1989 until the
Merger in April 1995. Mr. Elingburg is a member of the management committee of
the Company.

Larry L. Leonard has served as Executive Vice President of the Company since
1993. He joined the Company in 1978. Dr. Leonard, who holds a Ph.D degree in
microbiology, was named Senior Vice President of the Company in 1991 and
previously was Vice President-Division Manager. Dr. Leonard oversees Western
Operations of the Company which includes the Central, Great Lakes, Midlands,
Southwest and West Divisions. Dr. Leonard is a member of the management
committee of the Company.

Richard L. Novak has served as Executive Vice President of the Company since
March 1997. Previous to joining the Company, Mr. Novak was employed by
SmithKline Beecham Clinical Laboratories for more than the past five years
serving in a variety of senior management positions including Senior Vice
President, U.S. Operations and most recently President, International. Mr.
Novak oversees operations of the Company's Eastern Operations which include
the Mid-Atlantic, Northeast, South and South Atlantic Divisions. Mr. Novak is
a member of the management committee of the Company.

Bradford T. Smith has served as Executive Vice President, General Counsel
and Secretary since the Merger. He was appointed Corporate Compliance Officer
in August 1996. Previously, Mr. Smith served as Assistant General Counsel of
HLR, Division Counsel of RBL and Assistant Secretary and member of RBL's
Senior Management Committee from 1988 until April 1995. Mr. Smith served as
Assistant Secretary of HLR from 1989 until the Merger and as an Assistant Vice
President of HLR during 1992 and 1993. Mr. Smith is a member of the management
committee of the Company.

Stevan R. Stark was appointed Executive Vice President in October 1996 and
was Senior Vice President, New York Division, Cranford Region and
Alliance/Hospital Division since the Merger in April 1995. Mr. Stark oversees
the Company's sales operations including business alliances, managed care and
new business development. Previously, Mr. Stark was a Vice President and
Division Manager from 1991 to 1995 and a Division Manager from 1986 to 1991.
He joined the Company in 1983. Mr. Stark is a member of the management
committee of the Company.

Ronald B. Sturgill has served as Executive Vice President since October
1996. Mr. Sturgill oversees operations in the Company's South Atlantic
Division and certain corporate functions. Prior to that date and since the
Merger, Mr. Sturgill served as Senior Vice President, South Atlantic Division.
Mr. Sturgill served as Senior Vice President, Administration of RBL from 1987
until the Merger where his duties included the supervision of Information
Systems, Human Resources, Sales Support and Training. Mr. Sturgill is a member
of the management committee of the Company.

William M. Meilahn has served as Senior Vice President and Chief Information
Officer since December 1995. Previously, Mr. Meilahn was Executive Vice
President, MIS and a director of Eduserv Technologies, Inc. from 1993 through
1996, and was a Vice President in various capacities for Automatic Data
Processing, Inc. from 1983 through 1993. Mr. Meilahn is a member of the
management committee of the Company.

OWNERSHIP OF CAPITAL STOCK

The following table sets forth as of April 15, 1997, the total number of
shares of Common Stock beneficially owned, and the percent so owned, by (i)
each director of the Company who is a beneficial owner of any shares of Common
Stock, (ii) each person known to the Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, (iii) certain executive officers
and (iv) all current directors and officers as a group. The number of shares
owned are those "beneficially owned," as determined under the rules of the
Commission, and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which a person has sole or shared voting power or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or
right, through conversion of any security, or pursuant to the automatic
termination of power of attorney or revocation of trust, discretionary account
or similar arrangement.

PERCENT OF
COMMON
NUMBER OF SHARES STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING
---------------- ------------------ -----------

Roche Holdings, Inc............................ 61,329,256(1) 49.9%
15 East North Street
Dover, DE 19901
Ronald O. Perelman............................. 14,527,244(2) 11.8%
35 East 62nd Street
New York, NY 10021
Thomas P. Mac Mahon............................ 170,663(3) *
James B. Powell, M.D. ......................... -- *
Jean-Luc Belingard............................. 3,996 *
Wendy E. Lane.................................. 946 *
Robert E. Mittelstaedt, Jr. ................... 946 *
David B. Skinner, M.D. ........................ 3,996 *
Andrew G. Wallace, M.D. ....................... 3,996 *
Larry L. Leonard, Ph.D......................... 51,779(3) *
Bradford T. Smith.............................. 30,000(3) *
Stevan R. Stark................................ 33,601(3) *
Wesley R. Elingburg............................ 30,000(3) *
Haywood D. Cochrane, Jr. ...................... 107,735 *
David C. Weavil................................ -- *
All current directors and executive officers as
a group (14 persons) ......................... 354,923(3) *

- --------
* Less than 1%

(1) As reported on the Schedule 13D filed with the Commission on May 8, 1995,
on behalf of Roche Holdings. Roche Holdings is an indirect wholly owned
subsidiary of Roche. Dr. h.c. Paul Sacher, an individual and citizen of
Switzerland has, pursuant to an agreement, the power to vote a majority of
the voting shares of Roche.
(2) As reported in the Schedule 13G/A filed with the Commission on February
13, 1997, on behalf of Mafco, all shares are owned by NHCG, an indirect
wholly owned subsidiary of Mafco. All of the capital stock of Mafco is
owned by Mr. Ronald O. Perelman.
(3) Beneficial ownership by officers and directors of the Company includes
shares of Common Stock which such officers and directors have the right to
acquire upon the exercise of options which either are vested or which may
vest within 60 days. The number of shares of Common Stock included in the
table as beneficially owned which are subject to such options is as
follows: Mr. Mac Mahon--166,667; Dr Leonard--44,130; Mr. Smith--30,000;
Mr. Stark--33,601; Mr. Elingburg--30,000; all directors and executive
officers as a group (not including Dr. Powell and Messrs. Cochrane and
Weavil who are no longer employed by the Company)--329,398.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

THE STOCKHOLDER AGREEMENT

In connection with the Merger, the Company, HLR, Roche Holdings and Hoffmann-
La Roche Inc. entered into a stockholder agreement dated as of April 28, 1995.
In December 1996, HLR was merged with and into Hoffmann La-Roche Inc. and the
shares of Common Stock owned by HLR subsequently transferred from Hoffman La-
Roche to Roche Holdings. The Stockholder Agreement contains certain provisions
relating to (i) the governance of the Company following the Merger, including
but not limited to the composition of the Board of Directors, (ii) the
issuance, sale and transfer of the Company's Equity Securities (as defined
therein) by the Company and Hoffmann-La Roche Inc., (iii) the acquisition of
additional Equity Securities and (iv) the registration rights granted by the
Company to Roche Holdings and Hoffmann-La Roche Inc. with respect to the
Company's Equity Securities. A copy of the Stockholder Agreement was included
as an exhibit to the current report on Form 8-K of the Company filed with the
Commission on May 12, 1995 in connection with the consummation of the Merger.

Pursuant to the Stockholder Agreement, the Board of Directors of the Company
will (subject to specified exceptions) be comprised of seven members,
consisting of three designees of Roche Holdings (the "Roche Directors") and
four Independent Directors (as defined therein) nominated by the Nominating
Committee of the Board of Directors.

The Stockholder Agreement also provides that, among other things, certain
actions by the Company will require approval by a majority of the Roche
Directors and at least one Independent Director (a "Special Majority Vote").
Included in these items is any change in the size or composition of the Board
of Directors or any committee thereof and the establishment of a new committee
of the Board of Directors, and with certain exceptions, the issuance of
securities by the Company.

The Stockholder Agreement also provides that, except under certain
circumstances, which include the issuance of Common Stock pursuant to a public
offering, the Company may not issue any equity securities unless Roche Holdings
is offered the opportunity to purchase an amount of such stock necessary to
maintain their interest.

Pursuant to the Stockholder Agreement, Roche Holdings and its affiliates
(other than the Company and its subsidiaries) have the right to acquire Equity
Securities (as defined therein) to the extent that, after giving effect
thereto, their Total Voting Power would not exceed 75%. Moreover,
Roche Holdings and its affiliates (other than the Company and its subsidiaries)
may acquire additional Equity Securities notwithstanding the fact that after
giving effect thereto, their Total Voting Power would exceed 75%, if Roche
Holdings and its affiliates (other than the Company and its subsidiaries) or
any one of them offers, prior to consummation of such purchase, to purchase all
outstanding Equity Securities and holders of Equity Securities totaling more
than 50% of the outstanding Equity Securities (excluding Equity Securities held
by Roche Holdings and its affiliates (other than the Company and its
subsidiaries)) accept such offer. After the third anniversary of the Merger,
the Stockholder Agreement does not restrict purchases by Roche Holdings or its
affiliates of Equity Securities.

In addition, the Stockholder Agreement contains a Demand Registration
provision pursuant to which the Company is obligated, upon the request of Roche
Holdings or Roche, to file registration statements with the Commission covering
any shares of Common Stock owned by those parties which are restricted
securities within the meaning of Rule 144(a)(3) of the Securities Act of 1933,
as amended (the "Securities Act"). Roche Holdings and Roche will also have the
right to include such securities in any registration statement filed by the
Company offering securities for its own account or for the account of any
holder other than Mafco or any of its affiliates, subject to certain reductions
if the managing underwriter determines that the size of the offering or the
combination of securities offered would materially interfere with the offering.

THE SHARING AND CALL OPTION AGREEMENT

In connection with the Merger Agreement, HLR, Mafco, NHCG, and the Company
entered into the Sharing and Call Option Agreement. The Sharing and Call Option
Agreement provides, among other things, that at any time after the third
anniversary of the Merger, Hoffmann La-Roche Inc. (the successor to HLR as
discussed above) or one of its affiliates (other than the Company) may exercise
the right, which right may only be exercised once, to purchase all, but not
less than all, of the shares of Common Stock

then owned by NHCG, Mafco or any of their controlled affiliates. The Sharing
and Call Option Agreement provides that Hoffmann La-Roche Inc. or one of its
affiliates will, if it elects to exercise this purchase right, pay a price per
share for the shares to be purchased equal to 102% of the average closing price
per share of such security for the 30 trading days before the date of such
exercise.

In addition, in accordance with the Sharing and Call Option Agreement, the
Company has filed with the Commission a registration statement on Form S-3 (the
"NHGC Registration Statement") which has been declared effective by the
Commission and includes a resale prospectus that permits NHCG (or any of its
pledgees) to sell shares of Common Stock and Warrants received by NHCG in the
Merger without restriction. The Company has agreed to use its best efforts to
prepare and file with the Commission such post-effective amendments to the NHCG
Registration Statement or other filings as may be necessary to keep such NHCG
Registration Statement continuously effective for a period ending on the third
anniversary of the date of the Sharing and Call Option Agreement and during
such period to use its best efforts to cause the resale prospectus to be
supplemented by any required prospectus supplement. The Company has also agreed
to pay the applicable Registration Expenses (as defined therein) arising from
exercise of the registration rights set forth in the Sharing and Call Option
Agreement. A copy of the Sharing and Call Option Agreement was filed with the
Commission by the Company as an exhibit to the Company's December 31, 1994 Form
10-K.

REGISTRATION RIGHTS AGREEMENT

In addition to those registration rights granted to NHCG under the Sharing
and Call Option Agreement, the Company and NHCG also are parties to a
registration rights agreement dated as of April 30, 1991 (the "Registration
Rights Agreement") pursuant to which the Company is obligated, upon the request
of NHCG, to file registration statements ("Demand Registration Statements")
from time to time with the Commission covering the sale of any shares of Common
Stock owned by NHCG upon the completion of certain public offerings by the
Company of shares of Common Stock in 1991. Such Demand Registration Statements
may also cover the resale from time to time of any shares of Common Stock that
NHCG may purchase in the open market at a time when it is deemed to be an
affiliate (as such term is defined under Rule 144 under the Securities Act of
1933, as amended), and certain securities issued in connection with a
combination of shares, recapitalization, reclassification, merger or
consolidation, or other pro rata distribution. NHCG will also have the right to
include such Common Stock and other securities in any registration statement
filed by the Company for the underwritten public offering of shares of Common
Stock (whether or not for the Company's account), subject to certain reductions
in the amount of such Common Stock and securities if the managing underwriters
of such offering determine that the inclusion thereof would materially
interfere with the offering. The Company agreed not to effect any public or
private sale, distribution or purchase of any of its securities which are the
same as or similar to the securities covered by any Demand Registration
Statement during the 15-day period prior to, and during the 45-day period
beginning on, the closing date of each underwritten offering under such
registration statement and NHCG agreed to a similar restriction with respect to
underwritten offerings by the Company. NHCG's rights under the Registration
Rights Agreement are transferable as provided therein.

Until the third anniversary of the Sharing and Call Option Agreement, when
the Company's obligation to keep the NHCG Registration Statement effective
expires, the registration rights granted to NHCG pursuant to the Registration
Rights Agreement are substantially duplicative of those granted pursuant to the
Sharing and Call Option Agreement. After such date and only to the extent that
NHCG still holds shares of Common Stock or Warrants that it held as of or
received in the Merger, NHCG will continue to be entitled to the registration
rights described in the preceding paragraph, unless the Rights Agreement has
been otherwise amended or terminated.

TAX ALLOCATION ARRANGEMENT

Until May 7, 1991, the Company was included in the consolidated federal
income tax returns, and in certain state income tax returns, of Mafco, M&F
Holdings, Revlon Group and Revlon. As a result of the reduction of M&F
Holdings' indirect ownership interest in the Company on May 7, 1991, the
Company is

no longer a member of the Mafco consolidated tax group. For periods subsequent
to May 7, 1991, the Company files its own separate Federal, state and local
income tax returns. Nevertheless, the Company will remain obligated to pay to
M&F Holdings (or other members of the consolidated group of which M&F Holdings
is a member) any income taxes the Company would have had to pay (in excess of
those which it has already paid) if it had filed separate income tax returns
for taxable periods beginning on or after January 1, 1985 (but computed
without regard to (i) the effect of timing differences (i.e., the liability or
benefit that otherwise could be deferred will be, instead, includible in the
determination of current taxable income) and (ii) any gain recognized on the
sale of any asset not in the ordinary course of business). In addition,
despite the reduction of M&F Holdings' indirect ownership of the Company, the
Company will continue to be subject under existing federal regulations to
several liability for the consolidated federal income taxes for any
consolidated return year in which it was a member of any consolidated group of
which Mafco, M&F Holdings, Revlon Group or Revlon was the common parent.
However, Mafco, M&F Holdings, Revlon Group and Revlon have agreed to indemnify
the Company for any federal income tax liability (or any similar state or
local income tax liability) of Mafco, M&F Holdings, Revlon Group, Revlon or
any of their subsidiaries (other than that which is attributable to the
Company or any of its subsidiaries) that the Company would be required to pay.

OTHER TRANSACTIONS WITH ROCHE

In December 1996, the Company received a loan from Roche Holdings of $187.0
million to fund the Settlement Payment in the form of a promissory note which
bears interest at 6.625% per annum. In March 1997, the original maturity of
March 31, 1997 of such note was extended to March 31, 1998. Such note will be
repaid with a portion of the proceeds from the Rights Offering.

The Company has certain ongoing arrangements with Roche for the purchase by
the Company of certain products and the licensing by the Company from Roche of
certain diagnostics technologies, with an aggregate value of approximately
$18.7 million in 1996. The Company provides certain diagnostic testing and
support services to Roche in connection with Roche's clinical pharmaceutical
trials, with an aggregate value of approximately $2.4 million in 1996. In
addition, in connection with the Merger, the Company and Roche entered into a
transition services agreement for the provision by Roche to the Company of
certain payroll and other corporate services for a limited transition period
following the Merger. These services were charged to the Company based on the
time involved and the Roche personnel providing the service. The Company paid
Roche a total of approximately $267,000 in 1996 for these services. Each of
these arrangements was entered into in the ordinary course of business, on an
arm's-length basis and on terms which the Company believes are no less
favorable to it than those obtainable from unaffiliated third parties.

Roche Holdings has indicated that it intends to exercise its Basic
Subscription Privilege and Oversubscription Privilege in the Rights Offering
in full for Series B PIK Preferred Stock (subject, in the case of the
Oversubscription Privilege, to reduction in certain circumstances). As a
result, if no other Rights are exercised, Roche Holdings will purchase
10,000,000 shares of Series B PIK Preferred Stock.

REGISTRATION RIGHTS

In connection with the Rights Offering, the Company will grant to each
Rights Holder (including Roche Holdings) who upon consummation of the Rights
Offering beneficially owns Preferred Stock convertible into 10% or more of the
Common Stock outstanding, and who certifies as such, registration rights with
respect to such Common Stock on the same terms as those granted to Roche
Holdings pursuant to the Stockholder Agreement.

CERTAIN TRANSACTIONS WITH AUTOCYTE, INC.

The Company has certain on-going arrangements with AutoCyte for the purchase
by the Company of certain products with an aggregate value of approximately
$2.2 million in 1996.

DESCRIPTION OF THE AMENDED CREDIT AGREEMENT

The Amended Credit Agreement will become effective upon consummation of the
Rights Offering subject to satisfaction of certain conditions precedent
referred to below. A copy of the Amended Credit Agreement has been filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. The following summaries of certain provisions of the
Amended Credit Agreement do not purport to be complete and where reference is
made to particular provisions of the Amended Credit Agreement such provisions,
including definitions of certain terms, are incorporated by reference as a
part of such summaries or terms, which are qualified in their entirety by such
reference.

Following consummation of the Rights Offering and the receipt of $500
million in gross proceeds, the Amended Credit Agreement makes available to the
Company the Amended Term Loan Facility of $643.8 million and the Amended
Revolving Credit Facility of $450.0 million. Following the Rights Offering,
the Company estimates that availability under the Amended Credit Agreement
will be approximately $327.0 million. Such availability will be conditioned on
certain customary conditions contained in the Amended Credit Agreement.

FACILITIES AND MATURITY DATES

As in the Existing Credit Agreement, the senior unsecured credit facilities
under the Amended Credit Agreement are composed of the Amended Term Loan
Facility and the Amended Revolving Credit Facility. The Amended Revolving
Credit Facility includes a $50 million letter of credit sublimit. The Amended
Credit Agreement extends maturity dates by approximately three years for the
Amended Term Loan Facility to March 31, 2004 and approximately two years for
the Amended Revolving Credit Facility to March 31, 2002.

INTEREST MARGINS AND FACILITY FEE

As in the Existing Credit Agreement, both the Amended Term Loan Facility and
the Amended Revolving Credit Facility bear interest, at the option of the
Company, at (i) the base rate plus the applicable base rate margin or (ii) the
eurodollar rate plus the applicable eurodollar rate margin. The Amended Credit
Agreement provides that in the event of a reduction of the percentage of
Common Stock held by Roche Holdings and its affiliates (other than the Company
and its subsidiaries) below 25%, the applicable interest margins and facility
fees on borrowings outstanding under the Amended Credit Agreement will
increase. The amount of the increase will depend, in part, on the leverage
ratio of the Company at the time of such reduction. In addition, pursuant to
the Amended Credit Agreement, the applicable interest margins on borrowings
outstanding thereunder are based upon the leverage ratio.

AMENDMENT FEES

The Company will pay each lender an amendment fee based on the sum of its
revolving credit commitments and term loans.

LETTER OF CREDIT ISSUERS, FRONTING FEE AND LETTER OF CREDIT FEE

Any lender that is party to the Amended Credit Agreement may serve as a
letter of credit issuer under the Amended Credit Agreement, as agreed between
the Company and such lender. The fronting fee payable to each letter of credit
issuer will be as negotiated between the Company and such issuer, but will not
exceed 0.125% per annum of the outstanding amount of such issuer's letter of
credit. Each lender will be deemed to have purchased a participating interest
in each letter of credit, and in addition to the fronting fee the Company will
pay a letters of credit fee for the account of all the lenders equal to the
applicable Amended Revolving Credit Facility Eurodollar Rate Margin minus
0.125% per annum.

TERM FACILITY AMORTIZATION

Total amortization of the Amended Term Loan Facility for each twelve-month
period following consummation of the Rights Offering will be reduced
significantly for the first three years, and will be made (in quarterly
installments) in accordance with the following table:

Year Amount
---- -------------
(in millions)

1997........................................................ $ 0
1998........................................................ $ 0
1999........................................................ $ 46.4
2000........................................................ $ 92.8
2001........................................................ $139.2
2002........................................................ $139.2
2003........................................................ $139.2
3/31/2004................................................... $ 87.0

MANDATORY AND OPTIONAL PREPAYMENTS AND COMMITMENT REDUCTIONS

As in the Existing Credit Agreement, the amounts available under the Amended
Revolving Credit Facility are subject to certain mandatory permanent reduction
and prepayment requirements and the Amended Term Loan Facility is subject to
specified mandatory prepayment requirements. In the Amended Credit Agreement,
required amounts will first be applied to repay scheduled Amended Term Loan
Facility payments until the Amended Term Loan Facility is repaid in full and
then to reduce the commitments and advances under the Amended Revolving Credit
Facility. Required payments and reductions will include (i) the proceeds of
debt issuances, subject to certain exceptions; (ii) the proceeds of certain
asset sales, unless reinvested within one year of the applicable asset sale in
productive assets of a kind then used or usable in the business of the Company
and its subsidiaries; (iii) the proceeds of sales of equity securities in
excess of certain amounts; and (iv) under certain circumstances, a percentage
of excess cash flow, as calculated annually.

REPRESENTATIONS AND WARRANTIES

The Amended Credit Agreement contains representations and warranties
substantially similar to those set forth in the Existing Credit Agreement.

CONDITIONS PRECEDENT

Conditions precedent to effectiveness of the Amended Credit Agreement
include, without limitation, receipt of appropriate certificates and legal
opinions, accuracy in all material respects of representations and warranties,
including absence of material adverse change in the Company and its
subsidiaries (taken as a whole) since December 31, 1996, absence of defaults,
evidence of authority, and payment of transaction fees.

COVENANTS

The Amended Credit Agreement contains customary covenants similar to, and in
the case of limitations on acquisitions and incurrence of additional debt more
restrictive than, the covenants set forth in the Existing Credit Agreement.

FINANCIAL COVENANTS

Like the Existing Credit Agreement, the Amended Credit Agreement contains
financial covenants with respect to a leverage ratio, an interest coverage
ratio and minimum stockholders' equity. The covenant levels are less
restrictive than under the Existing Credit Agreement, and will be tested
quarterly.

EVENTS OF DEFAULT

The Amended Credit Agreement contains events of default substantially
similar to those set forth in the Existing Credit Agreement.

DESCRIPTION OF RIGHTS OFFERING

THE RIGHTS

The Company is hereby issuing transferable Rights at no cost to each
Recordholder of Common Stock as of the close of business on the Record Date of
May 29, 1997. The Company will issue approximately 0.08134 of a Right for each
share of Common Stock held on the Record Date. The Rights will be evidenced by
transferable Rights Certificates, which are being distributed to each
Recordholder contemporaneously with the delivery of this Prospectus. The
Rights permit the holder thereof to purchase an equal amount of either Series
A Exchangeable Preferred Stock or Series B PIK Preferred Stock. Except as to
payment of dividends, conversion and exchangeability as described in
"Description of Preferred Stock," the terms of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock are identical in all
respects.

No fractional Rights or cash in lieu thereof will be issued or paid.
Instead, the number of Rights issued to a Recordholder will be rounded to the
nearest whole number, with such adjustments as may be necessary to ensure that
no more than 10,000,000 shares of Preferred Stock are issued hereunder.

Because the number of Rights issued to each Recordholder will be rounded to
the nearest whole number, with such adjustments as may be necessary to ensure
that no more than 10,000,000 shares of Preferred Stock are issued hereunder,
beneficial owners of Common Stock who are also Recordholders of their shares
may receive more Rights under certain circumstances than beneficial owners of
Common Stock who are not Recordholders of their shares. Beneficial owners of
Common Stock who are not Recordholders may obtain a separate Rights
Certificate upon request to the nominee Recordholder. See "Method of
Subscription--Exercise of Rights."

Once the Rights are distributed and until the Expiration Date, the Company
will not effect a reclassification of the Company's equity securities which
could have the effect of materially altering the value of the Rights.

EXPIRATION DATE

The Rights will expire at 5:00 p.m., New York time, on June 16, 1997 subject
to extension in the sole discretion of the Company for up to 30 additional
days. The Company does not currently contemplate any extensions. After the
Expiration Date, unexercised Rights will be null and void. The Company will
not be obligated to honor any purported exercise of Rights received by the
American Stock Transfer & Trust Company (the "Subscription and Information
Agent") or any transfer of Rights into the Subscription and Information
Agent's Account at the Depository Trust Company ("DTC") after the Expiration
Date, regardless of when the documents relating to that exercise were sent,
except pursuant to the Guaranteed Delivery Procedures described below. The
Company may extend the Expiration Date by giving oral or written notice to the
Subscription and Information Agent on or before the Expiration Date, followed
by a press release no later than 9:00 a.m. New York time on the next business
day after the previously scheduled Expiration Date. The Rights Offering will
not be extended to a time later than 5:00 p.m., New York time, on July 16,
1997.

SUBSCRIPTION PRIVILEGES

Basic Subscription Privilege. Each Right will entitle the holder thereof to
purchase at the Subscription Price one Underlying Share. Upon exercise of
Rights, Rights Holders must indicate on their Rights Certificate whether they
wish to receive either shares of Series A Exchangeable Preferred Stock or
shares of Series B PIK Preferred Stock. A failure to so indicate on the Rights
Certificate will result in issuance of Series A Exchangeable Preferred Stock.
Each Rights Holder is entitled to subscribe for all, or any portion of, the
Underlying Shares which may be acquired through the exercise of Rights held by
it;

provided, that all of the Underlying Shares purchased must be either Series A
Exchangeable Preferred Stock or Series B PIK Preferred Stock. Payment of the
Subscription Price will be held in a segregated account to be maintained by
the Subscription and Information Agent and will be applied to the purchase of
Preferred Stock. The certificates representing Underlying Shares purchased
pursuant to the Basic Subscription Privilege will be delivered to subscribers
as soon as practicable after the Expiration Date.

Oversubscription Privilege. Subject to availability and proration as
described below, Rights Holders who fully exercise the Basic Subscription
Privilege will be eligible to subscribe, at the Subscription Price, for
additional shares of the same series of Preferred Stock purchased pursuant to
such Rights Holder's Basic Subscription Privilege available after satisfaction
of all subscriptions pursuant to the Basic Subscription Privilege. This
Oversubscription Privilege must be exercised at the same time as the Basic
Subscription Privilege is exercised.

Shares of Preferred Stock will be available for purchase pursuant to the
Oversubscription Privilege only to the extent that any Underlying Shares are
not subscribed for through exercise of the Basic Subscription Privilege. The
Excess Shares will be allocated pro rata (subject to the elimination of
fractional shares) among the Rights Holders who exercise their
Oversubscription Privilege in proportion to the respective number of shares of
Preferred Stock each such Rights Holder subscribes for pursuant to the Basic
Subscription Privilege; provided, however, that if such pro rata allocation
results in any Rights Holder being allocated a greater number of Excess Shares
than such holder subscribed for pursuant to the exercise of the
Oversubscription Privilege, then each Rights Holder will be allocated only
that number of Excess Shares for which such holder oversubscribed, and the
remaining Excess Shares will be allocated among all other Rights Holders
exercising the Oversubscription Privilege on the same pro rata basis outlined
above; such proration will be repeated until all Excess Shares have been
allocated to the full extent of the Oversubscription Privilege exercised;
provided further, however, that Roche Holdings will not be allocated any
Excess Shares until all other Rights Holders exercising the Oversubscription
Privilege have been allocated the number of Excess Shares for which they
oversubscribed. Payment for oversubscription will be deposited upon receipt by
the Subscription and Information Agent and held in a segregated account with
the Subscription and Information Agent pending a final determination of the
number of Underlying Shares to be issued pursuant to such Oversubscription
Privilege. THEREFORE, RIGHTS HOLDERS WHO PLACE OVERSUBSCRIPTION ORDERS PRIOR
TO THE EXPIRATION DATE WILL LOSE ACCESS TO FUNDS TENDERED FOR AN INDETERMINATE
PERIOD OF TIME UP TO TEN DAYS AFTER THE EXPIRATION DATE AND MAY NOT ACTUALLY
ACQUIRE SHARES OF PREFERRED STOCK SUBSCRIBED FOR. If a proration of the Excess
Shares results in a Rights Holder receiving fewer Excess Shares than such
Rights Holder subscribed for pursuant to the Oversubscription Privilege, then
the excess funds paid by that holder at the Subscription Price for shares not
issued will be returned without interest or deduction. Certificates
representing Underlying Shares purchased pursuant to the Oversubscription
Privilege, together with certificates representing Underlying Shares purchased
pursuant to the Basic Subscription Privilege, will be delivered to subscribers
as soon as practicable after the Expiration Date.

SUBSCRIPTION PRICE

The Subscription Price is $50 per Underlying Share subscribed for pursuant
to the Basic Subscription Privilege and the Oversubscription Privilege.

NO BOARD OR FINANCIAL ADVISOR RECOMMENDATION

An investment in the Preferred Stock must be made pursuant to each
investor's evaluation of such investor's best interests. Accordingly, neither
the Board of Directors of the Company nor Credit Suisse First Boston, as
financial advisor to the Company, makes any recommendation to Rights Holders
regarding whether they should exercise their Rights to subscribe for shares of
Preferred Stock.

METHOD OF SUBSCRIPTION--EXERCISE OF RIGHTS

Rights Holders may exercise their Rights by delivering to the Subscription
and Information Agent, at the addresses specified below, at or prior to the
Expiration Date, the properly completed and executed Rights Certificate(s)
evidencing those Rights, with any signatures guaranteed as required, together
with payment in full of the Subscription Price for each Underlying Share
subscribed for pursuant to the Basic Subscription Privilege and the
Oversubscription Privilege. Payment may be made only (i) by check or bank draft
drawn upon a U.S. bank, or postal, telegraphic or express money order, payable
to the Subscription and Information Agent; or (ii) by wire transfer of funds to
the escrow account maintained by the Subscription and Information Agent for the
purpose of accepting subscriptions at Chase Manhattan Bank ABA No. 021-000021,
account no. 323-053807 (the "Subscription Account"). In the case of Rights that
are held of record through DTC, exercises of the Basic Subscription Privilege
and Oversubscription Privilege may be effected by instructing DTC to transfer
Rights from the DTC account of such holder to the DTC account of the
Subscription and Information Agent, together with certification as to the
aggregate number of Rights exercised and the number of shares of Preferred
Stock thereby subscribed for pursuant to the Basic Subscription Privilege and
the Oversubscription Privilege by each beneficial owner of Rights on whose
behalf such nominee Recordholder is acting, and payment of the Subscription
Price for each share of Preferred Stock subscribed for pursuant to the
Subscription Privilege. Requests for information by Rights Holders, including
with respect to payment by wire transfer to the Subscription Account, should be
directed to the Subscription and Information Agent at (800) 937-5449 or (718)
921-8200. The Subscription Price will be deemed to have been received by the
Subscription and Information Agent only upon (i) clearance of any uncertified
check; (ii) receipt by the Subscription and Information Agent of any certified
check or bank draft drawn upon a U.S. bank or any postal, telegraphic or
express money order; or (iii) receipt of collected funds in the Subscription
Account. Funds paid by uncertified personal check may take up to five business
days to clear. Accordingly, Rights Holders who wish to pay the Subscription
Price by means of an uncertified personal check are urged to make payment
sufficiently in advance of the Expiration Date to ensure that such payment is
received and clears by such time and are urged to consider, in the alternative,
payment by means of certified check, bank draft, money order or wire transfer.
All funds received in payment of the Subscription Price shall be held by the
Subscription and Information Agent and invested at the direction of the Company
in short-term certificates of deposit, short-term obligations of the United
States or any state or any agency thereof or money market mutual funds
investing in the foregoing instruments. The account in which such funds will be
held will not be insured by the FDIC. Any interest earned on such funds will be
retained by the Company.

The Rights Certificates and payment of the Subscription Price or, if
applicable, Notices of Guaranteed Delivery, as defined below, must be delivered
to the Subscription and Information Agent by one of the methods described
below.

(1) BY FIRST CLASS MAIL; EXPRESS MAIL OR OVERNIGHT COURIER; AND BY HAND:

American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005

(2) BY FACSIMILE:

FOR NOTICE OF GUARANTEED DELIVERY ONLY

(718) 234-5001

Delivery to an address or facsimile other than those above does not
constitute valid delivery.

The Company will pay the fees and expenses of the Subscription and
Information Agent and has also agreed to indemnify the Subscription and
Information Agent from certain liabilities which it may incur in connection
with the Rights Offering. All commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection with the
purchase, sale or exercise of Rights will

be for the account of the transferor of the Rights, and none of such
commissions, fees or expenses will be paid by the Company or the Subscription
and Information Agent.

If a Rights Holder wishes to exercise Rights, but time will not permit such
Rights Holder to cause the Rights Certificate(s) evidencing those Rights to
reach the Subscription and Information Agent prior to the Expiration Date,
such Rights may nevertheless be exercised if all of the following conditions
(the "Guaranteed Delivery Procedures") are met:

(i) the Rights Holder has caused payment in full of the Subscription
Price for each Underlying Share being subscribed for pursuant to the Basic
Subscription Privilege and, if applicable, the Oversubscription Privilege
to be received (in the manner set forth above) by the Subscription and
Information Agent at or prior to the Expiration Date;

(ii) the Subscription and Information Agent receives, on or prior to the
Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"),
guaranteed by a member firm of a registered national securities exchange or
a member of the National Association of Securities Dealers, Inc., or from a
commercial bank or trust company having an office or correspondent in the
United States, giving the name of the exercising Rights Holder, the number
of Underlying Shares being subscribed for pursuant to the Basic
Subscription Privilege and, if any, pursuant to the Oversubscription
Privilege and guaranteeing the delivery to the Subscription and Information
Agent of the Rights Certificate(s) evidencing those Rights within two (2)
business days following the date of the Notice of Guaranteed Delivery; and

(iii) the properly completed Rights Certificate(s) evidencing the Rights
being exercised, with any signatures guaranteed as required, is received by
the Subscription and Information Agent or such Rights are transferred to
the DTC account of the Subscription and Information Agent within two (2)
business days following the date of the Notice of Guaranteed Delivery
relating thereto. The Notice of Guaranteed Delivery may be delivered to the
Subscription and Information Agent in the same manner as Rights
Certificates at the address set forth above or may be delivered to the
Subscription and Information Agent by telegram or facsimile transmission.
Additional copies of the form of Notice of Guaranteed Delivery are
available upon request from the Subscription and Information Agent at the
address and telephone number set forth below.

If an exercising Rights Holder does not indicate the number of Rights being
exercised, or does not forward full payment of the aggregate Subscription
Price for the number of Rights that the Rights Holder indicates are being
exercised, then the Rights Holder will be deemed to have exercised the Basic
Subscription Privilege with respect to the maximum number of Rights that may
be exercised for the aggregate payment delivered by the Rights Holder and, to
the extent that the aggregate payment delivered by a Rights Holder exceeds the
product of the Subscription Price multiplied by the number of Rights evidenced
by the Rights Certificates delivered by a Rights Holder (such excess being the
"Subscription Excess"), the Rights Holder will be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, that number
of whole Excess Shares equal to the quotient obtained by dividing the
Subscription Excess by the Subscription Price. Any amount remaining after
application of the foregoing procedures shall be returned to the Rights Holder
promptly by mail without interest or deduction.

Certificates for shares of Preferred Stock issued pursuant to the exercise
of Rights will be registered in the name of the Rights Holder exercising such
Rights. There can be no assurance that the value of the Preferred Stock will
not decline below the Subscription Price before such shares of Preferred Stock
are delivered.

A Rights Holder who subscribes for fewer than all of the shares represented
by its Right Certificates may, under certain circumstances, receive from the
Subscription and Information Agent a new Rights Certificate representing the
remaining Rights. See "--Partial Exercise Procedures."

Recordholders who hold shares of Common Stock for the account of others,
such as brokers, trustees or depositories for securities, should contact the
respective beneficial owners of such shares as soon as possible to ascertain
these beneficial owners' intentions and to obtain instructions with respect to
their Rights. If a beneficial owner so instructs, the Recordholders of that
beneficial owner's Rights should complete appropriate Rights Certificates and
submit them to the Subscription and Information Agent with the proper payment.
In addition, beneficial owners of Rights through such a nominee holder should
contact the nominee holder and request the nominee holder to effect
transactions in accordance with the beneficial owners' instructions. If a
beneficial owner wishes to obtain a separate Rights Certificate he, she or it
should contact the nominee as soon as possible and request that a separate
Rights Certificate be issued. A nominee may request any Rights Certificate
held by it to be split into such smaller denominations as it wishes, provided
that the Rights Certificate is received by the Subscription and Information
Agent, properly endorsed, no later than 5:00 p.m., New York time, on June 10,
1997.

The instructions as to use of Laboratory Corporation of America Holdings
Rights Certificates (the "Instructions") accompanying the Rights Certificates
should be read carefully and followed in detail. RIGHTS CERTIFICATES SHOULD BE
SENT WITH PAYMENT TO THE SUBSCRIPTION AND INFORMATION AGENT. DO NOT SEND
RIGHTS CERTIFICATES OR PAYMENTS TO THE COMPANY.

THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AND INFORMATION AGENT WILL BE AT THE
ELECTION AND RISK OF THE RIGHTS HOLDERS. IF RIGHTS CERTIFICATES AND PAYMENTS
ARE SENT BY MAIL, RIGHTS HOLDERS ARE URGED TO SEND SUCH MATERIALS BY
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND ARE
URGED TO ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE
SUBSCRIPTION AND INFORMATION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE
EXPIRATION DATE. BECAUSE UNCERTIFIED CHECKS MAY TAKE AT LEAST FIVE BUSINESS
DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR
PAYMENT, BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR WIRE
TRANSFER.

Certain directors and officers of the Company will assist the Company in the
Rights Offering by, among other things, participating in informational
meetings regarding the Rights Offering, generally being available to answer
questions of potential subscribers and soliciting orders in the Rights
Offering. None of such directors and officers will receive additional
compensation for such services. None of such directors and officers are
registered as securities brokers or dealers under the Federal or applicable
state securities laws, nor are any of such persons affiliated with any broker
or dealer. Because none of such persons are in the business of either
effecting securities transactions for others or buying and selling securities
for their own account, they are not required to register as brokers or dealers
under the Federal securities laws. In addition, the proposed activities of
such directors and officers are exempted from registration pursuant to a
specific safe-harbor provision under Rule 3a4-1 under the Exchange Act.
Substantially similar exemptions from registration are available under
applicable state securities laws.

All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determination
will be final and binding. The Company, in its sole discretion, may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine. Rights Certificates will not be deemed
to have been received or accepted until all irregularities have been waived or
cured within such time as the Company determines, in its sole discretion.
Neither the Subscription and Information Agent nor the Company will be under
any duty to give notification of any defect or irregularity in connection with
the submission of Rights Certificates or incur any liability for failure to
give such notification. The Company reserves the right to reject any exercise
if such exercise is not in accordance with the terms of the Rights Offering or
not in proper form or if the acceptance thereof or the issuance of the
Preferred Stock pursuant thereto could be deemed unlawful.

Any questions or requests for assistance concerning the method of
subscribing for shares of Preferred Stock or for additional copies of this
Prospectus, the Instructions or the Notice of Guaranteed Delivery may be
directed to the Subscription and Information Agent at the address and
telephone number below:

American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
(718) 921-8200

PARTIAL EXERCISE PROCEDURES

A new Rights Certificate will be issued to a submitting Rights Holder or
transferred according to the Rights Holder's instructions upon the partial
exercise of Rights only if the Subscription and Information Agent receives a
properly endorsed Rights Certificate no later than the fourth business day
prior to the Expiration Date. After such time and date no new Rights
Certificates will be issued. Accordingly, after such time and date a Rights
Holder exercising less than all of its Rights will lose the power to exercise
its remaining Rights. A new Rights Certificate will be sent by first class
mail to the submitting Rights Holder if the Subscription and Information Agent
receives the properly completed Rights Certificate by 5:00 p.m. New York time,
on June 6, 1997. Unless the submitting Rights Holder makes other arrangements
with the Subscription and Information Agent, a new Rights Certificate received
by the Subscription and Information Agent after 5:00 p.m. New York time, on
June 6, 1997 will be held for pickup by the submitting Rights Holder at the
Subscription and Information Agent's hand delivery address provided above. All
deliveries of newly issued Rights Certificates will be at the risk of the
submitting Rights Holder.

FOREIGN AND CERTAIN OTHER STOCKHOLDERS

Rights Certificates will not be mailed to Recordholders whose addresses are
outside the United States and Canada or who have an APO or FPO address, but
will be held by the Subscription and Information Agent for each Recordholder's
account. To exercise their Rights, such persons must notify the Subscription
and Information Agent at or prior to 5:00 p.m., New York time, on the
Expiration Date. Such Rights Holder's rights expire at the Expiration Date.

SUBSCRIPTION BY PRINCIPAL STOCKHOLDER

Roche Holdings has informed the Company that it intends to exercise its
Basic Subscription Privilege and Oversubscription Privilege in full for the
Series B PIK Preferred Stock (subject, in the case of the Oversubscription
Privilege, to reduction in certain circumstances). As a result, if no other
Rights are exercised, Roche Holdings will purchase 10,000,000 shares of Series
B PIK Preferred Stock.

NO REVOCATION

ONCE A RIGHTS HOLDER HAS PROPERLY EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE
OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED.

DILUTION

Rights Holders may experience dilution of their percentage of equity
ownership interest and voting power in the Company if and when all of the
shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms if they do not exercise the Basic Subscription
Privilege. Even if the Rights Holders exercise their Basic Subscription
Privilege in full, they may nevertheless still experience dilution in their
voting rights and in their proportional interest in any future net earnings of
the Company if other holders of Rights exercise the Oversubscription Privilege
and such Rights Holders elect not to exercise the Oversubscription Privilege,
if and when all of the shares of Preferred Stock are converted into shares of
Common Stock in accordance with their terms. In addition, Rights Holders who
exercise Rights for Series A Exchangeable Preferred Stock will experience
dilution as dividends on the Series B PIK Preferred Stock are paid in shares
of Series B PIK Preferred Stock.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 220,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 shares of preferred
stock, par value $0.10 per share. As of May 1, 1997, 122,935,080 shares of
Common Stock were issued and outstanding. Prior to the Rights Offering, no
shares of preferred stock were issued and outstanding.

There are currently insufficient shares of Common Stock authorized to permit
conversion of all of the Preferred Stock issued upon the exercise of Rights or
as dividends on the Series B PIK Preferred Stock and insufficient shares of
Preferred Stock authorized to permit the payment of dividends on the Series B
PIK Preferred Stock. In connection with the next annual meeting of
shareholders, the Board of Directors will propose amending the Company's
Certificate of Incorporation to increase (i) the authorized number of shares
of Common Stock to permit conversion of the Preferred Stock and the Notes, if
applicable, and (ii) the authorized number of shares of preferred stock to
permit the payment of dividends on the Series B PIK Preferred Stock. Roche
Holdings and the directors and executive officers of the Company have
indicated to the Company that they intend to vote in favor of such amendment.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders. The holders of outstanding
shares of Common Stock, subject to any preferences that may be applicable to
any outstanding series of Preferred Stock, are entitled to receive ratably
such dividends out of assets legally available therefor at such times and in
such amounts as the Board of Directors may from time to time determine. Upon
liquidation or dissolution of the Company, the holders of Common Stock of the
Company will be entitled to share ratably in the assets of the Company legally
available for distribution to shareholders after payment of liabilities and
subject to the prior rights of any holders of preferred stock then
outstanding. Holders of Common Stock generally have no conversion, sinking
fund, redemption, preemptive or subscription rights. However, pursuant to the
Stockholder Agreement, Roche Holdings was granted certain preemptive rights.
See "Certain Relationships and Related Transactions--The Stockholder
Agreement". In addition, the Common Stock does not have cumulative voting
rights. Shares of Common Stock are not liable to further calls or assessments
by the Company and holders of Common Stock are not liable for any liabilities
of the Company.

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

WARRANT AGREEMENT

In connection with the Merger, the Company entered into a warrant agreement
dated April 10, 1995 (the "Warrant Agreement"). Pursuant to the Warrant
Agreement, the Company distributed a dividend consisting of warrants to
purchase an aggregate of approximately 13,826,308 shares of Common Stock to
stockholders of record as of April 21, 1995, including NHCG. In addition,
pursuant to the Merger, on April 28, 1995, Roche purchased from the Company
warrants (the "Roche Warrants") to purchase 8,325,000 shares of Common Stock
for an aggregate purchase price of $51,048,900. The Warrant Agreement provides
that each Warrant may be exercised on the fifth anniversary (the "Warrant
Expiration Date") of issuance to purchase one share of Common Stock at a
purchase price of $22.00 per share (subject to adjustment as a result of the
Rights Offering). The Company has the option, exercisable by notice 60 days
prior to the Warrant Expiration Date, to redeem the Warrants on the Warrant
Expiration Date for a cash redemption price per Warrant equal to the average
closing price of the Common Stock over a specified period prior to the Warrant
Expiration Date minus the exercise price.

PREFERRED STOCK

The Board of Directors is authorized to issue up to an aggregate of
10,000,000 shares of preferred stock in one or more classes or series, and to
fix for each such class or series such voting powers, full or limited, or no
voting powers, and such distinctive designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of such class or series and as may be permitted by the Delaware
General Corporate Law ("DGCL"), including, without limitation, the authority
to provide that any such class or series may be (i) subject to redemption at
such time or times and at such price or prices; (ii) entitled to receive
dividends (which may be cumulative or non-cumulative) at such rates, on such
conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Company; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, of the
Company at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions. See
"Description of Preferred Stock" for a description of the Preferred Stock
being offered hereby.

DESCRIPTION OF PREFERRED STOCK

GENERAL

The Preferred Stock consists of the Series A Exchangeable Preferred Stock
and the Series B PIK Preferred Stock, each of which has been authorized as a
new series of preferred stock, which in the aggregate will consist of
10,000,000 shares (plus up to 6,564,000 shares of Series B PIK Preferred Stock
to be issued in the form of dividends). The Company's Certificate of
Incorporation authorizes the Company to issue without any action on the part
of its stockholders, an aggregate of 10,000,000 shares of Preferred Stock, par
value $0.10 per share. When issued in accordance with the terms of the Rights
Offering, the Preferred Stock will be fully paid and nonassessable. The
holders of the Preferred Stock will have no preemptive rights with respect to
any shares of capital stock of the Company or any other securities of the
Company convertible into, or carrying rights or options to purchase, any such
shares. The Preferred Stock will not be subject to any sinking fund. Unless
converted, exchanged or redeemed by the Company prior to June 30, 2012, on
such date all of the Preferred Stock shall be redeemed by the Company at the
redemption price set forth herein. The following summary description of the
terms of the Preferred Stock does not purport to be complete and is qualified
in its entirety by reference to the Certificate of Designation, Preferences
and Rights for the Series A Exchangeable Preferred Stock (the "Series A
Certificate of Designation") and the Certificate of Designation, Preferences
and Rights for the Series B PIK Preferred Stock (the "Series B Certificate of
Designation" and together with the Series A Certificate of Designation, the
"Certificates of Designation"), copies of which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Upon request,
the transfer agent for the Preferred Stock will furnish holders a copy of the
applicable Certificate of Designation.

DIVIDENDS AND RANKING

Dividends on Series A Exchangeable Preferred Stock. Holders of shares of
Series A Exchangeable Preferred Stock will be entitled to receive, when, as
and if declared by the Board of Directors of the Company out of funds legally
available for payment, dividends at an annual rate of 8 1/2% of the
Liquidation Preference (as defined) of the Preferred Stock, or $4.25 per share
of Series A Exchangeable Preferred Stock payable in cash quarterly in arrears
on June 30, September 30, December 31 and March 31 of each year, commencing
September 30, 1997 (with respect to the period from the date of issuance of
such shares of Preferred Stock to such date), except that if any such date is
a Saturday, Sunday or legal holiday then such dividend will be payable on the
next day that is not a Saturday, Sunday or legal holiday. Dividends will
accrue and be cumulative from such date of issuance and will be payable to
holders of record as they appear on the stock transfer books on such record
dates as are fixed by the Board of Directors (provided that no record date
shall be later than (a) the sixth business day prior to the date fixed for any
redemption of the Preferred Stock or, (b) in the case of the dividend payment
date occurring on June 30, 2000, the tenth business day prior to such date).

Dividends on Series B PIK Preferred Stock. Holders of shares of Series B
PIK Preferred Stock will be entitled to receive, when, as and if declared by
the Board of Directors of the Company out of funds legally available for
payment, if applicable, dividends at an annual rate of 8 1/2% of the
Liquidation Preference (as defined) of the Preferred Stock, or $4.25 per share
of Series B PIK Preferred Stock, payable in shares of Series B PIK Preferred
Stock until June 30, 2003 and in cash thereafter, quarterly in arrears on June
30, September 30, December 31 and March 31 of each year, commencing September
30, 1997 (with respect to the period from the date of issuance of such shares
of Preferred Stock to such date), except that if any such date is a Saturday,
Sunday or legal holiday then such dividend will be payable on the next day
that is not a Saturday, Sunday or legal holiday. Dividends will accrue and be
cumulative from such date of issuance and will be payable to holders of record
as they appear on the stock transfer books on such record dates as are fixed
by the Board of Directors (provided that no record date shall be later than
(a) the sixth business day prior to the date fixed for any redemption of the
Preferred Stock or, (b) in the case of the dividend payment date occurring on
June 30, 2000, the tenth business day prior to such date). No fractional
shares of Series B PIK Preferred Stock will be issued, so that the number of
shares to be paid as a dividend pursuant to the Series B PIK Preferred Stock
shall be rounded to the

nearest whole number of shares. All dividends paid in additional shares of
Series B PIK Preferred Stock shall be deemed issued on the applicable dividend
payment date, and will thereupon be duly authorized, validly issued, fully
paid and nonassessable and free and clear of all liens and charges.

The Preferred Stock will be junior as to dividends to any series or class of
stock hereafter issued that ranks senior as to dividends to the Preferred
Stock, when and if issued ("Senior Dividend Stock"), and if at any time the
Company has failed to pay or declare and set apart for payment accrued and
unpaid dividends on any Senior Dividend Stock, the Company may not pay any
dividend on the Preferred Stock. The Preferred Stock will have priority as to
dividends over the Common Stock and any other series or class of the Company's
stock hereafter issued that ranks junior as to dividends to the Preferred
Stock, when and if issued (collectively, "Junior Dividend Stock"), and no
dividend (other than dividends payable solely in stock that is Junior Dividend
Stock and that ranks junior to the Preferred Stock as to distributions of
assets upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary (such stock that is junior as to liquidation rights,
"Junior Liquidation Stock") (the Common Stock and any other capital stock of
the Company that is both Junior Dividend Stock and Junior Liquidation Stock,
"Junior Stock")) may be paid on any Junior Dividend Stock, and no payment may
be made on account of the purchase, redemption, retirement, or other
acquisition of Junior Dividend Stock or Junior Liquidation Stock (other than
such acquisitions pursuant to employee or director incentive or benefit plans
or arrangements, or in exchange solely for Junior Stock), unless all accrued
and unpaid dividends on the Preferred Stock for all dividend payment periods
ending on or before the date of payment of such dividends on Junior Dividend
Stock, or such payment for such Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, have been paid or declared and set apart for
payment. The Company may not pay or declare and set apart for payment
dividends on the Preferred Stock unless it has paid or declared and set apart
for payment or contemporaneously pays or declares and sets apart for payment
accrued and unpaid dividends for all dividend payment periods on any class or
series of stock having parity with the Preferred Stock as to dividends
("Parity Dividend Stock" which, in the case of the Series A Exchangeable
Preferred Stock, will include the Series B PIK Preferred Stock and vice versa)
ratably, so that the amount of dividends declared and paid per share on the
Preferred Stock and such Parity Dividend Stock will bear to each other the
same ratio that the accrued and unpaid dividends to the date of payment on
Preferred Stock and such Parity Dividend Stock bear each other. No payment may
be made on account of the purchase, redemption, retirement or other
acquisition of shares of Parity Dividend Stock or other class or series of the
Company's capital stock ranking on a parity with the Preferred Stock as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (such stock that has parity with the
Preferred Stock as to liquidation rights which, in the case of the Series A
Exchangeable Preferred Stock, will include the Series B PIK Preferred Stock
and vice versa, "Parity Liquidation Stock" and, together with Parity Dividend
Stock, "Parity Stock") (other than such acquisitions pursuant to employee or
director or incentive or benefit plans or arrangements, or in exchange solely
for Junior Stock) unless all accrued and unpaid dividends on the Preferred
Stock for all dividend payment periods ending on or before the date of payment
on account of such acquisition of such Parity Dividend Stock or Parity
Liquidation Stock shall have been paid or declared and set apart for payment.
The respective definitions of Senior Dividend Stock, Senior Liquidation Stock
(as defined herein), Parity Dividend Stock, Parity Liquidation Stock, Junior
Dividend Stock and Junior Liquidation Stock shall also include any warrants,
rights, calls or options, exercisable for or convertible into any of the
Senior Dividend Stock, Senior Liquidation Stock, Parity Dividend Stock, Parity
Liquidation Stock, Junior Dividend Stock and Junior Liquidation Stock, as the
case may be.

The amount of dividends payable per share of Preferred Stock for each
quarterly dividend period will be computed by dividing the annual dividend
amount by four. The amount of dividends payable for the initial period and for
any period shorter than a full quarterly dividend period will be computed on
the basis of a 360-day year of twelve 30-day months. No interest will be
payable in respect of any dividend payment on the Preferred Stock which may be
in arrears.

Under Delaware law, the Company may declare and pay dividends on its capital
stock only out of surplus, as defined in the Delaware General Corporation Law
(the "DGCL") or, if there is no such surplus,

out of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. Surplus under the DGCL is generally defined
to mean the excess, at any given time, of the net assets of a corporation over
the amount of the corporation's capital. No dividends or distributions may be
declared, paid or made if the Company is or would be rendered insolvent by
virtue of such dividend or distribution, or if such declaration, payment or
distribution would contravene the certificate of incorporation of the
corporation. The Company is also subject to restrictions on cash dividend
payments pursuant to the terms of the Amended Credit Agreement. In addition,
pursuant to the terms of the Preferred Stock, if dividends on the Series A
Exchangeable Preferred Stock were to be limited pursuant to the Amended Credit
Agreement prior to June 30, 2003, the Company's ability to pay dividends in
kind on the Series B PIK Preferred Stock would also be limited. See "Dividend
Policy".

LIQUIDATION RIGHTS

In the case of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of shares of Preferred Stock are entitled
to receive the liquidation preference of $50 per share (the "Liquidation
Preference"), plus an amount equal to any accrued and unpaid dividends to the
payment date, before any payment or distribution is made to the holders of
Common Stock or any Junior Liquidation Stock, but the holders of the shares of
the Preferred Stock will not be entitled to receive the liquidation preference
of such shares until the liquidation preference of any other series or class
of stock hereafter issued that ranks senior as to liquidation rights to the
Preferred Stock ("Senior Liquidation Stock") has been paid in full. The
holders of Preferred Stock and Parity Liquidation Stock are entitled to share
ratably, in accordance with the respective preferential amounts payable on
such stock, in any distribution (after payment of the liquidation preference
of the Senior Liquidation Stock) which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in full of the
liquidation preference of the shares of the Preferred Stock, the holders of
such shares will not be entitled to any further participation in any
distribution of assets by the Company. Neither a consolidation nor merger of
the Company with another corporation nor a sale or transfer of all or
substantially all of the Company's property or assets will be considered a
liquidation, dissolution or winding up of the Company.

VOTING RIGHTS

The holders of the Preferred Stock will not have voting rights except as
described below or as required by law. In exercising any such vote, each
outstanding share of Preferred Stock will be entitled to one vote, excluding
shares held by any entity controlled by the Company, which shares shall have
no voting rights.

Whenever dividends on the Preferred Stock or any outstanding shares of
Parity Dividend Stock have not been paid in an aggregate amount equal to at
least six quarterly dividends on such shares (whether or not consecutive), the
number of members of the Company's Board of Directors will be increased by
two, and the holders of the Preferred Stock, voting separately as a class with
the holders of Parity Dividend Stock on which like voting rights have been
conferred and are exercisable, will be entitled to elect such two additional
directors who shall continue to serve so long as such dividends remain in
arrears. Such voting rights will terminate when all such dividends accrued and
unpaid have been declared and paid or set apart for payment. The term of
office of all directors so elected will terminate immediately upon the
termination of such voting rights and the number of members of the Board of
Directors will be reduced by two.

In addition, so long as any Preferred Stock is outstanding, the Company will
not, without the affirmative vote or consent of the holders of at least (a) 66
2/3% of all outstanding shares of each series of Preferred Stock and
outstanding Parity Dividend Stock (voting as a single class), (i) amend, alter
or repeal (by merger or otherwise) any provision of the Certificate of
Incorporation, Certificates of Designation or the bylaws of the Company so as
to affect adversely the relative rights, preferences, qualifications,
limitations, or restrictions of the Preferred Stock, (ii) authorize or issue,
or increase the authorized amount of any Senior Dividend Stock, Senior
Liquidation Stock or any security convertible into such Senior Dividend Stock
or such Senior Liquidation Stock or (iii) effect any reclassification of the
Preferred Stock or (b) a majority of all outstanding shares of each series of
Preferred Stock and outstanding Parity Dividend Stock (voting as a single
class), authorize or issue, or increase the authorized amount of any
additional class of Parity Stock or any security convertible into such Parity
Stock.

REDEMPTION

The Preferred Stock may not be redeemed prior to July 7, 2000. On or after
such date, each series of Preferred Stock may be redeemed by the Company, at
its option, in whole or in part at any time, subject to the limitations, if
any, imposed by applicable law, at a cash redemption price per share, if
redeemed during the 12-month period beginning July 7 of the years indicated
below, plus, in each case, accrued and unpaid dividends thereon to the date of
redemption:

Redemption
Price
Year Per Share
---- ----------

2000........................................................... $52.83
2001........................................................... 52.36
2002........................................................... 51.89
2003........................................................... 51.42
2004........................................................... 50.95
2005........................................................... 50.47
2006 and thereafter............................................ 50.00

If fewer than all the outstanding shares of a series of Preferred Stock are
to be redeemed, the Company will select those shares to be redeemed pro rata
or by lot or in such other manner as the Board of Directors may determine to
be fair. On June 30, 2012, all of the outstanding Preferred Stock will be
mandatorily redeemed by the Company at a redemption price of $50 per share. If
at any time dividends on the Preferred Stock are in arrears, the Company may
not redeem less than all of the then outstanding shares of the applicable
series of Preferred Stock until all accrued dividends for all past dividend
periods have been paid in full.

Notice of redemption will be mailed at least 30 days but not more than 60
days before the date fixed for redemption to each holder of record of shares
of the applicable series of Preferred Stock to be redeemed at the address
shown on the stock transfer books. No fractional shares of Preferred Stock
will be issued upon a redemption of less than all of the Preferred Stock, but
in lieu thereof, an appropriate amount will be paid in cash based on the
Closing Price (as defined in the Certificates of Designation) on the date
fixed for redemption. After the date fixed for redemption (unless the Company
defaults on the payment of the redemption price), dividends will cease to
accrue on the shares of Preferred Stock called for redemption and other rights
of the holders of such shares will terminate, except the right to receive the
redemption price without interest.

CONVERSION RIGHTS

The holder of any shares of Preferred Stock will have the right at any time
on or after September 30, 1997 in the case of the Series A Exchangeable
Preferred Stock and on or after June 30, 2000 in the case of the Series B PIK
Preferred Stock, at the holder's option, to convert any or all shares into
Common Stock at the conversion rate (subject to adjustment as described below)
of 18.1818 shares for each share of Preferred Stock, equivalent to an initial
conversion price of $2.75 for each share of Common Stock. The conversion rate
was determined by the Company, in consultation with Credit Suisse First
Boston. Among the factors considered by the Board of Directors in determining
the conversion rate were (i) the market value of the Common Stock; (ii) the
present and projected operating results and financial condition of the
Company; (iii) an assessment of the Company's management and management's
analysis of the growth potential of the Company and of the Company's market
area; (iv) the aggregate size of the Rights Offering; and (v) the conversion
rate which the Board of Directors believes investors would readily accept
under current economic circumstances. If the Preferred Stock is called for
redemption, the conversion right will terminate at 5:00 p.m. New York City
time on the business day prior to the date fixed for such redemption and if
not exercised prior to such time, such conversion right will be lost, unless
the Company defaults in making the payment due upon redemption. Except as
provided in the next paragraph, no payment or adjustment will be made upon any
conversion of any share of Preferred Stock or on account

of any dividends on the Common Stock issued upon conversion (except that if a
converting holder of Preferred Stock is eligible for a dividend on both the
Preferred Stock and the Common Stock issued upon conversion, the holder is
entitled to the higher of such dividend amounts). Following conversion, the
holder will no longer have any right to payment of dividends on the shares
surrendered for conversion. No fractional shares of Common Stock will be issued
upon conversion but, in lieu thereof, an appropriate amount will be paid in
cash based on the Closing Price for the shares of Common Stock on the day of
such conversion.

If the Company, by dividend or otherwise, declares or makes a distribution on
its Common Stock referred to in clause (iv) or (v) of the next following
paragraph, the holders of the Preferred Stock, upon the conversion thereof
subsequent to the close of business on the date fixed for the determination of
shareholders entitled to receive such distribution and prior to the
effectiveness of the conversion price adjustment in respect of such
distribution, will be entitled to receive for each share of Common Stock into
which each such share of Preferred Stock is converted the portion of the shares
of Common Stock, rights, warrants, evidences of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of Common Stock;
provided, however, that the Company may, with respect to all holders so
converting, in lieu of distributing any portion of such distribution not
consisting of cash or securities of the Company, pay such holder cash equal to
the fair market value thereof (as determined by the Board of Directors).

The conversion price will be subject to adjustment in certain events
including, without duplication: (i) dividends (and other distributions) payable
in Common Stock on any class of capital stock of the Company; (ii) the issuance
to all holders of Common Stock of rights or warrants, entitling holders of such
rights or warrants to subscribe for or purchase Common Stock at less than the
then current market price (as defined in the Certificates of Designation);
(iii) subdivisions and combinations of Common Stock; (iv) distributions to all
holders of Common Stock of evidences of indebtedness of the Company, shares of
capital stock, cash or assets (including securities, but excluding those
rights, warrants, dividends and distributions referred to above and dividends
and distributions paid exclusively in cash); and (v) distributions consisting
of cash, excluding (A) cash that is part of a distribution referred to in (iv)
above, and (B) any cash representing an amount per share of Common Stock of any
quarterly cash dividend to the extent it does not exceed the amount per share
of Common Stock of the next preceding quarterly cash dividend (as adjusted to
reflect any of the events referred to in clauses (i) through (iv) of this
sentence) or all of any such quarterly cash dividends if the amount thereof per
share of Common Stock multiplied by four does not exceed 15% of the current
market price of Common Stock on the trading day (as defined in the Certificates
of Designation) next preceding the date of declaration of such dividend.
Promptly, following certain adjustments to the conversion price, notice of such
event will be mailed to the holders of the Preferred Stock.

The foregoing adjustments to the conversion price are designed to compensate
the holders of the Preferred Stock for the value of the cash, securities or
other assets that they would have otherwise received had they converted their
Preferred Stock into shares of Common Stock prior to such distribution. Such
adjustment would generally result in a reduced conversion price, which would
entitle the holders of Preferred Stock to receive a greater number of shares of
Common Stock upon conversion of the Preferred Stock into Common Stock.

The Company from time to time may reduce the conversion price by an amount
for any period of time of at least 20 days, in which case the Company shall
give at least 15 days' notice of such reduction, if the Board of Directors of
the Company has made a determination that such reduction would be in the best
interest of the Company, which determination shall be conclusive.

In the event that the Company is a party to any transaction (including,
without limitation, a merger, consolidation, sale of all or substantially all
of the Company's assets, recapitalization or reclassification of the Common
Stock (each of the foregoing being referred to as a "Company Transaction")), in
each case (except in the case of a Common Stock Fundamental Change (as
defined)) as a result of which shares of

Common Stock shall be converted into the right to receive securities, cash or
other property, each share of the Preferred Stock shall thereafter be
convertible into the kind and amount of securities, cash and other property
receivable upon the consummation of such Company Transaction by a holder of
that number of shares of Common Stock into which one share of the Preferred
Stock was convertible immediately prior to such Company Transaction (or in the
case of a Common Stock Fundamental Change, common stock of the kind received
by the holders of Common Stock as a result of such Common Stock Fundamental
Change) (but after giving effect to any adjustment discussed in the next
paragraph relating to a Fundamental Change (as defined) if such Company
Transaction constitutes a Fundamental Change, and subject to funds being
legally available for such purpose under applicable law at the time of such
conversion).

Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Fundamental Change occurs, then the conversion price in
effect will be adjusted immediately after such Fundamental Change as described
below. In addition, in the event of a Common Stock Fundamental Change, each
share of the Preferred Stock shall be convertible solely into common stock of
the kind received by holders of Common Stock as the result of such Common
Stock Fundamental Change. For purposes of calculating any adjustment to be
made pursuant to this paragraph in the event of a Fundamental Change,
immediately after such Fundamental Change:

(i) in the case of a Non-Stock Fundamental Change (as defined), the
conversion price of the Preferred Stock will thereupon become the lower of
(A) the conversion price in effect immediately prior to such Non-Stock
Fundamental Change, but after giving effect to any other prior adjustments,
and (B) the result obtained by multiplying the greater of the Applicable
Price (as defined) or the then applicable Reference Market Price (as
defined) by a fraction of which the numerator will be $50 and the
denominator will be the then current redemption price per share (or, for
periods prior to July 7, 2000, an amount per share determined in accordance
with the Certificates of Designation); and

(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Stock in effect immediately prior to such Common
Stock Fundamental Change, but after giving effect to any other prior
adjustments, will thereupon be adjusted by multiplying such conversion
price by a fraction, of which the numerator will be the Purchaser Stock
Price (as defined) and the denominator will be the Applicable Price;
provided, however, that in the event of a Common Stock Fundamental Change
in which (A) 100% of the value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third
party (and cash, if any, is paid with respect to any fractional interests
in such common stock resulting from such Common Stock Fundamental Change)
and (B) all of the Common Stock will have been exchanged for, converted
into, or acquired for, common stock (and cash with respect to fractional
interests) of the successor, acquiror or other third party, the conversion
price of the Preferred Stock in effect immediately prior to such Common
Stock Fundamental Change will thereupon be adjusted by dividing such
conversion price by the number of shares of common stock of the successor,
acquiror, or other third party received by a holder of one share of Common
Stock as a result of such Common Stock Fundamental Change.

The foregoing conversion price adjustments in the event of a Non-Stock
Fundamental Change will apply in situations whereby all or substantially all
of the Common Stock is acquired in a transaction in which 50% or less of the
value received by holders of Common Stock consists of common stock that has
been admitted for listing on a national securities exchange or quoted on the
Nasdaq National Market. If the market price of the Common Stock immediately
prior to a Non-Stock Fundamental Change is lower than the applicable
conversion price of the Preferred Stock then in effect, the conversion price
will be adjusted as described in (i) above and the holders of the Preferred
Stock will be entitled to receive the amount and kind of consideration that
would have been received if the Preferred Stock had been converted into Common
Stock prior to the Non-Stock Fundamental Change after giving effect to such
adjustment.

The foregoing conversion price adjustments in the event of a Common Stock
Fundamental Change will apply in situations whereby more than 50% of the value
received by holders of Common Stock consists of common stock of another
company that has been admitted for listing on a national securities exchange

or quoted on the Nasdaq National Market, in which case the Preferred Stock
will become convertible into shares of common stock of the other company. If
consideration for the Common Stock consists partly of common stock of another
company and partly of other securities, cash or property, each share of
Preferred Stock will be convertible solely into a number of shares of such
common stock determined so that the initial value of such shares (measured as
described in the definition of Purchaser Stock Price below) equals the value
of the shares of Common Stock into which such share of Preferred Stock was
convertible immediately before the transaction (measured as described in the
definition of Applicable Price below). If consideration for Common Stock is
solely common stock of another company, each share of Preferred Stock will be
convertible into the same number of shares of such common stock receivable by
a holder of the number of shares of Common Stock into which such share of
Preferred Stock was convertible immediately before such transaction.

Depending upon whether the Fundamental Change is a Non-Stock Fundamental
Change or Common Stock Fundamental Change, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock
Fundamental Change, the holder has the right to convert each share of the
Preferred Stock into the kind and amount of shares of stock and other
securities or property or assets receivable by a holder of the number of
shares of Common Stock issuable upon conversion of such share of the Preferred
Stock immediately prior to such Non-Stock Fundamental Change, but after giving
effect to the adjustment described above. However, in the event of a Common
Stock Fundamental Change in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of the Preferred Stock who
converts a share following the Common Stock Fundamental Change will receive
consideration in the form of such common stock only, whereas a holder who has
converted his share prior to the Common Stock Fundamental Change will receive
consideration in the form of common stock as well as any other securities or
assets (which may include cash) receivable thereupon by a holder of the number
of shares of Common Stock issuable upon conversion of such share of Preferred
Stock immediately prior to such Common Stock Fundamental Change.

The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of the Common Stock receive only cash,
the amount of cash received by the holder of one share of Common Stock and
(ii) in the event of any other Non-Stock Fundamental Change or any Common
Stock Fundamental Change, the average of the Closing Prices (as defined) for
the Common Stock during the ten trading days (as defined in the Certificate of
Designation) prior to and including the record date for the determination of
the holders of Common Stock entitled to receive cash, securities, property or
other assets in connection with such Non-Stock Fundamental Change or Common
Stock Fundamental Change, or, if there is no such record date, the date upon
which the holders of the Common Stock shall have the right to receive such
cash, securities, property or other assets, in each case, as adjusted in good
faith by the Board of Directors or the Company to appropriately reflect any of
the events referred to in clauses (i) through (v) of the third paragraph of
this Conversion Rights subsection.

The term "Closing Price" of any common stock means on any day the last
reported sale price regular way on such day or in case no sale takes place on
such day, the average of the reported closing bid and asked prices regular way
in each case on the NYSE or, if the common stock is not quoted on such system,
on the principal national securities exchange or quotation system on which
such stock is listed or admitted to trading or quoted, or, if not listed or
admitted to trading on any national securities exchange or quotation system,
the average of the closing bid and asked prices in the over-the-counter market
on such day, or, if not so available in such manner, as furnished by any NYSE
Member firm selected by the Company for that purpose.

The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that for each of the ten consecutive trading
days referred to in the second preceding paragraph has been admitted for
listing or

admitted for listing subject to notice of issuance on a national securities
exchange or quoted on the Nasdaq National Market, provided, however, that a
Fundamental Change shall not be a Common Stock Fundamental Change unless
either (i) the Company continues to exist after the occurrence of such
Fundamental Change and the outstanding shares of Preferred Stock continue to
exist as outstanding Preferred Stock, or (ii) not later than the occurrence of
such Fundamental Change, the outstanding shares of Preferred Stock are
converted into or exchanged for shares of preferred stock of a corporation
succeeding to the business of the Company, which preferred stock has powers,
preferences and relative, participating, optional or other rights, and
qualifications, limitations and restrictions, substantially similar to those
of the Preferred Stock.

The term "Fundamental Change" means the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
the Common Stock shall be exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) provided, in the case of a plan involving more than one such
transaction or event, for purposes of adjustment of the conversion price, such
Fundamental Change shall be deemed to have occurred when substantially all of
the Common Stock of the Company shall be exchanged for, converted into, or
acquired for or constitute solely the right to receive cash, securities,
property or other assets, but the adjustment shall be based upon the highest
weighted average per share consideration which a holder of Common Stock could
have received in such transactions or events as a result of which more than
50% of the Common Stock of the Company shall have been exchanged for,
converted into, or acquired for or constitute solely the right to receive
cash, securities, property or other assets.

The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.

The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive
trading days prior to and including the record date for the determination of
the holders of Common Stock entitled to receive such common stock, or if there
is no such record date, the date upon which the holders of the Common Stock
shall have the right to receive such common stock, in each case, as adjusted
in good faith by the Board of Directors to appropriately reflect any of the
events referred to in clauses (i) through (v) of the third paragraph of this
subsection; provided, however, that if no such Closing Prices exist, the
Purchaser Stock Price shall be set at a price determined in good faith by the
Board of Directors of the Company.

The term "Reference Market Price" shall mean $ (which is an amount equal
to 66 2/3% of the reported last sale price for the Common Stock on the NYSE on
, 1997) and in the event of any adjustment to the conversion price other
than as a result of a Fundamental Change, the Reference Market Price shall
also be adjusted so that the ratio of the Reference Market Price to the
conversion price after giving effect to any such adjustment shall always be
the same ratio of $ to the initial conversion price specified in the first
sentence of this subsection.

Notwithstanding the foregoing provisions, the issuance of any shares of
Common Stock pursuant to any plan providing for the reinvestment of dividends
or interest payable on securities of the Company and the investment of
additional optional amounts in shares of Common Stock under any such plan, and
the issuance of any shares of Common Stock or options or rights to purchase
such shares pursuant to any employee benefit plan or program of the Company or
pursuant to any option, warrant, right or exercisable, exchangeable or
convertible security outstanding as of the date the Preferred Stock was first
designated shall not be deemed to constitute an issuance of Common Stock or
exercisable, exchangeable or convertible securities by the Company to which
any of the adjustment provisions described above applies. There shall also be
no adjustment of the conversion price in case of the issuance of any stock (or
securities convertible into or exchangeable for stock) of the Company, except
as specifically described above. If any action would require adjustment of the
conversion price pursuant to more than one of the provisions

described above, only one adjustment shall be made and such adjustment shall
be the amount of adjustment which has the highest absolute value to holders of
the Preferred Stock. No adjustment in the conversion price will be required
unless such adjustment would require an increase or decrease of at least 1% of
the conversion price, but any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment.

EXCHANGE PROVISIONS

The Series A Exchangeable Preferred Stock may be exchanged, in whole but not
in part, at the option of the Company, for Notes on any June 30, September 30,
December 31 or March 31, on or after June 30, 2000 (a "Notes Exchange Date")
through the issuance of Notes, in redemption of and in exchange for shares of
Series A Exchangeable Preferred Stock, provided certain conditions described
below are met. See "Description of the Notes." Holders of the Series A
Exchangeable Preferred Stock will be entitled to receive Notes at the rate of
$50 principal amount of Notes for each share of Series A Exchangeable
Preferred Stock. The Company will mail notice of its intention to redeem
through such an exchange to each holder of record of the Series A Exchangeable
Preferred Stock not less than 30 nor more than 60 days before the Notes
Exchange Date. If notice of exchange has been given (unless the Company
defaults in issuing Notes in redemption of an exchange for the Series A
Exchangeable Preferred Stock or fails to pay or set aside for payment accrued
and unpaid dividends on the Series A Exchangeable Preferred Stock) on the
Notes Exchange Date the holders of the Series A Exchangeable Preferred Stock
will cease to be stockholders with respect to such shares and will have no
interests in or claims against the Company by virtue thereof (except the right
to receive Notes in exchange therefor and accrued and unpaid dividends on the
Series A Exchangeable Preferred Stock to the Notes Exchange Date) and will
have no voting, conversion or other rights with respect to such shares, and
all shares of Series A Exchangeable Preferred Stock will no longer be
outstanding. No shares of Series A Exchangeable Preferred Stock may be
exchanged for Notes unless the Company has paid or set aside for the benefit
of the holders of the Series A Exchangeable Preferred Stock all accrued and
unpaid dividends on the Series A Exchangeable Preferred Stock to the Notes
Exchange Date. The ability of the Company to exchange Series A Exchangeable
Preferred Stock for the Notes is restricted under the terms of the Amended
Credit Agreement. See "Risk Factors--Substantial Leverage." The ability of the
Company to exchange Series A Exchangeable Preferred Stock for Notes is also
subject to certain conditions contained in the Indenture relating to the Notes
and to limitations imposed under the DGCL and by applicable laws protecting
the rights of creditors.

REGISTRATION RIGHTS

LACK OF ESTABLISHED MARKET FOR THE PREFERRED STOCK

There is currently no public market for the Preferred Stock. While
application has been made to list the Series B PIK Preferred Stock on the
NYSE, it is unlikely that the Series B PIK Preferred Stock will be accepted
for listing as it is expected that following the Rights Offering the Series B
PIK Preferred Stock will be held by fewer than 100 holders. In addition, there
can be no assurance that an active market for the Preferred Stock will develop
or that, if the Preferred Stock is approved for such listing, such listing
will continue while the Preferred Stock is outstanding. Future trading prices
for the Preferred Stock will depend on many factors, including, among others,
the Company's financial results, the market for similar securities and the
volume of trading activity in the Preferred Stock.

TRANSFER AGENT

The transfer agent of the Preferred Stock will be American Stock Transfer &
Trust Company.

DESCRIPTION OF THE NOTES

If the Company elects to issue Notes in exchange for the Series A
Exchangeable Preferred Stock, the Company will issue the Notes under an
Indenture (the "Indenture") between the Company and First Union National Bank
of North Carolina, as trustee (the "Trustee") at a rate of $50 principal
amount of Notes for each share of Series A Exchangeable Preferred Stock
exchanged. The Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is available for inspection
at the office of the Trustee. The Indenture is governed by the Trust Indenture
Act of 1939, as amended. The following summaries of certain provisions of the
Indenture do not purport to be complete and where reference is made to
particular provisions of the Indenture, such provisions, including definitions
of certain terms, are incorporated by reference as part of such summaries,
which are qualified in their entirety by such reference.

GENERAL

The Notes will be unsecured, subordinated obligations of the Company, will
be limited in aggregate principal amount to $250,562,450 and will mature on
June 30, 2012. The Company will pay interest on the Notes quarterly in cash on
June 30, September 30, December 31 and March 31 of each year, at the rate of 8
1/2% per annum. Interest on the Notes will be paid to the persons who are
registered holders at the close of business on the June 15, September 15,
December 15 or March 15 immediately preceding the interest payment dates.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Principal (and premium, if any) and interest will be payable, and the
Notes may be presented for conversion, exchange or registration of transfer,
at the office or agency of the Company maintained for such purposes or payment
of interest may, at the option of the Company, be made by check mailed to the
address of the person entitled thereto as it appears on the security register
or, at the option of the holder, in immediately available funds. The Notes are
to be issued only in registered form, without coupons, in denominations of $50
or any integral multiple thereof.

CONVERSION RIGHTS

The holders of Notes will have the right at any time, through the close of
business on the maturity date, subject to prior redemption, to convert any
Notes (or any portion thereof that is an integral multiple of $50) into fully
paid and nonassessable shares of Common Stock, initially at the conversion
rate in effect on the Preferred Stock at the date of exchange of the Series A
Exchangeable Preferred Stock for Notes (subject to adjustment as described
below). If a Note is called for redemption prior to maturity, the conversion
right will terminate at 5:00 p.m. New York City time on the business day prior
to the date fixed for redemption unless in any such case, the Company shall
default in payment due upon such redemption. Except as described below, no
payment of interest and no adjustment in respect of dividends on the shares of
Common Stock will be made upon the conversion of any Notes, and the holder
will lose any right to payment of interest on the Notes surrendered for
conversion. Notes surrendered for conversion during the period from the
regular record date for an interest payment to the next succeeding interest
payment date (except Notes called for redemption during such period) must be
accompanied by payment of an amount equal to the interest thereon which the
holder is to receive on such interest payment date. No fractional shares of
Common Stock will be issued upon conversion but, in lieu thereof, an
appropriate amount will be paid in cash which, if available shall be based on
the last reported sale price for the shares of Common Stock on the NYSE on the
day of such conversion. The provisions in the Indenture for adjustment of the
conversion rate will be substantially the same as those applicable to the
Preferred Stock described under "Description of Preferred Stock--Conversion
Rights."

SUBORDINATION

Payment of the principal of (and premium, if any) and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to
the prior payment in full of all Senior Indebtedness when due in accordance
with the terms thereof. Senior Indebtedness will be defined in the Indenture
as the principal of (and premium, if any) and unpaid interest on, and all
other sums, whether direct or contingent including, without limitation, costs
and expenses of collection and enforcement (including the reasonable

fees and expenses of legal counsel engaged for such purpose) payable by the
Company relating to, the following (whether outstanding at the date of the
Indenture or thereafter incurred or created): (a) indebtedness of the Company
for money borrowed (including purchase-money obligations) evidenced by notes
or other written obligations including, without limitation, letters of credit
and bankers acceptances, (b) indebtedness of the Company evidenced by notes,
debentures, bonds or other securities issued under the provisions of an
indenture or similar instrument, (c) obligations of the Company as lessee
under capitalized leases and under leases of property made as part of any sale
and leaseback transactions, (d) indebtedness of others of any of the kinds
described in the preceding clauses (a) through (c) assumed or guaranteed by
the Company and (e) renewals, extensions and refundings of, and indebtedness
and obligations of a successor person issued in exchange for or in replacement
of indebtedness and obligations of the kinds described in the preceding
clauses (a) through (d); provided, however, that the following will not
constitute Senior Indebtedness: (i) any indebtedness or obligation as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is expressly provided that such indebtedness or
obligation is subordinate in right of payment to all other indebtedness of the
Company not expressly subordinated to such indebtedness or obligation, (ii)
any indebtedness or obligation which by its terms refers explicitly to the
Notes and states that such indebtedness or obligation shall not be senior in
right of payment thereto and (iii) any indebtedness or obligation of the
Company to a subsidiary.

Following the Rights Offering, $802.8 million of Senior Indebtedness will be
outstanding. There will be no restrictions on the creation of Senior
Indebtedness in the Indenture.

By reason of such subordination, in the event of liquidation, dissolution,
insolvency, bankruptcy, assignment to the benefit of creditors or other
similar proceeding, creditors (other than holders of Senior Indebtedness or
Notes) may recover less, ratably, than the holders of Senior Indebtedness and
may recover more, ratably, than the holders of the Notes and, upon any
distribution of assets, the holders of Notes will be required to pay over
their share of such distribution to the holders of Senior Indebtedness until
such Senior Indebtedness is paid in full. In addition, such subordination may
affect the Company's obligation to make principal and interest payments with
respect to the Notes, and the rights of the Trustee or the holders of the
Notes to exercise certain remedies under the Indenture (including the right to
declare the Notes due and payable prior to their stated maturity), in the
event of any default on the payment of principal (or premium, if any) or
interest on any Senior Indebtedness beyond any applicable grace period, or in
the event of any default with respect to Senior Indebtedness that would permit
or automatically effect acceleration of the maturity thereof or if any Notes
are declared due and payable prior to their stated maturity.

GLOBAL SECURITIES

The Notes will be issued in the form of one or more global securities (each,
a "Global Security") that will be deposited with, or on behalf of DTC. Global
Securities may be issued only in fully registered form and in either temporary
or permanent form. Unless and until it is exchanged in whole or in part for
Notes in definitive form, and except as set forth below, a Global Security may
not be transferred except as a whole to DTC or another nominee of DTC or to a
successor depositary or any nominee of such successor.

Upon the issuance of a Global Security, DTC or its nominee will credit, on
its book-entry registration and transfer system, the respective principal
amounts of the individual Notes represented by such Global Security to the
accounts of persons that have accounts with DTC or its nominee
("Participants"). Ownership of beneficial interests in a Global Security will
be limited to Participants or persons that may hold interests through
Participants. Ownership of beneficial interests in such Global Security will
be shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to the interests of
Participants) and the records of Participants (with respect to interests of
persons other than Participants). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Security.

100

So long as DTC, or its nominee, is the registered holder and owner of such
Global Security, DTC or such nominee, as the case may be, will be considered
the sole owner and holder of the Notes represented by such Global Security for
all purposes of such Notes and for all purposes under the Indenture. Except as
provided below, owners of beneficial interests in a Global Security will not
be entitled to have any of the individual Notes represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of any such Notes in definitive form and will not be
considered the owners or holders thereof under the Indenture.

Accordingly, each person owning a beneficial interest in a Global Security
must rely on the procedures of DTC and, if such person is not a Participant,
on the procedures of the Participant through which such person owns its
interest, to exercise all rights of a holder of Notes or such Global Security.
The Company understands that under existing industry practice, in the event
the Company requests any action of holders of Notes or an owner of a
beneficial interest in a Global Security desires to take any action that DTC,
as the holder of such Global Security, is entitled to take, DTC would
authorize the Participants to take such action, and that the Participants
would authorize beneficial owners owning through such Participants to take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.

Payments of principal of, any premium on, and any interest on, individual
Notes represented by a Global Security will be made to DTC or its nominee, as
the case may be, as the registered owner and holder of the Global Security
representing such Notes.

The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium or interest in respect of a Global Security, immediately
will credit Participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Global
Security as shown on the records of DTC or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in a
Global Security held through Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.

No Global Security may be transferred to, or registered or exchanged for
Notes registered in the name of, any person other than DTC or any nominee or
successor thereof, and no such transfer may be registered, unless (i) DTC (A)
notifies the Company that it is unwilling or unable to continue as depositary
for such Global Security or (B) ceases to be qualified to serve as depositary,
(ii) the Company executes and delivers to the Trustee a written request that
such Global Security shall be so transferable, registrable and exchangeable or
(iii) there shall have occurred and be continuing an event of default. A
Global Security to which the restriction set forth in the preceding sentence
shall have ceased to apply may be transferred only to, and may be registered
and exchanged for Notes registered only in the name or names of, such person
or persons as DTC shall have directed and no transfer thereof other than such
a transfer may be registered.

DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of Participants and to facilitate the clearance
and settlement of securities transactions among the Participants, thereby
eliminating the need for physical delivery of securities and certificates.
Participants include securities brokers and dealers (including the Dealer
Manager), banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own DTC.

101

Access to DTC's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with Participants, either directly or indirectly
("Indirect Participants"). Persons who are not Participants may beneficially
own securities held by DTC only through Participants or Indirect Participants.
The rules applicable to DTC and the Participants are on file with the
Commission. DTC currently accepts only notes denominated and payable in U.S.
dollars.

REDEMPTION AT OPTION OF COMPANY

The Notes are not redeemable prior to July 7, 2000. On or after such date
the Notes may be redeemed by the Company, at its option, in whole or in part
at any time and from time to time subject to the limitations, if any, imposed
by applicable law, at a redemption price, expressed as a percentage of the
principal amount, subject to the rights of Holders of record on a record date
to receive interest due on an interest payment date that is prior to such
redemption date together with accrued and unpaid interest to the date fixed
for redemption, if redeemed during the twelve month period beginning July 7 of
the years indicated below:

Redemption
Year Price
---- ----------

2000........................................................... 105.667%
2001........................................................... 104.722
2002........................................................... 103.778
2003........................................................... 102.833
2004........................................................... 101.889
2005........................................................... 100.944
2006 and thereafter............................................ 100.000%

Notes in any denomination equal to or larger than $50 may be redeemed in
whole or in part in multiples of $50. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption.

Notice of redemption will be mailed by first class mail at least 30 but not
more than 60 days prior to the redemption date to each holder of Notes to be
redeemed at the address appearing in the security register. If less than all
the outstanding Notes are to be redeemed, the Trustee will select the Notes
(or portion thereof equal to $50 or any integral multiple thereof) to be
redeemed by lot or by such other method as the Trustee shall deem fair and
appropriate.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company, without the consent of any holders of Notes may consolidate or
merge with or into any person, or convey, transfer or lease its properties and
assets substantially as an entirety to any person, provided that (i) the
person (if other than the Company) formed by such consolidation or into which
the Company is merged or which acquires by conveyance or transfer or leases
the properties and assets of the Company substantially as an entirety is a
corporation, partnership or trust organized and validly existing under the
laws of the United States, any state thereof or the District of Columbia, and
expressly assumes the Company's obligations on the Notes and under the
Indenture, (ii) after giving effect to such transaction, no event of default
and no event that, after notice or lapse of time or both, would become an
event of default shall have happened and be continuing and (iii) certain other
conditions are met.

The provisions of the Indenture may not necessarily afford the holders of
the Notes protection in the event of a highly leveraged transaction, including
a reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the holders.

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REPORTS

The Indenture will provide that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the Company shall deliver to the
Trustee and make available to each Holder, within 15 days after it files or
would have been required to file such reports with the Commission, annual and
quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission
if the Company were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission, and in each case,
together with management's discussion and analysis of financial condition and
results of operations which would be so required.

DEFAULTS AND REMEDIES

An event of default under the Indenture is defined as: default for 30 days
in payment of interest on the Notes; default in payment of principal of (or
premium, if any, on) the Notes; failure by the Company for 60 days after
written notice to it to comply with any of its other covenants or agreements
of the Notes or in the Indenture; and certain events of bankruptcy, insolvency
or reorganization relative to the Company or its subsidiaries. If an event of
default occurs and is continuing (other than certain events of bankruptcy,
insolvency or reorganization as specified above in which case the Notes will
be immediately due and payable), the Trustee or holders of at least 25% in
aggregate principal amount of the Notes outstanding may, subject to the
applicable subordination provisions, declare the Notes to be due and payable
immediately, but under certain conditions such acceleration may be rescinded
by the holders of a majority in principal amount of the Notes then
outstanding.

Holders of Notes may not enforce the Indenture except as provided in the
Indenture and except that, subject to the applicable subordination provisions,
nothing shall prevent the holders of Notes from enforcing payment of the
principal (or premium, if any) or (except for defaulted interest as set forth
in the Indenture) interest on, or conversion of, their Notes. The Trustee may
refuse to enforce the Indenture unless it receives reasonable security or
indemnity. Subject to certain limitations, holders of a majority in principal
amount of the Notes may direct the Trustee in its exercise of any trust or
power under the Indenture.

The Company will annually furnish the Trustee with an officers' certificate
with respect to compliance with the terms of the Indenture.

MODIFICATION

Modification and amendment of the Indenture or the entering into a
supplemental indenture may be effected by the Company and the Trustee with the
consent of the holders of not less than a majority in aggregate principal
amount of the then outstanding Notes, provided that no such modification,
amendment or supplemental indenture may, without the consent of each holder
affected thereby, (i) reduce the percentage of principal amount of Notes whose
holders must consent to an amendment, supplement or waiver of any provision of
the Indenture or the Notes; (ii) reduce the rate or extend the time for
payment of interest on any Note; (iii) reduce the principal or premium amount
of any Note, or reduce the price of redemption; (iv) change the date on which
the principal of the Notes or an installment of interest thereon is due and
payable; (v) alter the redemption provisions of the Indenture in a manner
adverse to any holder of Notes; (vi) make any change to the unconditional
right of holders of Notes to receive principal, premium and interest on the
Notes or the provisions of the Indenture relating to waiver of default (except
to increase the aggregate principal amount of Notes necessary to waive any
past default or to include in other provisions of the Indenture, a default in
respect of which may not be governed by the provisions of the Indenture
relating to waiver of default); (vii) make the principal of, or the interest
or premium on, any Note payable with anything or in any manner other than as
provided for in the Indenture (including changing the place of payment where,
or the coin or currency in which, any Note or any premium or the interest
thereon

103

is payable) and the Notes; (viii) adversely affect the right to convert any
Note; or (ix) modify the subordination provisions of the Indenture in a manner
adverse to the holders of the Notes. The Indenture also contains provisions
permitting the Company and the Trustee to effect certain minor modifications of
the Indenture not adversely affecting the rights of holders of Notes in any
material respect.

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

The Indenture will provide that the Company may, at its option and at any
time, elect to have its obligations discharged with respect to the outstanding
Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall
be deemed to have paid and discharged the entire indebtedness represented by
the Notes, and the Indenture shall cease to be of further effect as to all
outstanding Notes, except as to (i) rights of holders of Notes to receive
payments in respect of principal of, premium, if any, and interest on such
Notes when such payments are due from the trust funds, (ii) the Company's
obligation with respect to such Notes concerning issuing temporary Notes,
transfer or exchange of Notes, replacement of Notes and the maintenance of an
office or agency for payment of the Notes and the holding of assets in trust by
paying agents, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a default or event of default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events will no
longer constitute a default with respect to the Notes.

In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Note, U.S. legal tender, non-callable government securities
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date
for payment thereof or the redemption date of such principal or installment of
principal, premium, if any, or interest on such Notes, (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by the
Internal Revenue Service, or (B) since the date of the Indenture, there has
been a change in the applicable Federal income tax law, in each case to the
effect that, and based thereon such opinion shall confirm that, the holders of
such outstanding Notes shall not recognize income, gain or loss for Federal
income tax purposes as a result of such Legal Defeasance, and will be subject
to Federal income tax in the same amount, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred,
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States confirming that the
holders of such Notes shall not recognize income, gain or loss for Federal
income tax purposes as a result of such Covenant Defeasance, and will be
subject to Federal income tax in the same amount, in the same manner and at the
same times as would have been the case if such Covenant Defeasance had not
occurred, (iv) no default or event of default with respect to the Notes shall
have occurred and be continuing on the date of such deposit or insofar as
events of default for bankruptcy are concerned, at any time in the period
ending on the 91st day after the date of deposit, (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach of or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound, (vi) the Company shall
have delivered to the Trustee an Officers' Certificate stating that the deposit
was not made by the Company with the intent of preferring the holders of the
Notes over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any creditors of the Company or others, and
(vii) the Company shall have delivered to the Trustee an Officers' Certificate
stating that all conditions precedent provided for or relating to the Legal
Defeasance or Covenant Defeasance have been complied with.

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CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following discussion, which is the opinion of Davis Polk & Wardwell,
sets forth the material Federal income tax consequences of the receipt,
ownership and disposition of the Rights, the Preferred Stock and the Notes to
the United States holders described herein under present law. This discussion
is based on the Internal Revenue Code of 1986, as amended to the date hereof
(the "Code"), administrative pronouncements, judicial decisions and existing
and proposed Treasury Regulations, changes to any of which subsequent to the
date of this Prospectus may affect the tax consequences described herein. In
this connection, it should be noted that as used in the discussion below, the
term "earnings and profits" refers to the Company's earnings and profits as
determined under the Code. There is no assurance that the Company will have
earnings and profits for any particular taxable year. This discussion
addresses only initial distributees of the Rights who hold all their Common
Stock, the Rights, the Preferred Stock and the Notes as capital assets within
the meaning of section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to a holder in light of its particular
circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities and holders
that are, for Federal income tax purposes, non-resident alien individuals or
foreign corporations. Holders should consult their tax advisors with regard to
the application of the Federal income tax laws to their particular situations
as well as any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction.

On February 6, 1997, the Clinton Administration released several revenue
proposals that, if adopted, may, with respect to certain holders, affect the
Federal income tax consequences of holding the Preferred Stock. Among such
proposals is the proposal to reduce the dividend-received deduction rate from
70% to 50% for any corporation that owns less than 20% (by vote and value) of
the stock of the Company. There can be no assurance as to whether or when any
of such proposals will become effective.

THE RIGHTS

For Federal income tax purposes, receipt of Rights by a shareholder pursuant
to the Rights Offering should, in the opinion of Davis Polk & Wardwell, be
treated as a nontaxable distribution with respect to the Common Stock with the
consequences described below.

If the fair market value of the Rights is less than 15% of the fair market
value of the Common Stock on the date of distribution, then pursuant to
section 307(b) of the Code, the Rights will be allocated a zero basis, unless
the shareholder affirmatively elects to allocate basis in proportion to their
relative fair market values determined on such date. Such election must be
made in the shareholder's tax return for the taxable year in which the Rights
are received. On the other hand, if the fair market value of the Rights equals
or exceeds 15% of the fair market value of the Common Stock on such date, then
the shareholder's basis in the Common Stock must be allocated between the
Common Stock and the Rights received in proportion to their relative fair
market values.

In the case of exercise, any basis allocated to the Rights should be added
to the basis of the Preferred Stock that is so acquired. An initial
distributee shareholder would not be able to claim a loss if its Rights expire
unexercised. If a shareholder elects to sell its Rights, the shareholder
should include its holding period in the Common Stock with respect to which
the Rights were distributed in determining the holding period of the Rights.

If the Company has, as of the date of the issuance of the Rights, current or
accumulated earnings and profits, then the Rights will, with respect to the
initial distributees of such Rights, be treated as "section 306 stock." In
that event, each Right, with respect to an initial distributee, shall carry
section 306 "taint" in the amount equal to the lesser of (i) the fair market
value of the Right on the date of distribution, or (ii) the allocable share of
the Company's current or accumulated earnings and profits. Under such
circumstances, subject to

105

certain exceptions, an initial distributee shareholder who disposes of the
Rights must treat the proceeds as ordinary income to the extent of the "taint"
and cannot recognize a loss on the sale of the Rights.

THE PREFERRED STOCK

Dividends. Cash dividends paid on Preferred Stock will be taxable as
ordinary income to the extent of the Company's earnings and profits. To the
extent that the amount of cash distributions paid on Preferred Stock exceeds
the Company's earnings and profits, such distributions will be treated first
as a return of capital and will be applied against and reduce the adjusted tax
basis of Preferred Stock in the hands of the shareholder. Any remaining amount
after the holder's basis has been reduced to zero will be taxable.

Dividends paid in kind on the Series B PIK Preferred Stock will be taxable
as ordinary income in an amount equal to the lesser of (i) the fair market
value of the Series B PIK Preferred Stock paid in kind and (ii) the Company's
earnings and profits. Thus, holders of Series B PIK Preferred Stock may
recognize income without the receipt of cash to pay the tax attributable to
such income. To the extent that the fair market value of distributions in
Series B PIK Preferred Stock exceed the Company's earnings and profits, such
distributions will be treated first as a return of capital and applied against
and reduce the basis of the Series B PIK Preferred Stock with respect to which
such distributions were made. Any amount remaining after such basis has been
reduced to zero will be taxable. A recipient's adjusted basis in the Series B
PIK Preferred Stock received as a dividend will equal the fair market value of
such shares on the date of distribution, and the holding period for such
shares will begin on the date following the date of distribution.

For purposes of the remainder of this discussion, the term "dividend" refers
to a distribution taxable as ordinary income as described above unless the
context indicates otherwise. Dividends received by corporate shareholders will
be eligible for a dividends-received deduction under section 243 of the Code,
subject to the limitations contained in sections 246 and 246A of the Code.

Under certain circumstances, section 1059 of the Code would require a
corporate shareholder to reduce its basis in the Preferred Stock by the
"nontaxed portion" of any "extraordinary dividend." Generally, the nontaxed
portion of an extraordinary dividend is the amount excluded from income under
section 243 of the Code (relating to the dividends-received deduction). Under
the Code, the term "extraordinary dividend" includes any redemption of stock
that is treated as a dividend and that is non-pro rata as to all shareholders,
including holders of common stock, irrespective of holding period, as well as
all dividends on "disqualified preferred stock." An "extraordinary dividend"
may arise from an exchange of Preferred Stock for Notes or cash, and the
Preferred Stock may constitute "disqualified preferred stock." Corporate
shareholders should consult their tax advisors with respect to the possible
application of the extraordinary dividend rules.

Redemption and Exchange for the Notes. Subject to the discussion below with
respect to section 306 of the Code, the redemption of Preferred Stock for cash
will be treated as a distribution that is taxable as a dividend to the extent
of the Company's allocable earnings and profits unless the redemption (a)
results in a "complete termination" of the shareholder's stock interest in the
Company, (b) is "substantially disproportionate," or (c) is "not essentially
equivalent to a dividend" under section 302 of the Code. In determining
whether any of these tests has been met, shares considered to be owned by the
shareholder by reason of certain constructive ownership rules set forth in
section 318 of the Code, as well as shares actually owned, must generally be
taken into account. A distribution to a shareholder will be "not essentially
equivalent to a dividend" if it results in a "meaningful reduction" in the
shareholder's stock interest in the Company. The Internal Revenue Service has
issued a published ruling indicating that a redemption which results in a
reduction in the proportionate interest in the Company (taking into account
the section 318 constructive ownership rules) of a shareholder whose relative
stock interest is minimal (an interest of less than 1% should satisfy this
requirement) and who exercises no control over Company affairs should be
treated as being "not essentially equivalent to a dividend." If any of these
three tests is

106

met, the redemption of the Preferred Stock for cash would be treated, as to
that shareholder, as an exchange under section 302(a) of the Code giving rise
to capital gain or loss.

If the Rights are treated as "section 306 stock," then the Preferred Stock
acquired pursuant to the exercise by the initial distributee shareholder of
such Rights would constitute "section 306 stock" in the hands of such
shareholder to the extent of the original "taint" on the Rights. Under section
306(a)(2) of the Code, proceeds equal to the amount of such "taint" received
upon the redemption of the Preferred Stock will be taxable as ordinary income
to the extent of the Company's earnings and profits at the time of the
redemption, unless the "complete termination" test described above is met.

A redemption of the Series A Exchangeable Preferred Stock in exchange for
Notes cannot qualify under the "complete termination" or "substantially
disproportionate" tests described above. The redemption would, therefore, be
treated as a distribution to the extent of the fair market value of the Notes
and taxable as a dividend to the extent of the shareholder's allocable share
of the Company's earnings and profits unless it satisfies the "not essentially
equivalent to a dividend" test. The Internal Revenue Service has ruled that a
holder of convertible notes is considered to own the underlying stock for
purposes of the section 318 constructive ownership rules, and further that a
redemption which does not result in any reduction in the interest of a
shareholder does not satisfy the meaningful reduction standard even if such
shareholder holds only a minimal interest. Therefore, under a literal
interpretation of the statute, regulations and rulings, the receipt of Notes
in exchange for the Series A Exchangeable Preferred Stock will be taxable as a
dividend to the extent of the shareholder's allocable share of the Company's
earnings and profits. Accordingly, each shareholder should consult its tax
advisor regarding this issue, including the possible effect of the disposition
of a portion of its interest in the Company contemporaneously and as part of
an integrated plan with the exchange for Notes.

If a shareholder is treated as having received a dividend upon a redemption
for cash or an exchange for Notes, the basis of its Preferred Stock so
redeemed or exchanged will be transferred to any remaining stockholdings in
the Company. If the shareholder does not retain any stock ownership in the
Company, it may be permitted to transfer such basis to any Notes received in
the exchange or it may lose such basis entirely.

Sale of Preferred Stock. Subject to the discussion below with respect to
section 306 of the Code, a holder will recognize taxable gain or loss upon the
sale or disposition (other than a redemption or an exchange for Notes as
discussed above) of shares of Preferred Stock equal to the difference between
the amount of cash or the fair market value of property received and the
holder's tax basis in the shares. Such gain or loss will be capital gain or
loss and will be long-term capital gain or loss if the holder has held the
shares of Preferred Stock for more than one year.

If the Rights constitute "section 306 stock" as described above, then upon
the sale or disposition of the Preferred Stock acquired through the exercise
of the Rights, the proceeds received will be taxable as ordinary income to the
extent of the "taint." Furthermore, no loss will be recognized upon the sale
or disposition; any unrecovered basis would revert to the shareholder's
remaining Common Stock holdings or possibly to its Preferred Stock holdings,
or, if the shareholder does not retain any such holding, it may lose such
basis entirely.

THE NOTES

Original Issue Discount. For purposes of the following discussion, it is
assumed that the Notes will constitute debt for Federal income tax purposes
and will not constitute "applicable high-yield discount obligations" under
section 163(i) of the Code, and that the Notes or the Series A Exchangeable
Preferred Stock will be readily tradeable on an established securities market
at the time of exchange of the Notes for the Series A Exchangeable Preferred
Stock. In general, if a Note's stated redemption price at maturity exceeds its
"issue price," it will be considered to have been issued at an original issue
discount ("OID")

107

in an amount equal to such excess. For these purposes, the issue price of a
Note will be equal to the fair market value of the Note (including the value
of the conversion feature) as of the issue date or, if the Note is not traded
on an established securities market within 30 days of the issue date, the fair
market value of the Series A Exchangeable Preferred Stock on such date. The
stated redemption price at maturity of a Note will equal the sum of all
payments required under the Note other than payments of "qualified stated
interest." "Qualified stated interest" is stated interest unconditionally
payable as a series of payments in cash or property (other than interest
payments payable in debt instruments of the Company) at least annually during
the entire term of the Note and equal to the outstanding principal balance of
the Note multiplied by a single fixed rate of interest.

If the difference between a Note's stated redemption price at maturity and
its issue price is less than a de minimis amount, i.e., 1/4 of 1 percent of
the stated redemption price at maturity multiplied by the number of complete
years to maturity, then the Note will not be considered to have OID.

A holder will be required to include any qualified stated interest payments
in income in accordance with the holder's method of accounting for Federal
income tax purposes. A holder will also be required to include any OID in
income for Federal income tax purposes as it accrues, in accordance with a
constant yield method based on a compounding of interest, before the receipt
of cash payments attributable to such income. Under this method, a holder
generally will be required to include in income increasingly greater amounts
of OID in successive accrual periods.

Bond Premium. If the issue price of the Note reduced by the portion
attributable to the conversion feature exceeds the amount payable at maturity,
a holder will have "amortizable bond premium" equal in amount to such excess,
and may elect (in accordance with applicable Code provisions) to amortize such
premium, using a constant yield method. A holder who elects to amortize bond
premium must reduce its tax basis in the Note by the amount of the premium
amortized in any year. An election to amortize bond premium applies to all
taxable debt obligations then owned and thereafter acquired by the taxpayer
and may be revoked only with the consent of the Internal Revenue Service.

Redemption or Sale of Notes. Generally, any redemption or sale of Notes by a
holder will result in taxable gain or loss equal to the difference between the
amount of cash received (except to the extent that cash received is
attributable to interest which has not been included in income) and the
holder's tax basis in the Notes. Unless the exchange for the Notes was treated
as a dividend, the tax basis of a holder in a Note will generally be equal to
the issue price of the Note plus any OID included in the holder's income prior
to sale or redemption of the Note, reduced by any bond premium amortized prior
to such sale or redemption. Such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if the holding period exceeds one year.

CONVERSION OF PREFERRED STOCK OR NOTES INTO COMMON STOCK

Generally, no gain or loss will be recognized for Federal income tax
purposes on conversion of Preferred Stock or Notes solely into shares of
Common Stock, except with respect to any cash received in lieu of a fractional
share interest (in an amount equal to the difference between the cash received
and the holder's adjusted tax basis allocable to such fractional shares). A
holder's basis in the Common Stock received upon conversion will be the same
as its basis in the Preferred Stock (assuming there are no dividend
arrearages) or Notes, excluding the basis allocated to any fractional share as
described above. The holding period of the Common Stock received upon
conversion of Preferred Stock will include the holding period of the Preferred
Stock. With respect to any Common Stock acquired upon the conversion of a
Note, except for the portion, if any, of each full share of Common Stock
attributable to interest accrued within the meaning of section 354(a)(2)(B) of
the Code on or after the date on which the holder acquired the Note, the
Common Stock will have a holding period commencing on the day after the date
on which the holder acquired the Note.

108

If a shareholder converts Preferred Stock when dividends are in arrears, it
may be deemed to receive a distribution taxable as a dividend. Under such
circumstances, the shareholder is advised to consult its tax advisor
concerning the calculation of the amount of the dividend and the determination
of the holding period of the Common Stock received upon conversion.

CONVERSION ADJUSTMENTS FOR THE PREFERRED STOCK AND THE NOTES

The conversion price of the Preferred Stock and Notes is subject to
adjustment under certain circumstances. Holders may be deemed to receive a
dividend to the extent of the Company's earnings and profits if the conversion
price is adjusted to reflect a taxable distribution of property to holders of
Common Stock or in certain other circumstances involving conversion price
adjustments. Such deemed dividend would be includible in gross income,
although the holder would not receive any cash.

BACKUP WITHHOLDING AND INFORMATION REPORTING

A holder of Common Stock, Rights, Preferred Stock or Notes may be subject to
information reporting and to backup withholding at the rate of 31% with
respect to dividends or interest paid on, or the proceeds of a sale, exchange
or redemption thereof, as the case may be, unless such holder provides proof
of an applicable exemption or a correct taxpayer identification number, and
otherwise complies with applicable requirements of the backup withholding
rules. The amounts withheld under the backup withholding rules are not an
additional tax and may be refunded or credited against the holder's Federal
income tax liability, provided the required information is furnished to the
Internal Revenue Service on a timely basis.

109

PLAN OF DISTRIBUTION

The Company has retained Credit Suisse First Boston to act as dealer manager
in connection with the Rights Offering. The Dealer Manager will provide
marketing assistance and financial advisory services in connection with the
Rights Offering and will solicit the exercise of Rights by Rights Holders.

In its capacity as financial advisor, Credit Suisse First Boston provided
advice to the Company regarding the structure of the Rights Offering and with
respect to marketing the shares of Preferred Stock to be issued in the Rights
Offering.

The Company has agreed to pay the Dealer Manager a fee of 4% of the proceeds
raised in the Rights Offering excluding proceeds raised from or by Roche
Holdings or any of its affiliates. The maximum compensation that the Dealer
Manager would receive under this arrangement is $10,022,498.

In addition, the Company has agreed to indemnify the Dealer Manager with
respect to certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Dealer Manager may be
required to make in respect thereof.

The Company is also required to pay to Credit Suisse First Boston, as
financial advisor, a fee in the amount of $1,000,000. In addition, the Company
has agreed to reimburse Credit Suisse First Boston, upon request made from
time to time, for certain out-of-pocket expenses incurred in connection with
its activities as financial advisor.

Credit Suisse First Boston has not prepared any report or opinion
constituting a recommendation or advice to the Company or its stockholders,
nor has Credit Suisse First Boston prepared an opinion as to the fairness of
the Subscription Price or the terms of the Rights Offering to the Company or
its current stockholders. Credit Suisse First Boston expresses no opinion and
makes no recommendation to holders of Rights as to the purchase by any person
of Underlying Shares. Credit Suisse First Boston also expresses no opinion as
to the prices at which shares to be distributed in connection with the Rights
Offering may trade if and when they are issued or at any future time.

Other than the Dealer Manager, the Company has not employed any brokers,
dealers or underwriters in connection with the solicitation of exercise of
Rights, and, except as described above, no other commissions, fees or
discounts will be paid in connection with the Rights Offering. Certain
employees of the Company may solicit responses from Rights Holders, but such
employees will not receive any commissions or compensation for such services
other than their normal employment compensation.

An affiliate of the Dealer Manager will receive proceeds from the Rights
Offering in connection with its role as a lender under the Company's Existing
Credit Agreement and Amended Credit Agreement.

The Dealer Manager may engage in stabilizing transactions in accordance with
Regulation M under the Exchange Act. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Such stabilizing transactions may cause the price of the
securities to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the NYSE or otherwise and,
if commenced, may be discontinued at any time.

LEGAL MATTERS

The validity of the Preferred Stock and Notes and certain other matters will
be passed upon for the Company by Davis Polk & Wardwell. Davis Polk & Wardwell
from time to time provides legal services to the Company and its affiliates.

110

EXPERTS

The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, have been included or incorporated by reference
herein and in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein or incorporated by reference herein upon the authority of
said firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004. The Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov. The Company's Common Stock is listed on the
New York Stock Exchange, Inc. and reports and other information concerning the
Company can also be inspected at the office of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance where
such contract or other document has been filed as an exhibit to the
Registration Statement, reference is made to the exhibit so filed, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and exhibits thereto. The
information so omitted, including exhibits, may be obtained from the
Commission at its principal office in Washington, D.C. upon the payment of the
prescribed fees, or may be inspected without charge at the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004.

111

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997, the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, the Company's Amendment on 10-K/A to its Annual
Report on 10-K for the year ended December 31, 1996, the Company's Reports on
Form 8-K dated January 6, 1997, February 27, 1997, March 3, 1997, April 11,
1997, April 21, 1997 and April 25, 1997 and the Company's Report on Form 8-K/A
dated February 20, 1997 are hereby incorporated by reference in this
Prospectus except as superseded or modified herein. All documents filed with
the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, after the date of this Prospectus and prior to the termination of the
offering shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing of such documents. Any
statement contained in any document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person, including any beneficial owner, to
whom this Prospectus is delivered, upon written or oral request of such
person, a copy of any and all of the documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to Attention: Bradford T. Smith, Secretary,
Laboratory Corporation of America Holdings, 358 South Main Street, Burlington,
North Carolina 27215, (910) 229-1127.

112

LABORATORY CORPORATION OF AMERICA HOLDINGS

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Page
----

Consolidated Condensed Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996........................................................ F-2
Unaudited Consolidated Condensed Statements of Earnings for the three-
month periods ended March 31, 1997 and March 31, 1996.................... F-3
Unaudited Consolidated Condensed Statements of Cash Flows for the three-
month periods ended March 31, 1997 and March 31, 1996.................... F-4
Notes to Unaudited Consolidated Condensed Financial Statements............ F-5
Independent Auditors' Report.............................................. F-6
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. F-7
Consolidated Statements of Operations for each of the years in the three-
year period ended December 31, 1996...................................... F-8
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1996............................ F-9
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 1996...................................... F-10
Notes to Consolidated Financial Statements................................ F-12
Financial Statement Schedule:
II--Valuation and Qualifying Accounts and Reserves...................... F-30

F-1

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

March 31, December 31,
1997 1996
----------- ------------
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents........................... $ 29.5 $ 29.3
Accounts receivable, net............................ 519.2 505.6
Inventories......................................... 43.1 44.3
Prepaid expenses and other.......................... 22.5 21.8
Deferred income taxes............................... 64.6 66.2
Income taxes receivable............................. 53.1 54.3
-------- --------
Total current assets.............................. 732.0 721.5
Property, plant and equipment, net.................... 272.0 282.9
Intangible assets, net................................ 882.1 891.1
Other assets, net..................................... 25.8 21.5
-------- --------
$1,911.9 $1,917.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 64.1 $ 65.7
Accrued expenses and other.......................... 169.9 168.4
Current portion of long-term debt................... 131.3 18.7
Loan from affiliate................................. 187.0 --
-------- --------
Total current liabilities......................... 552.3 252.8
Revolving credit facility............................. 384.0 371.0
Long-term debt, less current portion.................. 562.5 693.8
Loan from affiliate................................... -- 187.0
Capital lease obligation.............................. 9.8 9.8
Other liabilities..................................... 142.8 144.5
Stockholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares
authorized; none issued and outstanding............ -- --
Common stock, $0.01 par value; 220,000,000 shares
authorized; 122,935,080 shares outstanding at March
31, 1997 and
December 31, 1996.................................. 1.2 1.2
Additional paid-in capital............................ 411.0 411.0
Accumulated deficit................................... (151.7) (154.1)
-------- --------
Total stockholders' equity........................ 260.5 258.1
-------- --------
$1,911.9 $1,917.0
======== ========

See notes to unaudited consolidated condensed financial statements.

F-2

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

(UNAUDITED)

Three Months Ended
March 31,
------------------
1997 1996
--------- ---------

Net sales................................................. $ 391.5 $ 403.9
Cost of sales............................................. 277.2 303.3
--------- ---------
Gross profit.............................................. 114.3 100.6
Selling, general and administrative expenses.............. 78.9 65.5
Amortization of intangibles and other assets.............. 7.6 7.3
--------- ---------
Operating income.......................................... 27.8 27.8
Other income (expense):
Investment income....................................... 0.8 0.7
Interest expense........................................ (22.7) (16.7)
--------- ---------
Earnings before income taxes.............................. 5.9 11.8
Provision for income taxes................................ 3.5 5.9
--------- ---------
Net earnings.............................................. $ 2.4 $ 5.9
========= =========
Net earnings per common share............................. $ 0.02 $ 0.05
========= =========

See notes to unaudited consolidated condensed financial statements.

F-3

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)

(UNAUDITED)

Three Months
Ended March
31,
--------------
1997 1996
------ ------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................. $ 2.4 $ 5.9
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization............................... 21.9 20.8
Deferred income taxes, net.................................. 2.0 4.8
Provision for doubtful accounts, net........................ 4.1 (0.9)
Change in assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable............................. (17.7) (20.8)
Decrease (increase) in inventories.......................... 1.2 (9.7)
Increase in prepaid expenses and other...................... (0.8) (0.7)
Change in income taxes receivable/payable, net.............. 1.2 18.7
Increase in accounts payable, accrued expenses and other.... 7.1 9.5
Payments for restructuring and non-recurring charges........ (4.4) (6.2)
Payments for settlements and related expenses............... (1.3) (0.3)
Other, net.................................................. (5.3) (1.9)
------ ------
Net cash provided by operating activities...................... 10.4 19.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................... (3.1) (14.9)
Acquisitions of businesses................................... -- (3.2)
------ ------
Net cash used for investing activities....................... (3.1) (18.1)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities.................... 25.0 87.0
Payments on revolving credit facilities...................... (12.0) (70.0)
Payments on long-term debt................................... (18.7) (16.7)
Deferred payments on acquisitions............................ (1.4) (2.1)
------ ------
Net cash used by financing activities........................ (7.1) (1.8)
------ ------
Net increase (decrease) in cash and cash equivalents......... 0.2 (0.7)
Cash and cash equivalents at beginning of year............... 29.3 16.4
------ ------
Cash and cash equivalents at end of period................... $ 29.5 $ 15.7
====== ======
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest................................................... $ 19.3 $ 16.8
Income taxes............................................... (1.8) (16.7)
In connection with business acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired................................ $ -- $ 7.9
Cash paid.................................................... -- (3.2)
------ ------
Liabilities assumed.......................................... $ -- $ 4.7
====== ======

See notes to unaudited consolidated condensed financial statements.

F-4

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS)

1. BASIS OF FINANCIAL STATEMENT PRESENTATIONS

The consolidated condensed financial statements include the accounts of
Laboratory Corporation of America Holdings and its wholly owned subsidiaries
(the "Company") after elimination of all material intercompany accounts and
transactions.

The accompanying consolidated condensed financial statements of the Company
and its subsidiaries are unaudited. In the opinion of management, all
adjustments (which include only normal recurring accruals) necessary for a
fair statement of the results of operations have been made.

2. EARNINGS PER SHARE

Earnings per share are based upon the weighted average number of shares
outstanding during the three months ended March 31, 1997 and 1996 of
122,935,080 shares and 122,908,722 shares, respectively.

On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
replacing Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per
Share." SFAS No. 128 replaces "primary" and "fully diluted" earnings per share
("EPS") under APB Opinion No. 15 with "basic" and "diluted" EPS. Unlike
primary EPS, basic EPS excludes the dilutive effects of options, warrants and
other convertible securities. Dilutive EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted EPS. SFAS No. 128 is effective for years ending after December 15,
1997 and will require the restatement of prior year earnings per share
calculations. The implementation of SFAS No. 128 would have had no significant
impact on the calculation of earnings per share for the quarters ended March
31, 1997 and 1996.

3. RESTRUCTURING CHARGES

Following a merger in 1995 with Roche Biomedical Laboratories, Inc. ("RBL"),
the Company determined that it would be beneficial to close Company laboratory
facilities in certain geographic regions where duplicate Company and RBL
facilities existed at the time of the Merger. In addition, in 1996 the Company
decided to downsize certain finance and administrative positions in La Jolla,
California in order to eliminate duplicative functions.

The following represents the Company's restructuring activities for the
period indicated:

Asset Lease and
Severance revaluations other facility
Costs and write-offs obligations Total
--------- -------------- -------------- -----

Balance at December 31, 1996.... $8.3 $9.4 $16.9 $34.6
Non cash items.................. -- -- -- --
Cash payments................... (3.4) (0.1) (0.5) (4.0)
---- ---- ----- -----
Balance at March 31, 1997....... $4.9 $9.3 $16.4 $30.6
==== ==== ===== =====
Current......................... $21.5
Non-current..................... 9.1
-----
$30.6
=====

F-5

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Laboratory Corporation of America Holdings:

We have audited the consolidated financial statements of Laboratory
Corporation of America Holdings and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Laboratory
Corporation of America Holdings and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

KPMG Peat Marwick LLP

Raleigh, North Carolina
February 14, 1997 except for Notes 9
and 10 as to which the date is March 31, 1997.

F-6

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

December 31
------------------
1996 1995
-------- --------

ASSETS
Current assets:
Cash and cash equivalents................................ $ 29.3 $ 16.4
Accounts receivable, net................................. 505.6 426.8
Inventories.............................................. 44.3 50.1
Prepaid expenses and other............................... 21.8 21.4
Deferred income taxes.................................... 66.2 63.3
Income taxes receivable.................................. 54.3 21.9
-------- --------
Total current assets....................................... 721.5 599.9
Property, plant and equipment, net......................... 282.9 304.8
Intangible assets, net..................................... 891.1 916.7
Other assets, net.......................................... 21.5 15.8
-------- --------
$1,917.0 $1,837.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 65.7 $ 106.2
Accrued expenses and other............................... 168.4 173.5
Current portion of long-term debt........................ 18.7 70.8
-------- --------
Total current liabilities.................................. 252.8 350.5
Loan from affiliate........................................ 187.0 --
Revolving credit facility.................................. 371.0 218.0
Long-term debt, less current portion....................... 693.8 712.5
Capital lease obligation................................... 9.8 9.6
Other liabilities.......................................... 144.5 135.0
Stockholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares
authorized; none issued................................. -- --
Common stock, $0.01 par value; 220,000,000 shares
authorized; 122,935,080 and 122,908,722 shares issued
and outstanding at December 31, 1996 and 1995,
respectively............................................ 1.2 1.2
Additional paid-in capital................................. 411.0 411.0
Accumulated deficit........................................ (154.1) (0.6)
-------- --------
Total stockholders' equity............................. 258.1 411.6
-------- --------
$1,917.0 $1,837.2
======== ========

See notes to consolidated financial statements.

F-7

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Years Ended December 31,
--------------------------
1996 1995 1994
-------- -------- ------

Net sales.......................................... $1,607.7 $1,432.0 $872.5
Cost of sales...................................... 1,183.9 1,024.3 597.0
-------- -------- ------
Gross profit....................................... 423.8 407.7 275.5
Selling, general and administrative expenses....... 305.0 238.5 149.3
Amortization of intangibles and other assets....... 29.6 27.0 16.3
Restructuring and non-recurring charges............ 23.0 65.0 --
Provision for settlements and related expenses..... 185.0 10.0 --
-------- -------- ------
Operating income (loss)............................ (118.8) 67.2 109.9
Other income (expenses):
Litigation settlement and related expenses....... -- -- (21.0)
Investment income................................ 2.2 1.4 1.0
Interest expense................................. (71.7) (65.5) (34.5)
-------- -------- ------
Earnings (loss) before income taxes and extraordi-
nary loss......................................... (188.3) 3.1 55.4
Provision for income taxes......................... (34.8) 7.1 25.3
-------- -------- ------
Earnings (loss) before extraordinary loss.......... (153.5) (4.0) 30.1
======== ======== ======
Extraordinary loss from extinguishment of debt, net
of early
income tax benefit of $5.2........................ -- (8.3) --
-------- -------- ------
Net earnings (loss)................................ $ (153.5) $ (12.3) $ 30.1
======== ======== ======
Earnings (loss) per common share:
Earnings (loss) per common share before
extraordinary item.............................. $ (1.25) $ (0.03) $ 0.36
Extraordinary loss per common share.............. -- (0.08) --
-------- -------- ------
Net earnings (loss) per common share............... $ (1.25) $ (0.11) $ 0.36
======== ======== ======
Dividends per common share......................... $ -- $ -- $ 0.08
======== ======== ======

See notes to consolidated financial statements.

F-8

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Common Additional Pension Minimum
Stock $0.01 Paid-in Retained Liability Treasury
Par Value Capital Earnings Adjustment Stock Total
----------- ---------- -------- ---------- -------- ------

Balance, December 31,
1993................... $1.0 $226.3 $ 202.0 $(2.4) $(286.1) $140.8
Net earnings.......... -- -- 30.1 -- -- 30.1
Exercise of stock
options.............. -- 0.1 -- -- -- 0.1
Dividends to
stockholders......... -- -- (6.8) -- -- (6.8)
Retirement of treasury
stock................ (0.2) (72.3) (213.6) -- 286.1 --
Adjustment for minimum
pension liability.... -- -- -- 2.4 -- 2.4
Other................. -- (0.6) -- -- -- (0.6)
---- ------ ------- ----- ------- ------
Balance, December 31,
1994................... 0.8 153.5 11.7 -- -- 166.0
Net loss.............. -- -- (12.3) -- -- (12.3)
Exercise of stock
options.............. -- 0.2 -- -- -- 0.2
Cancellation of stock
options.............. -- 6.9 -- -- -- 6.9
Distribution to
stockholders......... 0.2 (474.5) -- -- -- (474.7)
Issuance of common
stock................ 0.6 674.6 -- -- -- 675.2
Issuance of warrants.. -- 51.0 -- -- -- 51.0
Other................. -- (0.7) -- -- -- (0.7)
---- ------ ------- ----- ------- ------
Balance, December 31,
1995................... 1.2 411.0 (0.6) -- -- 411.6
Net loss.............. -- -- (153.5) -- -- (153.5)
---- ------ ------- ----- ------- ------
Balance, December 31,
1996................... $1.2 $411.0 $(154.1) -- -- $258.1
==== ====== ======= ===== ======= ======

See notes to consolidated financial statements.

F-9

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Years Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................ $ (153.5) $ (12.3) $ 30.1
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Restructuring and non-recurring charges....... 23.0 65.0 --
Provision for settlements and related
expenses..................................... 185.0 10.0 21.0
Extraordinary loss, net of income tax
benefit...................................... -- 8.3 --
Depreciation and amortization, net............ 84.5 72.4 44.4
Deferred income taxes, net.................... 30.3 (21.6) 11.0
Provision for doubtful accounts, net.......... 22.2 12.4 (1.4)
Change in assets and liabilities, net of
effects of acquisitions:
Increase in accounts receivable............... (102.2) (58.6) (54.0)
Decrease (increase) in inventories............ 8.0 5.1 (0.9)
Decrease (increase) in prepaid expenses and
other........................................ (3.1) 1.0 5.1
Change in income taxes receivable/payable,
net.......................................... (32.4) (11.7) 5.5
Increase (decrease) in accounts payable,
accrued expenses and other................... (33.4) 27.9 (13.1)
Payments for restructuring and non-recurring
charges...................................... (18.8) (13.4) --
Payments for settlement and related expenses.. (188.9) (32.1) (29.8)
Other, net.................................... (7.5) (5.4) (3.2)
-------- -------- --------
Net cash provided by (used for) operating activi-
ties............................................ (186.8) 47.0 14.7
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (54.1) (75.4) (48.9)
Proceeds from sale of subsidiary............... -- -- 10.1
Acquisitions of businesses..................... (5.0) (39.6) (254.8)
-------- -------- --------
Net cash used for investing activities......... (59.1) (115.0) (293.6)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities...... $ 293.0 $ 308.0 $ 308.0
Payments on revolving credit facilities........ (140.0) (303.0) (373.0)
Proceeds from long-term debt................... -- 800.0 400.0
Loan from affiliate............................ 187.0 -- --
Payments on long-term debt..................... (70.8) (446.7) (20.0)
Deferred payments on acquisitions.............. (10.4) (12.9) (7.6)
Dividends paid on common stock................. -- -- (13.6)
Distribution to stockholders................... -- (474.7) --
Cash received for issuance of common stock..... -- 135.7 --
Cash received for issuance of warrants......... -- 51.0 --
Other.......................................... -- 0.2 (0.4)
-------- -------- --------
Net cash provided by financing activities...... 258.8 57.6 293.4
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 12.9 (10.4) 14.5
Cash and cash equivalents at beginning of
year.......................................... 16.4 26.8 12.3
-------- -------- --------
Cash and cash equivalents at end of year....... $ 29.3 $ 16.4 $ 26.8
======== ======== ========

See notes to consolidated financial statements.

F-10

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Years Ended December 31,
--------------------------
1996 1995 1994
-------- -------- --------

Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest......................................... $ 65.1 $ 58.6 $ 34.2
Income taxes..................................... (15.2) 27.2 14.8
Disclosure of non-cash financing and investing ac-
tivities:
Common stock issued in connection with
acquisition..................................... -- 539.6 --
Common stock issued in connection with the
cancellation of employee stock options.......... -- 6.9 --
In connection with business acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired.................... $ 23.4 $ 777.7 $ 399.4
Cash paid........................................ (5.0) (39.6) (254.8)
Stock issued..................................... -- (539.5) --
Liabilities assumed.............................. $ 18.4 $ 198.6 $ 144.6
======= ======= ========

See notes to consolidated financial statements.

F-11

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Laboratory
Corporation of America Holdings and its subsidiaries ("Company") after
elimination of all material intercompany accounts and transactions. Prior to
April 28, 1995, the Company's name was National Health Laboratories Holdings
Inc. ("NHL"). On April 28, 1995, following approval at a special meeting of
the stockholders of the Company, the name of the Company was changed to
Laboratory Corporation of America Holdings.

CASH EQUIVALENTS:

Cash equivalents (primarily investments in money market funds, time deposits
and commercial paper which have original maturities of three months or less at
the date of purchase) are carried at cost which approximates market.

INVENTORIES:

Inventories, consisting primarily of laboratory supplies, are stated at the
lower of cost (first-in, first-out) or market.

FINANCIAL INSTRUMENTS:

Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on an accrual basis.
Amounts to be paid or received under such agreements are recognized as
interest income or expense in the periods in which they accrue.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are recorded at cost. The cost of properties
held under capital leases is equal to the lower of the net present value of
the minimum lease payments or the fair value of the leased property at the
inception of the lease. Depreciation and amortization expense is computed on
all classes of assets based on their estimated useful lives, as indicated
below, using principally the straight-line method.

Years
-----

Buildings and building improvements................................. 35-40
Machinery and equipment............................................. 3-10
Furniture and fixtures.............................................. 5-10

Leasehold improvements and assets held under capital leases are amortized
over the shorter of their estimated lives or the period of the related leases.
Expenditures for repairs and maintenance charged against earnings in 1996,
1995 and 1994 were $34.2, $28.3 and $16.5, respectively.

F-12

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

FAIR VALUE OF FINANCIAL INSTRUMENTS:

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments", requires that fair values be
disclosed for most of the Company's financial instruments. The carrying amount
of cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are considered to be representative of their respective fair
values. The carrying amount of the revolving credit facility and long-term
debt are considered to be representative of their respective fair values as
their interest rates are based on market rates. The carrying value of the loan
from affiliate is considered to be representative of its fair value due to the
related party nature of the obligation.

CONCENTRATION 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.

REVENUE RECOGNITION:

Sales are recognized on the accrual basis at the time test results are
reported, which approximates when services are provided. Services are provided
to certain patients covered by various third-party payor programs including
the Medicare and Medicaid programs. Billings for services under third-party
payor programs are included in sales net of allowances for differences between
the amounts billed and estimated program payment amounts. Adjustments to the
estimated payment amounts based on final settlement with the programs are
recorded upon settlement. In 1996, 1995 and 1994, approximately 23%, 28% and
35%, respectively, of the Company's revenues were derived from tests performed
for beneficiaries of Medicare and Medicaid programs.

INCOME TAXES:

The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes" ("Statement 109"). Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.

STOCK OPTION PLANS:

Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in

F-13

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.

EARNINGS PER COMMON SHARE:

For the years ended December 31, 1996, 1995 and 1994, earnings per common
share is calculated based on the weighted average number of shares outstanding
during each year (122,919,767, 110,579,096, and 84,754,183 shares,
respectively).

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets 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
reported periods. Actual results could differ from those estimates.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:

The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.

Intangible assets, consisting of goodwill, net of amortization, of $696.1
and $700.1 at December 31, 1996 and 1995, respectively, and other intangibles
(i.e., customer lists and non-compete agreements), net of amortization, of
$195.0 and $216.6 at December 31, 1996 and 1995, respectively, are being
amortized on a straight-line basis over a period of 40 years and 3-25 years,
respectively. Total accumulated amortization for intangible assets aggregated
$116.9 and $87.4 at December 31, 1996 and 1995, respectively.

RECLASSIFICATIONS:

Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1996 presentation.

2. MERGER AND ACQUISITIONS

In April 1995, the Company completed a merger (the "Merger") with Roche
Biomedical Laboratories, Inc. ("RBL"). In connection with the Merger, the
Company issued 61,329,256 shares of Common Stock to HLR Holdings Inc. ("HLR")
and Roche Holdings Inc. ("Roche") in exchange for all outstanding shares of
RBL and $135.7 in cash. The exchange consideration of approximately $558.0 for
the purchase of RBL consisted of the value of the stock issued to HLR and
Roche, as well as other cash costs of the Merger,

F-14

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

net of cash received from HLR. In June 1994, the Company acquired Allied
Clinical Laboratories, Inc. ("Allied") for approximately $191.5 in cash plus
the assumption of $24.0 of Allied indebtedness (the "Allied Acquisition"). The
Allied Acquisition and the Merger have been accounted for under the purchase
method of accounting; as such, the acquired assets and liabilities were
recorded at their estimated fair values on the date of acquisition. RBL's and
Allied's results of operations have been included in the Company's results of
operations since April 28, 1995 and June 23, 1994, respectively.

During 1996, the Company acquired four small clinical laboratory companies
for an aggregate purchase price, including assumption of liabilities, of
$23.4. During 1995 and 1994, the Company acquired nine and eleven
laboratories, respectively, for an aggregate purchase price, including
assumption of liabilities, of $41.7 and $79.3, respectively. The acquisitions
were accounted for as purchase transactions. The excess of cost over the fair
value of net tangible assets acquired during 1996, 1995 and 1994 was $22.5,
$28.2, and $72.1, respectively, which is included under the caption
"Intangible assets, net" in the accompanying consolidated balance sheets. The
consolidated statements of operations reflect the results of operations of
these purchased businesses from dates of acquisition.

3. RESTRUCTURING AND NON-RECURRING CHARGES

In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the restructuring
of operations. The Company recorded a restructuring charge totaling $13.0 for
the shutdown of its La Jolla, California administrative facility and other
workforce reductions. This amount includes approximately $8.1 for severance,
$3.5 for the future lease obligation of the La Jolla facility and $1.4 for the
write down of leasehold improvements and fixed assets that will be abandoned
or disposed of. The La Jolla facility was substantially closed by the end of
1996. The remaining workforce reductions took place in other areas of the
Company and were substantially completed by the end of 1996. The net work
force reduction as a result of these activities was approximately 250
employees. Payments for severance are expected to continue through 1997.

In addition, the Company recorded certain non-recurring charges in the
second quarter of 1996 related to further integration after the Merger. The
Company decided to abandon certain data processing systems and therefore wrote
off approximately $6.7 in capitalized software costs. In addition, the Company
relocated its principal drug testing facility to accommodate consolidation of
the RBL and Company operations and will incur approximately $1.3 in costs
primarily related to the write-off of leasehold improvements and building
clean up. Finally, the Company recorded a charge of $2.0 for various other
items including the write-off of certain supplies related to changes in
testing methodologies to increase efficiency. As a result of these changes,
some supplies were not compatible with the new testing methods and were
disposed of.

Following the Merger in 1995, the Company determined that it would be
beneficial to close Company laboratory facilities in certain geographic
regions where duplicate Company and RBL facilities existed at the time of the
Merger. As a result, the Company recorded a restructuring charge of $65.0 in
the second quarter of 1995. As part of the Company's evaluation of its future
obligations under these restructuring activities, certain changes in the
estimates were made during the quarter ended June 30, 1996. These resulted in
the reclassification of certain accruals in the categories listed below
although the total liability did not change. These restructuring activities
have been substantially completed as of December 31, 1996 and have resulted in
a net reduction of approximately 1,600 employees.

F-15

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

The following represents the Company's restructuring activities for the
period indicated:

Asset Lease and
revaluations other
Severance and write- facility
Costs offs obligations Total
--------- ------------ ----------- ------

Balance at December 31, 1994........ $ -- $ -- $ -- $ --
Restructuring charges............. 24.2 21.3 19.5 65.0
Non-cash items.................... (0.3) (2.7) -- (3.0)
Cash payments..................... (11.1) -- (0.6) (11.7)
------ ------ ----- ------
Balance at December 31, 1995........ $ 12.8 $ 18.6 $18.9 $ 50.3
Restructuring charges............. 8.1 1.4 3.5 13.0
Reclassifications................. 1.6 0.7 (2.3) --
Non-cash items.................... -- (11.3) -- (11.3)
Cash payments..................... (14.2) -- (3.2) (17.4)
------ ------ ----- ------
Balance at December 31, 1996........ $ 8.3 $ 9.4 $16.9 $ 34.6
====== ====== ===== ======
Current........................... $ 25.5
Non-current....................... 9.1
------
$ 34.6
======

4. ACCOUNTS RECEIVABLE, NET

December 31, December 31,
1996 1995
------------ ------------

Gross accounts receivable........................ $ 617.2 $517.2
Less contractual allowances and allowance for
doubtful accounts............................... (111.6) (90.4)
------- ------
$ 505.6 $426.8
======= ======

5. PROPERTY, PLANT AND EQUIPMENT, NET

December 31, December 31,
1996 1995
------------ ------------

Land.............................................. $ 9.2 $ 7.0
Buildings and building improvements............... 64.2 54.7
Machinery and equipment........................... 289.3 268.1
Leasehold improvements............................ 58.3 70.3
Furniture and fixtures............................ 27.0 27.3
Buildings under capital leases.................... 9.6 9.6
------- -------
457.6 437.0
Less accumulated depreciation and amortization.... (174.7) (132.2)
------- -------
$ 282.9 $ 304.8
======= =======

F-16

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

6. ACCRUED EXPENSES AND OTHER

December 31, December 31,
1996 1995
------------ ------------

Employee compensation and benefits................. $ 49.5 $ 50.5
Deferred acquisition related payments.............. 12.9 14.8
Acquisition related reserves....................... 17.2 39.4
Restructuring reserves............................. 25.5 32.3
Accrued taxes...................................... 15.4 14.0
Interest payable................................... 12.8 7.4
Other.............................................. 35.1 15.1
------ ------
$168.4 $173.5
====== ======

7. OTHER LIABILITIES

December 31, December 31,
1996 1995
------------ ------------

Deferred acquisition related payments.............. $ 14.8 $ 8.5
Acquisition related reserves....................... 12.3 68.2
Restructuring reserves............................. 9.1 18.0
Deferred income taxes.............................. 38.7 5.1
Post-retirement benefit obligation................. 27.0 25.1
Other.............................................. 42.6 10.1
------ ------
$144.5 $135.0
====== ======

8. SETTLEMENTS

As previously discussed in the Company's December 31, 1995 10-K, the Office
of Inspector General ("OIG") of Health and Human Services and the Department
of Justice ("DOJ") had been investigating certain past laboratory practices of
the predecessor companies of the Company--NHL, RBL and Allied. On November 21,
1996, the Company reached a settlement with the OIG and the DOJ regarding the
prior billing practices of these predecessor companies (the "1996 Government
Settlement"). Consistent with this overall settlement, the Company paid $187.0
to the Federal Government in December 1996 (the "Settlement Payment") with
proceeds from a loan from Roche (the "Roche Loan"). As a result of
negotiations related to the 1996 Government Settlement, the Company recorded a
charge of $185.0 in the third quarter of 1996 (the "Settlement Charge") to
increase reserves for the 1996 Government Settlement described above, and
other related expenses of government and private claims resulting therefrom.

In the second quarter of 1995, the Company took a pre-tax special charge of
$10.0 in connection with the estimated costs of settling various claims
pending against the Company, substantially all of which were billing disputes
with various third party payors relating to the contention that NHL improperly
included tests for HDL cholesterol and serum ferritin in its basic test
profile without clearly offering an alternative profile that did not include
these medical tests. As of December 31, 1996, the majority of these disputes
have been settled.

F-17

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

In the third quarter of 1994, the Company approved a settlement of
previously disclosed shareholder class and derivative litigation. The
litigation consisted of two consolidated class action suits and a consolidated
shareholder derivative action brought in Federal and state courts in San
Diego, California. The settlement involved no admission of wrongdoing. In
connection with the settlement, the Company took a pre-tax special charge of
$15.0 and a $6.0 charge for expenses related to the settled litigation.
Insurance payments and payments from other defendants aggregated $55.0 plus
expenses.

9. LONG-TERM DEBT

The Company entered into a credit agreement dated as of April 28, 1995 (the
"Existing Credit Agreement"), with the banks named therein (the "Banks") and
Credit Suisse First Boston, as administrative agent (the "Bank Agent"), under
which the Banks made available to the Company a senior term loan facility of
$800.0 which expires in April 2001 (the "Term Loan Facility") and a revolving
credit facility of $450.0 which expires in April 2000 (the "Revolving Credit
Facility" and, together with the Term Loan Facility, the "Bank Facility"). The
Bank Facility is unconditionally and irrevocably guaranteed by certain of the
Company's subsidiaries.

As a result of potential defaults under the Existing Credit Agreement,
resulting from, among other things, the Company's performance and higher than
projected debt levels, the Settlement Charge and the Roche Loan, the Company
has obtained several amendments and waivers to the Existing Credit Agreement.
In September 1996, the Company negotiated an amendment (the "Fourth
Amendment") to the Existing Credit Agreement. The Fourth Amendment modified
the interest coverage and leverage ratios applicable to the quarters ending
September 30 and December 31, 1996. The Fourth Amendment also increased the
interest rate margin on its revolving credit facility from 0.25% to 0.875% and
increased the interest rate margin on its term loan facility from 0.375% to
1.00%. As a result of the Settlement Charge in the third quarter of 1996, as
described above, the Company obtained a waiver (the "Third Waiver") which
excluded the special charge from covenant calculations for the periods covered
by the most recent amendment until 30 days after the 1996 Government
Settlement. As a result of the Roche Loan and the 1996 Government Settlement,
the Company negotiated a Fifth Amendment and Fourth Waiver (the "Fifth
Amendment") to the Existing Credit Agreement. The Fifth Amendment extended the
Third Waiver until January 31, 1997 and excluded the Roche Loan from covenant
calculations for the quarters ending December 31, 1996 and March 31, 1997. On
January 27, 1997, the Company negotiated a waiver (the "Fifth Waiver") which
further extended the Third Waiver until March 31, 1997.

In March 1997, the Company entered into the Sixth Amendment and Waiver (the
"Sixth Amendment") which eliminates amortization payments on the Term Loan
Facility for 1997 and modifies the interest coverage and leverage ratios for
the quarterly periods through December 31, 1997. As a result of the Sixth
Amendment certain amounts outstanding under the Revolving Credit Facility and
Term Loan Facility that were classified as current liabilities in the
September 30, 1996 financial statements have been reclassified to long-term
debt in the December 31, 1996 financial statements. Pursuant to this
amendment, the Company paid an amendment fee of 37.5 basis points on
commitments and will pay an additional fee of 62.5 basis points if the Rights
Offering, as described in Note 17, is not completed by June 30, 1997. Under
the Sixth Amendment, maturities under the Term Loan Facility aggregate $243.8,
$162.5, $187.5 and $100.0 in 1998 through 2001, respectively.

In March 1997, the Company also entered into an amended and restated credit
agreement (the "Amended Credit Agreement") which will become effective upon
completion of the Rights Offering following satisfaction of certain conditions
precedent. The Amended Credit Agreement makes available to the Company a term
loan facility of $693.8 (the "Amended Term Loan Facility") and a $450.0
revolving

F-18

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

credit facility (the "Amended Revolving Credit Facility"). The Amended
Revolving Credit Facility will include a $50.0 letter of credit sublimit. The
maturities under the Amended Credit Agreement are extended approximately three
years for the Amended Term Loan Facility to March 31, 2004 and approximately
two years for the Amended Revolving Credit Facility to March 31, 2002.

Total amortization of the Amended Term Loan Facility for each twelve-month
period following the closing date of the Rights Offering will be reduced
significantly for the first three years, and will be made (in quarterly
installments) in accordance with the following table:

Year Amount
---- ------

1997............................................................... $ --
1998............................................................... --
1999............................................................... 50.0
2000............................................................... 100.0
2001............................................................... 150.0
2002............................................................... 150.0
2003............................................................... 150.0
3/21/2004.......................................................... 93.8

Conditions precedent to effectiveness of the Amended Credit Agreement
include, without limitation, gross cash proceeds from the Rights Offering in
an aggregate amount equal to at least $250.0, receipt of appropriate
certificates and legal opinions, accuracy in all material respects of
representations and warranties, including absence of material adverse change
in the Company and its subsidiaries (taken as a whole) since December 31,
1996, absence of defaults and material litigation, evidence of authority, and
payment of transaction fees.

F-19

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

financial institutions paying a floating rate amount. Amounts paid by the
Company in 1996 were $2.0. The notional amounts of the agreements are used to
measure the interest to be paid or received and do not represent the amount of
exposure to credit loss. These agreements mature in September 1998. The
estimated cost at which the Company could terminate these agreements as of
December 31, 1996 was approximately $0.9. The fair value was estimated by
discounting the expected cash flows using rates currently available for
interest rate swaps with similar terms and maturities.

In connection with the repayment of existing revolving credit and term loan
facilities in 1995, the Company recorded an extraordinary loss of
approximately $13.5 ($8.3 net of tax), consisting of the write-off of deferred
financing costs, related to the early extinguishment of debt.

Prior to April 28, 1995, the Company had a credit agreement with a group of
banks which provided the Company with a $400.0 term loan facility and a
revolving credit facility of $350.0. This credit agreement provided funds for
the Allied Acquisition, to refinance certain existing debt of Allied and the
Company, and for general corporate purposes. The credit agreement was repaid
in full on April 28, 1995. At December 31, 1994, the Company's effective
borrowing rate on this credit agreement was 8.16%.

10. LOAN FROM AFFILIATE

In December 1996, the Company financed the Settlement Payment with the
proceeds of a $187.0 loan from Roche. The promissory note bears interest at
6.625% per annum and was originally due March 31, 1997. In March 1997, the
Company renegotiated the term of the note and it is now due March 31, 1998.
The note is unsecured and ranks pari passu with the Company's bank
obligations. The Company subsequently made the Settlement Payment in December
1996.

11. STOCKHOLDERS' EQUITY

In connection with a corporate reorganization on June 7, 1994, all of the
14,603,800 treasury shares held by National Health Laboratories Incorporated
were canceled. As a result, the $286.1 cost of such treasury shares was
eliminated with corresponding decreases in the par value, additional paid-in
capital and retained earnings accounts of $0.2, $72.3 and $213.6,
respectively.

12. INCOME TAXES

The provisions for income taxes in the accompanying consolidated statements
of operations consist of the following:

Year Ended December 31,
--------------------------
1996 1995 1994
-------- ------- -------

Current:
Federal......................................... $ (54.4) $ 10.4 $ 16.2
State........................................... 2.3 1.5 3.0
-------- ------- -------
(52.1) 11.9 19.2
-------- ------- -------
Deferred:
Federal......................................... 15.2 (4.6) 4.9
State........................................... 2.1 (0.2) 1.2
-------- ------- -------
17.3 (4.8) 6.1
-------- ------- -------
$ (34.8) $ 7.1 $ 25.3
======== ======= =======

F-20

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

The effective tax rates on earnings before income taxes is reconciled to
statutory federal income tax rates as follows:

Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------

Statutory federal rate....................... (35.0)% 35.0% 35.0%
State and local income taxes, net of federal
income tax benefit.......................... (3.0) 28.0 4.9
Non-deductible amortization of intangible
assets...................................... 3.0 166.0 4.9
Change in valuation allowance................ 17.0 -- --
Other........................................ (0.5) 7.0 0.9
-------- -------- -------
Effective rate............................... (18.5)% 236.0% 45.7%
======== ======== =======

The significant components of deferred income tax expense are as follows:

Years Ended December 31,
-----------------------------
1996 1995 1994
-------- -------- --------

Acquisition related reserves................. $ 2.7 $ (17.7) $ (1.2)
Settlement and related expenses.............. -- 8.8 2.5
Reserve for doubtful accounts................ (9.5) (4.3) 0.9
Insurance accrual............................ (1.9) -- --
Change in valuation allowance................ 32.0 -- --
Other........................................ (6.0) 8.4 3.9
-------- -------- -------
$17.3 $ (4.8) $ 6.1
======== ======== =======

F-21

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

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

December 31, December 31,
1996 1995
------------ ------------

Deferred tax assets:
Settlement and related expenses, principally
due to accrual for financial reporting
purposes...................................... $ 19.2 $ 1.8
Accounts receivable, principally due to
allowance for doubtful accounts............... 31.1 21.9
Self insurance reserves, principally due to
accrual for financial reporting purposes...... 7.9 4.8
Postretirement benefit obligation, principally
due to accrual for financial reporting
purposes...................................... 10.7 9.9
Compensated absences, principally due to
accrual for financial reporting purposes...... -- --
Acquisition related reserves, principally due
to accrual for financial reporting purposes... 43.1 81.0
State net operating loss carryforwards......... 11.8 7.4
Other.......................................... 18.1 13.7
------ ------
141.9 140.5
Less valuation allowance..................... (32.0) --
------ ------
Net deferred tax asset....................... 109.9 140.5
Deferred tax liabilities:
Intangible assets, principally due to
differences in amortization................... (60.2) (59.5)
Property, plant and equipment, principally due
to differences in depreciation................ (20.9) (16.4)
Other.......................................... (1.3) (6.4)
------ ------
Total gross deferred tax liabilities......... (82.4) (82.3)
------ ------
Net deferred tax asset........................... $ 27.5 $ 58.2
====== ======

There was no valuation allowance for deferred tax assets as of December 31,
1995 and 1994. At December 31, 1996 the valuation allowance for deferred tax
assets was $32.0. Realization of the deferred tax assets related to the state
net operating loss carryforwards, the postretirement benefit obligation as
well as certain other temporary differences is considered uncertain, and
therefore a valuation allowance has been established for these items. The
Company believes that it is more likely than not that the results of future
operations and carryback availability will generate sufficient taxable income
to realize the remaining deferred tax assets.

13. STOCK OPTIONS

The Company has adopted the 1997 Employee Stock Purchase Plan (the "1997
Stock Plan") which became effective January 1, 1997. Under the 1997 Stock
Plan, eligible employees may purchase shares of the Company's common stock
based on compensation through payroll deductions. The purchase price is the
lower of 85% of the fair market value of the common stock on the first or last
day of the purchase period. There was no activity under the plan in 1996.

F-22

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

In 1988, the Company adopted the 1988 Stock Option Plan, reserving 2,000,000
shares of common stock for issuance pursuant to options and stock appreciation
rights that may be granted under the plan. The Stock Option Plan was amended
in 1990 to limit the number of options to be issued under the Stock Option
Plan to 550,000 in the aggregate (including all options previously granted).
In 1991, the number of shares authorized for issuance under the Stock Option
Plan was increased to an aggregate of 2,550,000.

In 1994, the Company adopted the 1994 Stock Option Plan, reserving 3,000,000
shares of common stock for issuance pursuant to options and stock appreciation
rights that may be granted under the plan.

In connection with the Merger, all options outstanding as of December 13,
1994 became vested and employees were given the choice to (i) cancel options
outstanding as of December 13, 1994 and receive cash and shares of common
stock according to a formula included in the merger agreement or (ii) convert
such options into new options based on a formula included in the merger
agreement. The amount of cash and shares of common stock issued was equal to
the product of (i) the number of shares of common stock subject to such
options submitted for cancellation and (ii) the excess of (1) $18.50 over (2)
the per share exercise price of such options (such product, the "Option Value
Amount"). The Option Value Amount was paid as follows: 40% of such amount was
paid in cash, and 60% of such amount (the "Option Stock Amount") was paid in
the number of shares of common stock obtained by dividing the Option Stock
Amount by $15.42. In connection with the cancellation of stock options, the
Company paid a total of $5.5 in cash and issued 538,307 shares of common stock
to option holders. The value of such amounts were considered transaction costs
of the merger and included in the purchase price of the acquired entity. Also,
a total of 562,532 options were reissued as a result of option conversions at
exercise prices between $11.293 and $16.481.

At December 31, 1996, there were 3,427,316 additional shares available for
grant under the Company's Stock Option Plans. There were no options granted in
1996. The per share weighted-average fair value of stock options granted
during 1995 was $8.54 per share on the date of grant using the Black Scholes
option-pricing model assuming a volatility of 0.4243 and the following
weighted-average assumptions: --expected dividend yield 0.0%, risk-free
interest rate of 6.86%, and an expected life of ten years.

The Company applies the provisions of APB Opinion No. 25 in accounting for
its Plan and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been reduced
to the pro forma amounts indicated below:

Years Ended
December 31,
---------------
1996 1995
------- ------

Net loss
As reported............................................... $(153.5) $(12.3)
Pro forma................................................. (154.7) (14.5)
Earnings per share
As reported............................................... $ (1.25) $(0.11)
Pro forma................................................. (1.26) (0.13)

F-23

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options
vesting period of two years and compensation cost for options granted prior to
January 1, 1995 is not considered.

The following table summarizes grants of non-qualified options made by the
Company to officers and key employees under both plans. Stock options are
generally granted at an exercise price equal to or greater than the fair
market price per share on the date of grant. Also, for each grant, one-third
of the options vested on the date of grant and one-third vest on each of the
first and second anniversaries of such date, subject to their earlier
expiration or termination.

Changes in options outstanding under the plans for the periods indicated
were as follows:

Weighted Average
Number of Exercise Price per
Options Option
---------- ------------------

Outstanding at January 1, 1994................ 1,564,336 $17.366
Granted..................................... 2,042,000 $12.600
Exercised................................... (11,125) $ 7.717
Canceled or expired......................... (92,498) $16.649
----------
Outstanding at December 31, 1994.............. 3,502,713 $14.637
Granted..................................... 1,378,000 $13.000
Merger-related grants....................... 562,532 $15.870
Exercised................................... (20,542) $10.297
Merger-related cancellations................ (3,459,167) $14.653
Canceled or expired......................... (222,291) $14.816
----------
Outstanding at December 31, 1995.............. 1,741,245 $14.637
Canceled or expired......................... (443,027) $14.104
----------
Outstanding at December 31, 1996............ 1,298,218 $14.637
==========
Exercisable at December 31, 1996.............. 993,429 $13.748
==========

The weighted average remaining life of options outstanding at December 31,
1996 is approximately 8.4 years.

14. COMMITMENTS AND CONTINGENCIES

Under the Company's present insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law or
contract. The Company is responsible for the uninsured portion of losses
related primarily to general, product and vehicle liability and workers'
compensation. The self-insured retentions are on a per occurrence basis
without any aggregate annual limit. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of the aggregated
liability of claims incurred. At December 31, 1996 and 1995, the Company had
provided letters of credit aggregating approximately $17.6 and $8.6,
respectively, primarily in connection with certain insurance programs.

During 1991, the Company guaranteed a $9.0, five-year loan to a third party
for construction of a new laboratory to replace one of the Company's existing
facilities. Following its completion in November of

F-24

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

1992, the building was leased to the Company by this third party. Such
transaction is treated as a capital lease for financial reporting purposes.
The associated lease term continues for a period of 15 years, expiring in
2007. Under the terms of this guarantee, as modified, the Company is required
to maintain 105% of the outstanding loan balance including any overdue
interest as collateral in a custody account established and maintained at the
lending institution. As of December 31, 1996 and 1995, the Company had placed
$9.5 of investments in the custody account. Such investments are included
under the caption "Other assets, net" in the accompanying consolidated balance
sheets.

The Company does not anticipate incurring any loss as a result of this loan
guarantee due to protection provided by the terms of the lease. Accordingly,
the Company, if required to repay the loan upon default of the borrower (and
ultimate lessor), is entitled to a rent abatement equivalent to the amount of
repayment made by the Company on the borrower's behalf, plus interest thereon
at a rate equal to 2% over the prime rate.

The Company leases various facilities and equipment under non-cancelable
lease arrangements. Future minimum rental commitments for leases with
noncancellable terms of one year or more at December 31, 1996 are as follows:

Operating Capital
--------- -------

1997..................................................... 44.9 1.6
1998..................................................... 36.3 1.7
1999..................................................... 29.4 1.8
2000..................................................... 24.2 1.9
2001..................................................... 16.5 2.0
Thereafter............................................... 65.9 13.1
------ -----
Total minimum lease payments............................. 217.2 22.1
Less amount representing interest........................ -- 12.3
------ -----
Total minimum operating lease payments and present value
of minimum capital lease payments....................... $217.2 $ 9.8
====== =====

Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $70.6, $60.4 and $34.6 for the
years ended December 31, 1996, 1995 and 1994, respectively.

15. PENSION AND POSTRETIREMENT PLANS

The Company maintains a defined contribution pension plan for all eligible
employees. Eligible employees are defined as individuals who are age 21 or
older and have been employed by the Company for at least six consecutive
months and completed 1,000 hours of service. Company contributions to the plan
are based on a percentage of employee contributions. The cost of this plan was
$7.5, $5.8, and $3.6 in 1996, 1995, and 1994, respectively.

In addition, substantially all employees of the Company are covered by a
defined benefit retirement plan (the "Company Plan"). The benefits to be paid
under the Company Plan are based on years of credited service and average
final compensation.

Effective December 31, 1994, the Company adopted certain amendments to the
Company Plan which resulted in a decrease of approximately $9.5 in the
projected benefit obligation.

F-25

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Under the requirements of SFAS No. 87, "Employers Accounting for Pensions",
the Company recorded an additional minimum pension liability representing the
excess accumulated benefit obligation over plan assets at December 31, 1993. A
corresponding amount was recognized as an intangible asset to the extent of
unrecognized prior service cost, with the balance recorded as a separate
reduction of stockholders' equity.

The Company recorded an additional liability of $3.0, an intangible asset of
$0.6, and a reduction of stockholders' equity of $2.4. Such amounts were
eliminated as a result of the amendments to the Company Plan effective
December 31, 1994.

In connection with the Merger, the Company assumed obligations under the RBL
defined benefit pension plan ("RBL Plan"). Effective July 1, 1995, the plan
was amended to provide benefits similar to the Company Plan, as amended.
Certain employees of RBL were grandfathered so that their benefits were not
affected by the amendment. On January 1, 1996, the two plans were merged.

The Company's policy is to fund the Company Plan with at least the minimum
amount required by applicable regulations. The components of net periodic
pension cost for each of the RBL plans are summarized as follows:

Company Plan RBL Plan
--------------------------- ------------
Eight months
ended
Years ended December 31, December 31,
--------------------------- ------------
1996 1995 1994 1995
-------- -------- -------- ------------

Service cost........................... $ 10.3 $ 3.2 $ 5.5 $ 2.6
Interest cost.......................... 7.0 2.7 3.5 2.3
Actual return on plan assets........... (11.9) (7.6) 0.1 (4.3)
Net amortization and deferral.......... 3.3 4.2 (1.4) 1.2
-------- ------- ------- -----
Net periodic pension cost.............. $ 8.7 $ 2.5 $ 7.7 $ 1.8
======== ======= ======= =====

The status of the plans are as follows:

Company Plan RBL Plan
------------- ------------
December 31, December 31,
------------- ------------
1996 1995 1995
------ ----- ------------

Actuarial present value of benefit obligations:
Vested benefits................................. $ 86.2 $36.2 $38.8
Non-vested benefits............................. 11.2 4.4 6.4
------ ----- -----
Accumulated benefit obligation.................... 97.4 40.6 45.2
Effect of projected future salary increases....... 6.3 2.2 1.6
------ ----- -----
Projected benefit obligation...................... 103.7 42.8 46.8
Fair value of plan assets, principally corporate
equity securities and fixed income investments... 96.2 40.8 46.6
------ ----- -----
Unfunded projected benefit obligation............. 7.5 2.0 0.2
Unrecognized prior service cost................... 17.4 6.6 12.7
Unrecognized net loss............................. (14.9) (7.1) (9.4)
------ ----- -----
Accrued pension cost.............................. $ 10.0 $ 1.5 $ 3.5
====== ===== =====

F-26

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Assumptions used in the accounting for the plans were as follows:

Company Plan RBL Plan
-------------- --------
1996 1995 1995
------ ------ --------

Weighted average discount rate.................... 7.75% 7.5% 7.5%
Weighted average rate of increase in future
compensation levels.............................. 4.0% 4.0% 5.4%
Weighted average expected long-term rate of
return........................................... 9.0% 9.0% 9.5%

In addition, the Company assumed obligations under RBL's postretirement
medical plan effective with the Merger. Effective July 1, 1995, coverage under
the plan was restricted to certain existing RBL employees. This plan is
unfunded and the Company's policy is to fund benefits as claims are incurred.
The components of postretirement benefit expense are as follows:

Eight months
Year Ended ended
December 31, December 31,
1996 1995
------------ ------------

Service cost....................................... $0.9 $1.1
Interest cost...................................... 1.4 1.4
---- ----
Postretirement benefit costs....................... $2.3 $2.5
==== ====

The status of the plan is as follows:

December 31,
--------------
1996 1995
------ ------

Accumulated postretirement benefit obligation................ $28.6 $27.2
Unrecognized net loss........................................ (1.6) (2.1)
------ ------
Accrued postretirement benefit obligation.................... $ 27.0 $ 25.1
====== ======

The weighted average discount rate used in the calculation of the
accumulated postretirement benefit obligation and the net postretirement
benefit cost was 7.85% and 7.6%, respectively. The health care cost trend rate
was assumed to be 8.5%, declining gradually to 5.0% in the year 2006,
remaining level thereafter. The health care cost trend rate has a significant
effect on the amounts reported. To illustrate, a one percentage point increase
in the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by approximately
$5.2, and the aggregate of the service and interest components of 1996 net
periodic postretirement benefit cost by approximately $0.5.

16. QUARTERLY DATA (UNAUDITED)

The following is a summary of unaudited quarterly data:

Year ended December 31, 1996
---------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- ---------

Net Sales............... $403.9 $410.0 $ 402.6 $391.2 $1,607.7
Gross Profit............ 100.6 109.5 102.5 111.2 423.3
Net earnings............ 5.9 (14.2) (146.4) 1.2 (153.5)
Earnings per common
share.................. 0.05 (0.12) (1.19) 0.01 (1.25)

F-27

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

Year ended December 31, 1995
---------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ----------- ---------

Net sales............... $243.8 $367.3 $417.5 $403.4 $1,432.0
Gross profit............ 79.5 108.9 117.8 101.5 407.7
Earnings (loss) before
extraordinary item..... 12.8 (31.6) 14.4 0.4 (4.0)
Extraordinary item...... -- (8.3) -- -- (8.3)
Net earnings (loss)..... 12.8 (39.9) 14.4 0.4 (12.3)
Earnings (loss) per
common share before
extraordinary loss..... 0.15 (0.28) 0.12 -- (0.03)
Extraordinary loss per
common share........... -- (0.08) -- -- (0.08)
Earnings (loss) per
common share........... 0.15 (0.36) 0.12 -- (0.11)

In the third quarter of 1996, the Company recorded a charge of $185.0 to
increase reserves related to the 1996 Government Settlement and other related
expenses of government and private claims resulting therefrom.

In the second quarter of 1996, the Company recorded a charge of $23.0
relating to the shutdown of its La Jolla administrative facility and other
non-recurring charges. In addition, the company recorded an additional $10.0
provision for doubtful accounts which was based on the Company's determination
that additional reserves were needed, based on trends that became evident in
the second quarter, for lower collection rates primarily from Medicare.

In the fourth quarter of 1995, the Company recorded an additional $15.0 of
provision for doubtful accounts which reflects the Company's determination,
based on trends that became evident in the fourth quarter, that additional
reserves were needed primarily to cover potentially lower collection rates
from several third-party payors.

In the second quarter of 1995, the Company took a pre-tax special charge of
$65.0 to cover the costs of the restructuring plan related to the Merger. The
charge includes approximately $24.2 to reduce the workforce, $21.3 to reduce
certain assets to their net realizable values, and $19.5 for lease and other
facility obligations. Also in the second quarter of 1995, the Company took a
pre-tax special charge of $10.0 in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which are billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.

In connection with the repayment of existing revolving credit and term loan
facilities, the Company recorded an extraordinary loss of approximately $13.5
($8.3 net of tax) in the second quarter of 1995, consisting of the write-off
of deferred financing costs, related to the early extinguishment of debt.

17. SUBSEQUENT EVENT (UNAUDITED)

In February 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the proposed
offering of an aggregate of $500.0 of convertible preferred stock issuable in
two series pursuant to transferable subscription rights to be granted on a pro

F-28

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

rata basis to each stockholder of the Company (the "Rights Offering"). Rights
holders who exercise their rights in full will also be entitled to subscribe
for additional shares of preferred stock issuable pursuant to any unexercised
rights.

The subscription rights will give the holder thereof the option to purchase
one of two series of preferred stock, each of which will be convertible at the
option of the holder into common stock. One series will pay cash dividends and
will be exchangeable at the Company's option for convertible subordinated
notes due 2012. The other series will pay dividends in kind and will not be
exchangeable for notes. Each series of preferred stock will be mandatorily
redeemable in 2012 and will be redeemable at the option of the Company after
three years.

The Company has recently been contacted by representatives of certain
insurance companies, and individuals in a purported class action, who have
asserted claims for private reimbursement which are similar to the Government
claims recently settled. The Company is carefully evaluating these claims and
although there can be no assurance, based upon the information currently
available to it, management does not believe that the ultimate outcome of
these claims will have a material adverse effect on its financial condition.
However, due to the early stage of such claims, management cannot make an
estimate of loss or predict whether or not such claims will have a material
adverse effect on the Company's results of operations in any particular
period.

F-29

SCHEDULE II

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)

Balance at Charged to Other
beginning costs and (Deductions) Balance at
of year Acquisitions expenses Additions end of year
---------- ------------ ---------- ------------ -----------

Year ended December 31,
1996:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts.... $90.4 $ 0.0 $148.8 $(127.6) $111.6
===== ===== ====== ======= ======
Year ended December 31,
1995:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts.... $65.3 $33.2 $147.6 $(155.7) $ 90.4
===== ===== ====== ======= ======
Year ended December 31,
1994
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts.... $51.0 $18.5 $ 91.5 $ (95.7) $ 65.3
===== ===== ====== ======= ======

F-30

- -------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFER-
ENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
DEALER MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JU-
RISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

---------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary....................................................... 4
Risk Factors............................................................. 21
Use of Proceeds.......................................................... 29
Common Stock Price Range................................................. 29
Dividend Policy.......................................................... 29
Capitalization........................................................... 30
Unaudited Pro forma Financial Statements................................. 31
Selected Historical Year End Financial
Data.................................................................... 38
Selected Historical Interim Financial
Data.................................................................... 41
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 43
Business................................................................. 53
Regulation and Reimbursement............................................. 67
Management............................................................... 73
Ownership of Capital Stock............................................... 76
Certain Relationships and Related Transactions........................... 77
Description of the Amended Credit Agreement.............................. 80
Description of Rights Offering........................................... 82
Description of Capital Stock............................................. 88
Description of Preferred Stock........................................... 90
Description of the Notes................................................. 99
Certain Federal Income Tax Consequences.................................. 105
Plan of Distribution..................................................... 110
Legal Matters............................................................ 110
Experts.................................................................. 111
Available Information.................................................... 111
Incorporation of Certain Documents by Reference.......................... 112
Index to Financial Statements............................................ F-1

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

LABORATORY CORPORATION
OF AMERICA HOLDINGS

10,000,000 Shares

8 1/2% Series A Convertible
Exchangeable
Preferred Stock
or

8 1/2% Series B Convertible
Pay-in-Kind
Preferred Stock

PROSPECTUS

CREDIT SUISSE FIRST BOSTON

- -------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the fees and expenses payable by the Company
in connection with the Rights Offering other than dealer manager and
solicitation fees. All of such expenses except the Securities and Exchange
Commission registration fee and the NASD filing fee are estimated:

Securities and Exchange Commission registration fee.............. $ 250,970
NASD filing fee.................................................. 30,500
NYSE listing fee................................................. 47,800
Printing expense................................................. 60,000
Accounting fees and expenses..................................... 75,000
Legal fees and expenses.......................................... 1,100,000
Miscellaneous.................................................... 435,730
----------
Total............................................................ $2,000,000
==========

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty,
except (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the DGCL (providing for liability of directors for the
unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director derived an improper personal
benefit.

Section 145 of the DGCL empowers the Company to indemnify, subject to the
standards set forth therein, any person in connection with any action, suit or
proceeding brought before or threatened by reason of the fact that the person
was a director, officer, employee or agent of such company, or is or was
serving as such with respect to another entity at the request of such company.
The DGCL also provides that the Company may purchase insurance on behalf of
any such director, officer, employee or agent.

The Company's Certificate of Incorporation provides in effect for the
indemnification by the Company of each director and officer of the Company to
the fullest extent permitted by applicable law.

ITEM 16. EXHIBITS

See index to exhibits at E-1.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

II-1

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

II-2

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF BURLINGTON, STATE OF NORTH CAROLINA, ON MAY 20, 1997.

LABORATORY CORPORATION OF AMERICA
HOLDINGS

/s/ Thomas P. Mac Mahon
By: _________________________________
THOMAS P. MAC MAHON
CHAIRMAN OF THE BOARD, PRESIDENT
AND
CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.

SIGNATURE TITLE DATE

/s/ Thomas P. Mac Mahon Chairman of the
- ------------------------------------- Board, President, May 20, 1997
THOMAS P. MAC MAHON Chief Executive
Officer and
Director

* Executive Vice
- ------------------------------------- President, Chief May 20, 1997
WESLEY R. ELINGBURG Financial Officer
and Treasurer
(Principal
Accounting and
Financial Officer)

* Director
- ------------------------------------- May 20, 1997
JEAN-LUC BELINGARD

* Director
- ------------------------------------- May 20, 1997
WENDY E. LANE

* Director
- ------------------------------------- May 20, 1997
ROBERT E. MITTELSTAEDT, JR.

* Director
- ------------------------------------- May 20, 1997
JAMES B. POWELL, M.D.

* Director
- ------------------------------------- May 20, 1997
DAVID B. SKINNER, M.D.

* Director
- ------------------------------------- May 20, 1997
ANDREW G. WALLACE, M.D.

/s/ Thomas P. Mac Mahon
*By: ________________________________
THOMAS P. MAC MAHON
ATTORNEY-IN-FACT

INDEX TO EXHIBITS

Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------

1.1 Form of Dealer Manager Agreement*
4.1 Form of Certificate of Designation of the Series A
Exchangeable Preferred Stock*
4.2 Form of Certificate of Designation of the Series B
PIK Preferred Stock*
4.3 Form of Indenture*
4.4 Form of Note (included in Exhibit 4.3 hereto)*
4.5 Form of Rights Certificate*
4.6 Form of Amendment to Stockholders Agreement dated
as of April 28, 1995 among HLR, Roche Holdings,
Hoffmann-La Roche Inc. and the Company*
5.1 Opinion of Davis Polk & Wardwell*
8.1 Opinion of Davis Polk & Wardwell (re: tax
matters)*
12.1 Statement regarding Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred
Stock Dividends
23.1 Consent of KPMG Peat Marwick LLP
23.3 Consent of Davis Polk & Wardwell (contained in the
Opinion of Counsel filed as Exhibits 5.1 and 8.1
hereto)*
24.1 Power of Attorney*
25.1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended of First Union National
Bank of North Carolina, as Trustee under the
Indenture*
99.1 Form of Subscription Agency Agreement*
99.2 Form of Information Agency Agreement*
99.3 Form of Instructions for Use of Rights
Certificates*

- --------

* Previously filed.


 
                                                                  
                                                               EXHIBIT 12.1     
                   
                LABORATORY CORPORATION OF AMERICA HOLDINGS     
            
         STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS (LOSS) TO     
                 
              COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS     
                              
                           (DOLLARS IN MILLIONS)     
 
   

                                                             THREE MONTHS                 PROFORMA
                                                                 ENDED       PROFORMA   THREE MONTHS
                               YEAR ENDED DECEMBER 31,         MARCH 31     YEAR ENDED     ENDED
                          ---------------------------------  ------------- DECEMBER 31,  MARCH 31,
                          1992   1993   1994  1995   1996     1996   1997      1996         1997
                          ----- ------ ------ ----- -------  ------ ------ ------------ ------------
                                                             
Earnings (loss):
 Earnings (loss) before
  provision for income
  taxes and
  extraordinary item....  $62.1 $191.1 $ 55.4 $ 3.1 $(188.3) $ 11.8 $  5.9   $(176.0)      $13.2
Add: Fixed Charges
 Interest expense
  (gross)                   4.2   10.9   34.5  65.5    71.7    16.7   22.7      59.4        15.4
 Interest factor in
  rents.................    9.0   10.0   11.5  20.1    23.5     6.1    5.9      23.5         5.9
                          ----- ------ ------ ----- -------  ------ ------   -------       -----
 Earnings (loss) as
  adjusted..............  $75.3 $212.0 $101.4 $88.7 $ (93.1) $ 34.6 $ 34.5   $ (93.1)      $34.5
 Preferred dividend
  requirements..........  $ --  $  --  $  --  $ --  $   --   $  --  $  --    $  43.2       $10.6
 Ratio of earnings
  before provision for
  income taxes to net
  earnings .............    --     --     --    --      --      --     --        120%        194%
                          ----- ------ ------ ----- -------  ------ ------   -------       -----
 Preferred dividend
  factor on a pre-tax
  basis.................    --     --     --    --      --      --     --       51.8        20.6
 Fixed Charges
 Interest expense.......    4.2   10.9   34.5  65.5    71.7    16.7   22.7      59.4        15.4
 Interest factor in
  rents.................    9.0   10.0   11.5  20.1    23.5     6.1    5.9      23.5         5.9
                          ----- ------ ------ ----- -------  ------ ------   -------       -----
 Combined fixed charges
  and preferred
  dividends.............   13.2   20.9   46.0  85.6    95.2    22.8   28.6     134.7        41.9
Ratio of earnings to
 combined fixed charges
 and preferred
 dividends..............   5.71  10.16   2.20  1.04      NM    1.52   1.21        NM          NM
Amount by which earnings
 are insufficient to
 cover combined fixed
 charges and preferred
 dividends..............                            $(188.3)                 $(227.8)      $(7.4)


 
                                                                 
                                                              EXHIBIT 23.1     
                         
                      INDEPENDENT AUDITORS' CONSENT     
   
The Board of Directors     
   
Laboratory Corporation of America Holdings:     
   
  We consent to the use of our reports included herein and incorporated herein
by reference and to the reference to our firm under the heading "Experts" in
the prospectus.     
                                             
                                          /s/ KPMG Peat Marwick LLP     
   
Raleigh, North Carolina     
   
May 19, 1997