UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    FORM 10-K
 
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998
 
                         Commission File Number: 1-12213
 
                                  COVANCE INC.
             (Exact name of Registrant as specified in its Charter)

           Delaware                                   22-3265977
  (State of Incorporation)                (I.R.S. Employer Identification No.)
 
        210 Carnegie Center, Princeton, New Jersey         08540
         (Address of Principal Executive Offices)        (Zip Code)

Registrant's telephone number, including area code: (609) 452-4440

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

                                            Name of Each Exchange
         Title of Each Class                 on Which Registered
-------------------------------------   ----------------------------
       Common Stock, $.01 Par Value        New York Stock Exchange


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


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES  X    NO
                                               ---      ---

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

As of February 10, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,643,841,049 (based on the closing price
of the Company's Common Stock on the New York Stock Exchange on February 10,
1999 of $28.19).


As of February 10, 1999, the Registrant had 58,520,505 shares of Common Stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

The Company's definitive Proxy Statement is incorporated by reference into
Items 10, 11, 12 and 13 of Part III of this Form 10-K.
<PAGE>

                                    PART I


Item 1. Business


General

     Covance Inc. ("Covance" or the "Company") is a leading contract research
organization ("CRO") providing a wide range of integrated product development
services on a worldwide basis to the pharmaceutical, biotechnology and medical
device industries. In addition and to a lesser extent, Covance also provides
health economics and outcomes services for managed care organizations,
hospitals and other health care providers and laboratory testing services to
the chemical, agrochemical and food industries. The services Covance provides
constitute two segments: early development services (preclinical and Phase I
clinical), and late-stage development services (clinical and clinical support
services). Covance believes it is one of the largest biopharmaceutical CROs,
based on 1998 annual net revenues, and one of a few that are capable of
providing comprehensive global product development services.

     On May 13, 1996, the Board of Directors of Corning Incorporated
("Corning"), the Company's former indirect parent, approved a plan to
distribute (the "Distributions"), in a tax free distribution to all Corning
stockholders of record as of 11:59 PM on December 31, 1996, all of the
Company's outstanding Common Stock, and that of Quest Diagnostics Inc.
("Quest"). The Distributions were effected as of the close of December 31, 1996
(the "Distribution Date") and the Company (as well as Quest) became an
independent, publicly-traded company on such date.

     Most of the service offerings that constitute Covance's business were
initially acquired by its former parent, Corning, as part of a strategy to
create a global and full service product development company. In 1987, Corning
acquired Hazleton Corporation (now known as Covance Laboratories Inc.), owner
of preclinical drug safety assessment laboratories and Phase I clinical
research units. In 1989, Phase II and Phase III clinical trials expertise was
added with G.H. Besselaar Associates (now known as Covance Clinical Services
Inc.). Covance further expanded its clinical trials expertise in 1990 with the
purchase of PACT Inc. (now known as Covance Periapproval Services Inc.), a
periapproval studies company. In 1991, SciCor Inc. (now known as Covance
Central Laboratories Inc.), a clinical laboratory dedicated to the drug
development process was purchased. Covance's pharmaceutical laboratory
capabilities were expanded in 1992 with the creation in Switzerland of a
jointly owned company, SciCor S.A. Covance acquired 100% of this company in
1994. In 1995, Covance acquired National Packaging Systems, Inc. ("National
Packaging") (now known as Covance Pharmaceutical Packaging Services Inc.), a
pharmaceutical packaging company. Also in 1995, Covance formed Covance
Biotechnology Services Inc. ("Covance Biotechnology"), a majority-owned company
which has enabled Covance to engage in the manufacture of biologics.

     In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics and outcomes company. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of
Swiss-based CRS Pacamed AG ("CRS Pacamed") (now known as Covance Pharmaceutical
Packaging Services AG). In addition, in connection with the acquisition of CRS
Pacamed, Covance acquired a 91,000 square-foot facility in Horsham, United
Kingdom, which is used, among other things, to enhance the Company's ability to
provide pharmaceutical packaging services in Europe. In 1998, Covance commenced
operating a 45,000 square-foot facility in Allschwil, Switzerland, to further
enhance its packaging capabilities in Europe. Covance has also built an
additional 160,000 square-foot facility at its Princeton location. The
Princeton facility became operational in January 1999, is leased and supports
the Company's clinical services and corporate functions, and permits increased
employee capacity. Covance has also increased its Indianapolis, Indiana,
facility by 112,000 square feet to expand its pharmaceutical laboratory
operations. The additional space in Indianapolis, which is also leased, became
operational in 1998.

     In November 1998, Covance acquired GDXI, Inc., a company located in Reno,
Nevada (now known as Covance Central Diagnostics Inc.), which provides
centralized electrocardiogram analysis for clinical trials. Also in November of
1998, Covance acquired Berkeley Antibody Company, Inc. (now a subsidiary of
Covance Research Products Inc.), a company located in Richmond, California,
which provides contract services in custom antibody production, applied
immunology, and custom animal research to support the medical device industry
and preclinical evaluations.

     The Company maintains offices in 17 countries, including offices in
Canada, Argentina, and Poland, all of which opened in 1997 and in China, which
opened in 1998.


CRO Industry Overview

     The CRO industry provides independent product development services to the
pharmaceutical, biotechnology and medical device industries. In general, CROs
derive substantially all of their revenue from the research, development and
marketing expenditures of such industries. Full service CROs design and manage
preclinical and clinical and periapproval studies and trials,


                                                                               1
<PAGE>

and provide health economics and outcome services, and may provide other
services including health economics and outcomes services, packaging, central
laboratory, manufacturing biologics and other services required to develop and
market new products in accordance with applicable government regulations in the
jurisdictions where the services are provided, including the regulations of the
Food and Drug Administration ("FDA") in the United States.


Trends Affecting the CRO Industry

     Covance believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will
continue to increase as a result of a number of factors, as further described
below.

     Cost Containment Pressures. Market forces and governmental initiatives
have placed downward pressure on pharmaceutical and biotechnology companies'
drug prices. Covance believes that the pharmaceutical industry is responding to
these pressures by converting some of the fixed costs of maintaining research
and development infrastructure to variable costs by outsourcing drug
development activities to CROs. Demand for CROs is also driven by internal
development resource shortages experienced when a large number of compounds
emerge from the research process and need to undergo development. Management
also believes that many of these companies are attempting to shorten new drug
development cycle time by using CROs, which may have greater expertise in a
therapeutic area and/or offer greater efficiency at a lower cost.

     Marketplace Globalization. Pharmaceutical and biotechnology companies are
increasingly attempting to expand the market for new drugs by pursuing
regulatory approvals in multiple countries simultaneously rather than
sequentially as they have in the past. Covance believes that CROs with a global
presence will continue to benefit from these trends, and that the Company is
well-positioned to benefit from such trends.

     Revenue Enhancement Through Faster Drug Development. Covance believes that
CROs, by providing specialized development services, are often able to perform
the needed services with a higher level of expertise or specialization, and
more quickly than a pharmaceutical or biotechnology company could perform such
services internally.

     Pharmaceutical Company Consolidation. Business combinations in the
pharmaceutical industry present an opportunity for CROs, as such companies
generally seek to obtain cost reduction synergies. Once combined, many
pharmaceutical companies aggressively manage costs by reducing jobs,
decentralizing the research and development process and outsourcing to CROs in
an effort to reduce the fixed costs associated with internal drug development.

     Increasingly Stringent Regulation. Increasingly stringent regulatory
requirements throughout the world and their standardization have increased the
need for broader, global regulatory expertise. Covance believes that the
pharmaceutical and biotechnology industries are outsourcing to global CROs to
take advantage of their capabilities and geographic presence.

     Therapeutic Focus. Management believes that the economics of the
marketplace require increased research and development expenditures as
biopharmaceutical companies become focused on innovative new products,
including drugs for an aging population, and drugs for the treatment of chronic
disorders and life threatening conditions. The development of therapies for
chronic disorders, such as Alzheimer's disease or arthritis, requires complex
clinical trials to demonstrate the therapies' effectiveness and to determine
whether the drugs cause any long-term side effects. Management believes that
CROs with the requisite therapeutic experience and the ability to manage
complex trials will present an attractive development alternative for
biopharmaceutical companies.


     Biotechnology Industry Growth. The United States biotechnology industry
has grown rapidly over the last twelve years and is introducing new therapies
which require regulatory approval. Many biotechnology companies do not have the
necessary internal resources and experience (capital, equipment or people) to
conduct preclinical studies and clinical trials. Accordingly, many
biotechnology companies have chosen to outsource to CROs rather than expend
significant time and resources to develop an internal preclinical or clinical
development or biomanufacturing capability.


The New Drug Development Process--Overview

     Before a new drug may be marketed to the public, it must undergo extensive
testing and regulatory review to determine that the drug is both safe and
effective for its intended purpose. The developmental process and typical
corresponding time periods are as set forth below. Similar extensive testing
and regulatory reviews are required in Europe and some Asian countries.


     Preclinical Research (6 months to 3 years). In vitro ("test tube") and in
vivo ("animal") studies are conducted to establish the basic pharmacokinetic
effect and safety of a drug including the toxicity of the drug over a wide
range of doses. Initially, acute toxicology studies are conducted. In the
United States, if results warrant continuing development of the drug, the
manufacturer (also known as the "sponsor") will file an Investigational New
Drug ("IND") application, whereupon the FDA


2
<PAGE>

may grant permission to begin human trials (also known as "clinical trials").
Preclinical studies may continue after the start of clinical trials to
determine the longer term effects of a product.


     Clinical Research (3.5 to 6 years).


     o Phase I (6 months to 1 year). This phase involves the initial basic 
       safety and pharmacology testing in approximately 20 to 100 human
       subjects, usually healthy volunteers in a closely monitored setting,
       including studies to determine the side effect profile of the drug,
       how the drug works, how it is affected by other drugs, where it goes
       in the body, how long it remains active and how it is broken down and
       eliminated from the body.
     
     
     o Phase II (1 to 2 years). This phase involves basic efficacy
       (effectiveness) and dose-range testing in approximately 100 to 400
       carefully selected patients suffering from the disease or condition under
       study to help determine the best effective dose, confirm that the drug
       works as expected and provide additional safety data. The trials are
       typically well controlled and usually involve a placebo. A placebo is an
       identical tablet or solution which lacks the active substance under
       investigation.
     
     
     o Phase III (2 to 3 years). This phase involves efficacy and safety studies
       in broader populations of hundreds or thousands of patients at many
       investigational sites (hospitals and clinics) and may involve
       placebo-controlled trials, in which the new drug is compared with a
       placebo; studies comparing the new drug with one or more drugs with
       established safety and efficacy profiles in the same therapeutic category
       ("controlled trials"); or studies where there is no comparison to a
       placebo or another drug ("uncontrolled trials"). Generally, Phase III
       studies are intended to provide additional information on drug safety and
       efficacy, an evaluation of the risk-benefit relationship for the drug,
       and information for the adequate labeling of the product.
         
     NDA Preparation and Submission. Upon completion of Phase III trials, the
sponsor or CRO assembles the tabulated and statistically analyzed data from all
phases of development into a single large document, the New Drug Application
("NDA") in the United States, which comprises, on average, approximately
100,000 pages.


     Regulatory Review and Approval. At this stage, the regulatory agency will
scrutinize data from all phases of development to confirm that the sponsor has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study. Product labeling is also approved
at this stage, which serves as a guideline to the sponsor about how its product
can be promoted in the marketplace.


     Treatment Investigational New Drug (May span late Phase II, Phase III and
FDA review). When results from Phase II or Phase III show special promise in
the treatment of a serious condition for which existing therapeutic options are
limited or are of minimal value in the United States, the FDA may allow the
manufacturer to make the new drug available to a larger number of patients
through the regulated mechanism of a Treatment Investigational New Drug
("TIND") application. Although less scientifically rigorous than a controlled
clinical trial, a TIND may enroll and collect primarily safety data from
thousands of patients.


     Post-Marketing Surveillance and Phase IV Studies (Periapproval). United
States Federal regulation requires the sponsor to collect and periodically
report to the FDA additional safety and effectiveness data on the drug for as
long as the sponsor markets the drug (post-marketing surveillance). If the drug
is marketed outside the United States, these reports must include data from all
countries in which the drug is sold. Additional studies (Phase IV) may be
undertaken after initial approval to find new uses for the drug or to test new
dosage formulations. All of these studies are types of "periapproval" studies.


Business Strategy

     Based on 1998 annual net revenues, Covance believes it is one of the
largest CROs serving the biotechnology and pharmaceutical industries. The
Company's strategy is to provide high quality, cost effective, integrated,
comprehensive and innovative services to assist its pharmaceutical and
biotechnology clients to develop, produce, obtain approval for and enhance the
commercial success of their new therapeutic products worldwide. As this
strategy unfolds, Covance intends to focus increased attention on customers who
are biased towards development approaches that are flexible, innovative and
more likely to yield optimal outcomes.


     Services. Covance believes that CROs capable of offering a full range of
biopharmaceutical drug development and manufacturing services are better able
to compete for three reasons: (1) a full range of services provides a client
with the choice of using just one provider to secure all of the client's
development needs; (2) an integrated provider of these services can provide
economies of scale and accelerate the development of the client's product
through more comprehensive planning of the


                                                                               3
<PAGE>

development process; and (3) early stage development provides the CRO with
access to the client sooner in the development cycle and may promote the
client's use of later stage development services.

     As part of its strategy, Covance strives to continually improve its
existing services. Covance has implemented a total quality management system
throughout its operations which assists the Company in its goal of producing
error-free services on time and within the client's budget. This management
system is overseen by a quality team comprised of Covance's most senior
executives, including its Chief Executive Officer. Furthermore, certain of
Covance's United States and European subsidiaries have received ISO 9000 and
9001 certifications based on quality standards established by the International
Standards Organization. The ISO 9000 standards define the international
requirements for creating a quality assurance system that will result in
providing consistent service.

     In addition to improving its existing services, Covance also focuses on
providing its clients new market oriented, value-added services, including
those that involve integrated services relying on multidisciplinary teams drawn
from various Covance operations. For instance, Covance is duplicating in the
United States a Strategic Product Development ("SPD") program developed in
Europe that has successfully reduced the estimated time from preclinical
testing to the first human studies.

     Covance's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions and alliances. With respect to
the former, in addition to the programs noted above, Covance has invested in
the creation of a multi-use biomanufacturing facility which became operational
in 1997. With respect to the latter, Covance added domestic pharmaceutical
packaging capabilities through the acquisition of National Packaging in 1995,
European pharmaceutical packaging capabilities through the acquisition of CRS
Pacamed in 1996, enhanced its health economics and outcomes services by
acquiring HTA in 1996, acquired centralized electrocardiogram analysis
capabilities through the acquisition of GDXI, Inc. in 1998, and enhanced its
custom animal research and antibody production capabilities through the
acquisition of Berkeley Antibody Company, Inc. in 1998. Covance expects to
continue developing services internally and making strategic acquisitions that
are complementary to its existing services and that will expand its capability
to serve its clients.

     Streamlining the Drug Development Process. In recognition of the Company's
clients' needs with respect to cost containment, reduced testing time frames
and global trials, Covance has invested in and created a Clinical Trials
Research and Development Group which has the goal of improving Covance's
clinical trials processes with a primary focus on improving speed, efficiency,
quality and customer service. This group, which is comprised of experts in
information technology, clinical and data management processes, and medicine,
will examine processes and technologies across the clinical development
continuum in an effort to develop evolutionary and revolutionary improvements
in the conduct of clinical development programs. In addition to focusing on key
development processes, the group intends to use technologies and applications
that have been developed or enhanced by Covance such as optical character
recognition/intelligent character recognition imaging technology, integrated
voice response systems (IVRS), web-enabled data information and reporting
tools, as well as new technologies in the areas of remote data capture (RDC)
and work flow automation.

     In early 1997, the Company created the Covance Investigator Alliance
("CIA"). The CIA's purpose is to identify and form alliances with leading
investigators and institutions throughout North America and Europe to
facilitate expeditious study approvals, patient and data access and to improve
the timeliness and quality of data. Over 50 member organizations encompassing
several hundred active investigators in North America are currently part of the
CIA. Management intends to continue to expand the number of CIA sites in North
America and Europe.

     With respect to technical resources, Covance has over 400 information
systems professionals working in 14 regional information system centers (nine
in the United States, four in Europe and one in Australia) and 22 satellite
centers (six in the United States, 11 in Europe, four in Asia/Pacific and one
in South America). Most of the Company's employees (both domestic and
international) as well as its file server and desktop computer systems, are
connected by a wide area network that provides global access to the expertise,
technologies and data resident in the regional information system centers.
These systems support the Company's ability to provide integrated services and
connect the Company to its clients. For instance, Covance's development of its
Trial Tracker(SM) Information Access System ("Trial Tracker(SM)") provides 
clients with 24-hour access to study data, such as study patient enrollment
progress, patient visit information, case report form status, serious adverse
event experiences and other pertinent clinical trial information. Covance's drug
supply management system based on IVRS technology allows clients to more
efficiently manage the distribution of their experimental compounds to
investigational sites. In continually examining ways to improve the drug
developmental process, Covance's information technology strategy is to
capitalize on its existing heterogeneous, flexible and proprietary computer
systems, by customizing them where appropriate for client specific requirements,
and to incorporate new systems and technologies to meet changing demands in a
timely and cost effective manner.

     Geographic Expansion. Covance believes that it will become increasingly
important to provide its full range of drug research and development services
in all major and many developing biotechnology and pharmaceutical markets,
especially given


4
<PAGE>

industry trends to conduct clinical trials in multiple countries
simultaneously. Through its offices, regional monitoring sites, laboratories
and manufacturing sites in over 39 locations in 17 different countries and
field work in over 30 other countries, Covance believes it is a leader among
CROs in its ability to deliver services globally. Currently, approximately 34%
of Covance's 7,200 employees are based outside of the United States.

     Covance will continue its strategy of establishing new or enhancing
existing operations in significant biotechnology and pharmaceutical markets.
Covance expects this will occur as a result of internal growth and through
strategic acquisitions. For example, in February 1997, Covance opened an office
in Montreal, Canada which serves the Company's Canadian clients and those North
American customers who are developing their products in Canada. In March 1997,
Covance opened its Buenos Aires, Argentina office which serves as Covance's
center for conducting clinical research in Latin America, a region that Covance
believes will be a significant contributor of clinical and central laboratory
data for global regulatory dossiers. In October 1997, Covance opened its
Warsaw, Poland office. Warsaw presents an opportunity for Covance to conduct
clinical trials in a region which provides previously untapped sources for new
patient populations and investigator networks.

     Covance also continues to collaborate in the Asia-Pacific region (from
Japan through Australia) with various science and technology boards and
ministries to assist in the improvement of the regulatory environment necessary
to attract more international trials. Covance is also continuing its
collaboration with the Singapore National Science and Technology Board
concerning the Singapore government's initiative to form the Asia Pacific
Economic Cooperation Coordinating Center for Good Clinical Practice. In July
1997, Covance signed a collaboration agreement with the Chinese Ministry of
Science and Technology--China Innovation Center for Life Sciences ("Chinese
Ministry of Science") to enhance multinational pharmaceutical development in
the Chinese market. Covance is currently teaching Good Clinical Practices
("GCP") to key physicians and investigators in select Chinese hospitals and
clinical pharmacology centers. The training is expected to be expanded in
future years to include Good Laboratory Practices ("GLP") and Good
Manufacturing Practices ("GMP"). Covance also tests traditional Chinese
botanical-based products for approval by the FDA on behalf of the Chinese
Ministry of Science and leading Chinese pharmaceutical companies. Covance and
the Chinese Ministry of Science will also be evaluating the possible
development of alternative alliances and joint venture strategies. In October
1998, Covance opened an office in Beijing, China, offering clinical services.


Services

     Covance provides a wide range of product development services on a
worldwide basis to the pharmaceutical, biotechnology and medical device
industries. In addition and to a lesser extent, Covance provides health
economics and outcomes services for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. The services Covance provides constitute two
segments: early development (preclinical and Phase I clinical) and late-stage
development (clinical and clinical support services).


Early Development

Preclinical and Phase I Clinical Services
-----------------------------------------

     Covance has four major laboratories, located in Madison, Wisconsin and
Vienna, Virginia in the United States and Harrogate, United Kingdom and
Munster, Germany. The Company also has an administrative and sales office in
Tokyo, Japan. The preclinical services offered are wide-ranging, including in
vivo toxicology studies (such as acute, subchronic and carcinogenicity
studies), genetic toxicology studies (such as in vitro cytotoxicity,
cytogenetics and gene mutation studies and transgenic mouse models) and
chemistry services (such as in vitro metabolism, pharmacokinetics and
bioequivalence studies).

     The preclinical area has also been a source of innovation by introducing
new technologies for client access to data, electronic animal identification,
multimedia study reports and data tables and in vivo and in vitro measures of
induced cell proliferation. Covance's preclinical group also works closely with
the Phase I and II operations of the early development and clinical services
groups to minimize product development time and to provide clients with early
data on the safety and efficacy of new molecules. This data allows clients to
make a decision about whether to continue, modify or cease their development
programs.

     As part of its preclinical services, Covance has duplicated in the United
States the SPD program developed in Europe. This program has successfully
reduced in Europe the time from preclinical testing to the first human studies.
SPD involves an integrated process and team drawn from Covance's preclinical
and Phase I and II areas. In an SPD program, the compound is researched from
initial preclinical evaluation through its first dosing in humans, including
the filing and attainment of an IND application. Specific elements of the
process include formulation and dose delivery testing, product metabolism,
chemistry, pharmacology, toxicology and safety testing. The preclinical testing
phase in the United States typically takes six months to three years and Phase
I studies typically take six months to one year. Because IND applications are
required in the United States to be filed before


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<PAGE>

human clinical trials start, it is uncertain whether SPD trial completion
speeds in the United States will be as swift as the Company's experiences with
clients in the United Kingdom (where IND applications are not required to
commence Phase I clinical trials), but Covance believes that an SPD program can
reduce the typical drug development time in the United States. Several SPD
trials in the United States are continuing, with the program scheduled to be
expanded in 1999.

     In early 1997, Covance launched the compound appraisal and selection
service, an integrated labs service which combines several preclinical
offerings. This program is particularly directed to small and start-up
companies, and offers consultancy, in vitro screens and in vivo animal tests to
determine the viability of compounds for future development.

     Covance also provides purpose-bred animals for biomedical research. These
research animals are required by biopharmaceutical companies, university
research centers and CROs, like Covance, as part of their preclinical in vivo
safety and efficacy testing. Through a variety of processes, technology and
specifically constructed facilities, Covance is able to provide both
purpose-bred and specific pathogen free animals that meet clients' rigorous
control requirements. Although Covance's preclinical research facilities
maintain procedures in accordance with applicable government regulations and
company policies for the quarantine and handling of imported animals, including
primates, there is a risk that these animals may be infected with diseases that
may be harmful and even lethal to themselves and humans.

     Covance is also a provider of custom polyclonal and monoclonal antibody
services and owns and operates a state-of-the-art antisera production facility
that complies with both GMP and GLP. In November 1998, Covance augmented this
capability with the acquisition of Berkely Antibody Company, Inc., which
provides contract services in custom antibody production as well as offers
custom animal research, applied immunology and preclinical evaluations.

     Covance also provides laboratory testing services to the chemical,
agrochemical and food industries. Covance offers a complete range of services
to agrochemical manufacturers to determine the potential risk to humans,
animals and the environment from plant protection products. Covance also offers
a broad range of services to the food industries, including nutritional
analysis and nutritional content fact labels, and in 1998 Covance began
offering residue and bioavailability testing services to the growing
nutriceutical industry.


Late-Stage Development


Clinical Development Services
-----------------------------

     Covance offers a comprehensive range of clinical trial services, including
Phase II through III clinical studies. Covance also has extensive experience in
a number of therapeutic areas, including diseases of the cardiovascular and
central nervous systems, endocrinology and respiratory systems, oncology,
infectious diseases (including AIDS) as well as significant experience in other
areas including bone metabolism immunology, gastroenterology, urology,
dermatology and hematology. Covance has extensive experience in managing small,
medium and large trials in the United States and in many parts of the world.
These trials may be conducted separately or simultaneously as part of a
multinational development plan.

     Covance can manage every aspect of clinical trials by providing its
clients the following services: clinical development plans and protocol design,
consulting services (clinical and data management, regulatory consulting and
filings, information systems and drug development strategy), site, investigator
and patient enrollment, and preparation and submission of IND applications,
European study submissions, NDAs, product license applications ("PLAs"),
European submission dossiers, computerized patient randomization and dose
assignment and tracking, Phase II - Phase III study design and implementation,
monitoring and safety evaluation management and reporting, data processing and
management, statistical analyses and report writing, medical writing, and GCP,
GLP and GMP audits. Clinical trials are managed by a dedicated project team,
which, in each case, is led by a project director who supervises all aspects of
the clinical trial.

     The following is a description of the core services Covance provides,
either on an individual or integrated basis depending on client needs, as part
of conducting clinical trials:

     Study Design. Covance serves its clients in the critical area of study
design by applying its experience in the preparation of study protocols and
case report forms ("CRFs"). The study protocol defines the medical issues to be
examined in evaluating the safety and efficacy of the drug under study, the
number of patients required to produce statistically valid results, the
clinical tests to be performed in the study, the time period over which the
study will be conducted, the frequency and dosage of drug administration and
the exact inclusion and exclusion criteria to be met for the patients enrolled
in the study. The success of the study depends not only on the ability of the
protocol to accurately reflect requirements of regulatory authorities, but also
on the ability of the protocol to fit coherently with the other aspects of the
development process including the ultimate marketing strategy for the drug.
Marketing strategy considerations include outcomes and pharmacoeconomic
concerns and reimbursement planning. During study protocol finalization, CRFs
are developed to record the desired information and ensure that valid data are
acquired


6
<PAGE>

in a form that is most efficient for the investigator. The various disciplines
involved in the drug development process, including epidemiology, data
management, statistics and regulatory affairs, must work closely with the
clinical trial management project team to assure that the right data are
acquired, in a form which is most efficient for subsequent data entry,
management analyses and reporting.

     Investigator Recruitment. During a clinical trial, patient drug
administration is supervised by physicians, also referred to as investigators,
at hospitals, clinics or other locations, also referred to as investigational
sites. The success of a clinical trial depends, in large part, on the
performance of these investigators. Covance solicits the participation of
investigators, who contract directly with either Covance or Covance's clients.
Covance maintains, and continually expands and refines, its investigator
databases. Information regarding Covance's experience with these investigators,
including factors relevant to rapid study initiation, are contained in the
databases.

     Study Monitoring. Covance provides study monitoring services, which
include investigational site initiation, patient enrollment assistance and data
collection, through periodic site visits. These visits also serve to assure
that data is gathered according to GCP, the requirements of the client, as
specified in the study protocol or otherwise, and applicable regulations.
Covance focuses, at an early stage, on identifying and quickly completing the
critical rate-limiting steps of screening and selecting investigators,
processing pre-study regulatory paperwork, obtaining institutional review board
approvals and scheduling investigational site initiation visits.


     Clinical Data Management and Biostatistical Analysis. Covance's data
management and biostatistical analysis services are managed by professionals
with pharmaceutical and biotechnology industry experience in the design and
construction of local and multinational clinical trial databases. They are
offered either as discrete products or as part of an integrated drug
development program. During the design of development plans and protocols,
Covance offers consulting services relating to, and the determination of,
sample size parameters for patient enrollment, development of data analysis
plans and randomization schemes. During the conduct of a clinical trial,
Covance assists in the rapid acquisition of clean and accurate data. Following
completion of the clinical trial, Covance assists in report preparation and
regulatory submissions. Covance's biostatisticians may participate with clients
in meetings with the FDA to present and discuss biostatistical analyses
prepared by Covance. Covance has expertise in electronically capturing and
integrating geographically diverse data and in connection therewith employs a
variety of software, which may be specified by clients or combined with
customized programs developed by Covance.


     Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients, which include integrated
clinical/statistical reports, manuscripts, risk/benefit assessment reports,
package inserts, quality assurance and environmental risk assessments. These
services, which are fully integrated with Covance's other clinical services,
are designed to complement parallel development processes and therefore
accelerate development speed, consistent with good service and regulatory
compliance, reducing overall drug development time.


Clinical Support Services
-------------------------

     Central Laboratory Services. Covance believes that the ability to provide
high quality and sophisticated central laboratory services is an integral
aspect of what constitutes a full service CRO. Covance has two laboratories
(one located in the United States and the other in Switzerland) that provide
central laboratory services dedicated exclusively to biopharmaceutical studies.
These facilities provide clients with combinable data in studies that can be
conducted separately, or multinationally and simultaneously. Providing
combinable data eliminates the need for statistical correlation among different
laboratories by the use of consistent laboratory methods, the same reagent
manufacturers and the identical clinical trial reference ranges and equipment
calibration. Covance also employs a proprietary clinical trials management
system, which Covance believes is unique, that enables it to enter a sponsor's
protocol requirements directly into its own database. This system, based on
protocol requirements, constructs the drug kits that will go to the
investigational sites and the requisition forms therefor, allows for proper
laboratory specimen collection from the investigational sites, sequencing of
study participants visits and investigator ordering of additional tests and
ensures that all demographic data is complete and accurate and will produce for
the client reports that are customized to their specifications. The
laboratories provide a comprehensive audit trail by ensuring that all
laboratory data are traceable to source documents, are capable of delivering
customized data electronically within 24 hours of test completion and provide
safety test results within 48 hours of test completion from most locations.


     As the need for central laboratory services expands geographically, the
Company has expanded the reach of its central laboratories services through
contractual arrangements, one with a leading South African laboratory and the
other with a leading Australian laboratory, each of which allows Covance to
combine the testing capabilities of such laboratory with its own proprietary
systems. In June 1998, Covance completed a 112,000 square-foot expansion of its
152,000 square-foot United States laboratory to further accommodate expanding
operations and expected future requirements.


                                                                               7
<PAGE>

     Centralized Electrocardiogram Services. In November 1998, Covance expanded
its centralized clinical trial data collection capabilities with the purchase
of GDXI, Inc. which undertakes the capture and interpretation of
electrocardiograms ("ECG"). ECG analysis, one of the most frequently used tools
in clinical trials, is included in more than one-half of clinical trials as
part of the study protocol. GDXI, Inc. distributes a proprietary hand-held ECG
device to clinical trial sites. The device can be used anywhere in the world
and collects the data, performs a real-time quality check, and transmits the
information by telephone to a full-time central operations center.

     Clinical Development Technologies. To expedite the drug development
process and to help reduce costs, Covance created a proprietary interactive
trial management system utilizing an Interactive Voice Response System
("IVRS"). IVRS uses data entry via touch-tone telephone technology to assist
pharmaceutical and biotechnology clients in managing clinical trials on a real
time basis and in reducing product waste with just in time inventory
processing. IVRS is a multilingual system which is available world-wide through
toll-free numbers seven days per week, 24 hours per day. The most frequently
used functions include patient screening, enrollment, randomization, drug
assignment(s), drug inventory management, titration(s), unblinding,
discontinuation(s) and patient diaries. Through this information technology,
clients can realize substantial cost savings by reducing and better managing
clinical supply requirements and controlling wastage. In addition, real time
data access offers clients precise and accurate information for quick analysis
thus expediting the clinical trial process. Covance offers IVRS both in
conjunction with clinical trials conducted by Covance and as a stand alone
service.

     Pharmaceutical Packaging Services. Covance offers full service contract
clinical packaging for the pharmaceutical industry in the United States and
Europe including package development and design, coldformed and thermoformed
blister units, blister packaging, multi-dose bottle filling, clinical labeling,
wallet packaging, storage and site distribution of clinical supplies and return
services for unused supplies. Management believes that by integrating packaging
services with its other clinical and clinical support services it can
accelerate the drug development process for its clients through operational
efficiencies that arise from the upfront coordination of clinical trial design.
 

     In 1997, Covance completed its substantial renovation and upgrade to the
91,000 square-foot packaging facility in Horsham, United Kingdom which Covance
had purchased in 1996. The facility, which became fully operational with the
completion of this renovation, is one of the largest clinical packaging
facilities in Europe. In April 1998, Covance completed construction of a new,
purpose designed, 45,000 square-foot facility in Allschwil, Switzerland. This
new facility replaced Covance's 20,000 square-foot facility in Basel,
Switzerland and further increased its European operations and capabilities.
Also in 1998, Covance introduced multi-product blister packaging technology
which is intended to increase efficiency and reduce time lines for clinical
supplies.

     Biomanufacturing Services. Covance holds a majority interest in Covance
Biotechnology, a company formed in 1995 to manufacture recombinant proteins for
biotechnology and pharmaceutical clients for preclinical and clinical trials as
well as for commercial sales. Covance Biotechnology's services include process
development services, GMP manufacturing by microbial and mammalian cell
expression, laboratory testing, quality assurance and quality control and
regulatory affairs assistance. Covance Biotechnology is able to produce
multiple compounds for multiple clients simultaneously and on a scale, Covance
believes, greater than most other contract biomanufacturers. Covance
Biotechnology provides an alternative for clients who might otherwise have to
design, finance and construct their own facility to manufacture a
biopharmaceutical compound for clinical trials or commercial sale. By retaining
Covance Biotechnology, a client can avoid the expense, time delay and risk of
making additional significant investments for a product whose safety, efficacy
and commercial success are uncertain. This allows clients to preserve their
capital and lower their financial risk. In 1998, Covance Biotechnology
commenced an expansion of its production capacity intended to significantly
expand its production from microbial cell sources. The expansion is scheduled
for completion by July 1999.


     Covance owns 78% of the voting capital stock of Covance Biotechnology in
the form of convertible preferred stock. The remaining 22% of Covance
Biotechnology's capital stock is owned by certain minority stockholders (the
"Minority Stockholders") in the form of common stock. Covance's ownership in
Covance Biotechnology could be reduced to approximately 68% in the event that
all stock options granted to key Covance Biotechnology executives were
exercised in full.


     The Company, Covance Biotechnology and the Minority Stockholders are also
party to a capital contribution and stockholder agreement (the "Stockholders'
Agreement"), which, among other things, limits certain Minority Stockholders'
common stock transfers, grants Covance a right of first refusal on shares of
Minority Stockholders' common stock, and grants Covance the right to purchase
the common stock held by the Minority Stockholders in increments of one-third
each within 60 days of December 31, 1998, 1999 and 2000. If Covance chooses not
to exercise its purchase right, the Stockholders' Agreement gives the Minority
Stockholders the right to require Covance Biotechnology to use its best efforts
to arrange for the sale of such shares on certain specified terms, and certain
other conditions. Supplementing the Stockholders' Agreement, in October 1997,
the Company and


8
<PAGE>

the Minority Stockholders entered into an agreement by which, subject to the
satisfaction of certain conditions, the Company and the Minority Stockholders
are obligated to make, upon request by Covance Biotechnology, in proportion to
their ownership interests, additional capital contributions to Covance
Biotechnology not to exceed an aggregate amount of $30.0 million. Through
December 31, 1998, aggregate capital contributions of $18.5 million have been
made to Covance Biotechnology pursuant to this agreement. Covance's pro-rata
share of the capital contributions has totaled $14.4 million and Covance has
loaned to the Minority Stockholders $4.1 million in the aggregate to fund their
required capital contributions.

     Periapproval Services. Covance offers a range of periapproval services,
including TINDs, Phase IIIb clinical studies (involving studies conducted after
NDA submission, but before regulatory approval is issued), Phase IV clinical
studies, and other types of periapproval studies such as post-marketing
surveillance studies and prescription to over-the-counter switch studies. A
TIND application by a pharmaceutical or biotechnology sponsor and the
associated procedure allows broader populations of patients to receive
treatment with an investigational new drug for a serious or immediate
life-threatening disease, such as AIDS or cancer, for which no comparable or
satisfactory therapy is available. This treatment is provided during the
clinical trial phase of development but does not typically use controlled
clinical trials. Covance is experienced with TINDs and has developed
specialized systems for prompt initiation and effective operation of TIND
programs, such as computerized patient screening, optical scanning of CRFs and
drug management systems. Other special TIND programs or systems involve
providing project specific information to physicians, patients and patient
advocacy groups, and data processing, management, analyses and reporting
systems. Covance's expanded access program, which is conducted pursuant to a
TIND application, is a mechanism that allows innovative new therapies for
life-threatening diseases to be given to expanded populations prior to FDA
approval. Post-marketing surveillance studies are epidemiologically based
evaluations of the use of products in actual medical practice using a broad
range of patients. These studies use practicing physicians to evaluate
primarily the safety profile of the product under actual medical practice
conditions. Post-marketing surveillance studies are large, typically involving
over 1,000 physicians and thousands of patients, and usually focus on
evaluating just a limited number of key clinical outcomes, such as a particular
side effect. In Rx to O-T-C Switch studies, Covance gathers, on behalf of a
sponsor, the necessary safety data to obtain regulatory permission for the sale
of its drug without the need of a prescription. These studies are also large,
well-controlled programs. Covance also offers adverse event processing
services, both in the context of periapproval studies and as a stand alone
service, which involves the fielding and processing of telephone calls and
inquiries relating to adverse experiences with a drug.

     Health Economics and Outcomes Services. Covance offers a wide range of
health economics and outcomes services, including outcomes and pharmacoeconomic
studies, reimbursement planning services, reimbursement advocacy programs and
disease management services, as discussed below, for pharmaceutical,
biotechnology and medical device manufacturers as well as, to a lesser extent,
managed care organizations, hospitals and other health care providers.

     Covance offers its clients a full range of strategic and analytical
services, including strategic planning, quality-of-life assessment and economic
studies (including feasibility studies, protocol and instrument design and data
analysis). Outcomes studies may be prospective, often conducted in conjunction
with clinical trials, or retrospective. Many cost-effectiveness studies employ
economic modeling techniques to evaluate the full financial impact of new
medical technologies. When planning studies, Covance examines the audience for
the study's findings to determine which of the client's concerns (such as
regulatory approval, clinical acceptance, insurer coverage or insurer payment)
might be more fully informed by the availability of outcomes data, and then
determines how such data can be efficiently collected and communicated. Covance
typically involves academic and clinical experts to ensure that appropriate
techniques are used and to enhance study credibility and acceptance. Covance
also designs most studies with a goal of publishing its findings in respected,
peer-reviewed journals.

     Covance believes that given the changing competitive pressures affecting
the pharmaceutical industry and the rising need to more rigorously demonstrate
the value of particular drugs, both in their own right and as compared to other
drugs and treatment regimes, the ability to perform outcomes and
pharmacoeconomic studies will become increasingly important.


     Covance offers its customers strategic reimbursement and market planning
services. These services enable clients to enhance the commercial success of
their medical products. Covance analyzes, on behalf of the customer, who will
pay for a medical product (e.g., third-party payers such as private insurance
companies or federal programs like Medicare) and what economic barriers or
opportunities exist for the product (e.g., claims coding, coverage policy and
payment amounts). In addition, Covance often offers its reimbursement planning
activities in conjunction with its other services that evaluate existing and
potential market size, pricing, distribution and economic impact.


     Covance also provides full service reimbursement case management programs
on behalf of manufacturers. These programs generally consist of toll-free
telephone hotlines offering one or more of the following services: (1)
contacting insurers to investigate specific coverage and benefit matters,
resolving denied claims and educating insurers; (2) assisting manufacturers in
designing and effectively running their indigent patient programs, pursuant to
which costly new products are made available


                                                                               9
<PAGE>

to patients who cannot afford them because of inadequate insurance coverage or
other cost reasons; (3) designing and administering transition programs for
manufacturers, which includes obtaining third-party payment for a product for
patients who had previously received it free as part of a clinical trial; and
(4) conducting reimbursement training seminars for clients and their customers.
In 1998, Covance added an additional service offering in this area, which
utilizes field based representatives, known as the Payer Alliance Group[TM], to
intervene with major third party payers to secure favorable coverage and
reimbursement policies.


     All of these services are supported by a dedicated information services
group that provides a range of data products, services and information systems,
including customized hospital cost reports and patient average length of stay
or mortality rates at the federal, state, local or individual hospital level.
The extensive economic and epidemiologic databases Covance maintains are used
to perform market research, determine the economics of a disease or inform
government authorities about the need for potential policy changes.


     Working for a variety of customers, including pharmaceutical and device
manufacturers, managed care organizations, hospitals, provider networks and
computerized medical record companies, Covance designs and implements systems
that track patterns of care, patient outcomes and costs, and develops programs
and tools designed to improve quality and decrease costs of care. These
programs and tools include medical practice guidelines and computerized
decision support tools.


Customers and Marketing

     Covance provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. In 1998, Covance
served approximately 290 biopharmaceutical companies, including nearly all of
the world's 50 largest pharmaceutical companies and most of the largest
biotechnology companies. Approximately 45 of the biopharmaceutical companies
Covance serves are Japanese. The Japanese biopharmaceutical companies are
served by Covance's United States and European operations.


     Early development net revenues from external customers comprised
approximately 33%, 37% and 41% respectively, of total net revenues for the
years ended December 31, 1998, 1997 and 1996, while late-stage development
comprised approximately 67%, 63% and 59%, respectively. Early development
operating income comprised approximately 35%, 42% and 40%, respectively, of
total operating income for the years ended December 31, 1998, 1997 and 1996,
while late-stage development comprised approximately 65%, 58% and 60%,
respectively. Early development segment assets comprised approximately 37%, 41%
and 47%, respectively, of total segment assets for the years ended December 31,
1998, 1997 and 1996, while late-stage development comprised approximately 63%,
59% and 53%, respectively. Net revenues from external customers attributable to
United States operations totaled approximately 68%, 68% and 71% for the years
ended December 31, 1998, 1997 and 1996, respectively. Net revenues from
external customers attributable to operations in the United Kingdom totaled
approximately 16%, 17% and 17%, respectively, and net revenues from external
customers attributable to other countries totaled approximately 16%, 15% and
12%, respectively. Long-lived assets attributable to United States operations
totaled approximately 61%, 52% and 54% for the years ended December 31, 1998,
1997 and 1996, respectively. Long-lived assets attributable to operations in
the United Kingdom totaled approximately 32%, 36% and 35%, respectively, and
long-lived assets attributable to other countries totaled approximately 7%, 12%
and 11%, respectively. See Note 10 to Notes to Consolidated Financial
Statements.


     Covance's sales activities (including client contact and support) are
conducted by more than 120 sales and business development personnel based in
Covance's operations in the United States, Europe, Australia, Japan, Argentina
and Singapore. Most of Covance's business development personnel have technical
or scientific backgrounds.


     Covance's sales force consists primarily of account executives, account
managers and client service managers. Account executives and account managers
are each responsible for optimizing business opportunities for specific service
offerings. Client service managers are focused on providing timely responses to
client requests for information and fostering client relationships. In late
1998, Covance reorganized its sales force by shifting the focus of its Key
Account Directors and Strategic Account Managers, who formerly were part of a
central sales effort, to specific service offerings. This strategic shift is
intended to permit the Company to adapt its services/products to regional
market differences and specific client needs. Also in 1998, Covance created a
Client Relations Group which is headed by senior executives of Covance and is
intended to enable Covance to build better relationships with some of the
largest users of development services and to create long-term strategic
relationships with these customers.


     In September 1998, Covance entered into a strategic alliance with
Proliance Pharmaceuticals Inc. ("Proliance"), a company specializing in
collaborative drug development. Under the terms of the agreement, Covance is a
preferred provider of services to Proliance. In addition, Covance is a minority
stockholder of Proliance.


10
<PAGE>

     In 1998, Covance commenced a program, known as the Covance Institute,
which is intended to provide a platform for the Company to showcase its
company-wide scientific talent and expertise by collecting and organizing
Covance's institutional knowledge regarding the effective design and execution
of clinical development programs, provide strategic input to clients and raise
Covance's profile in the pharmaceutical, academic and scientific communities.
The Covance Institute focuses upon the internal development of talent and
capabilities, educational initiatives, seminars and conferences and training
programs.


Contractual Arrangements

     Most of Covance's contracts are either fixed price, fee-for-service or
fee-for-service with a cap. To a lesser extent, some of the contracts are
fee-for-service without a cap. In cases where the contracts are fixed price,
Covance bears the cost of overruns, with certain exceptions, but benefits if
the costs are lower than anticipated. In cases where the contracts are
fee-for-service with a cap, the contracts contain an overall budget for the
trial based on time and cost estimates. If costs are lower than anticipated,
the customer keeps the savings, but if costs are higher than estimated, Covance
is responsible for the overrun unless the increased cost is a result of a
change requested by the customer, such as an increase in the number of patients
to be enrolled or the type or amount of data to be collected. Contracts may
range from a few months to several years depending on the nature of the work
performed. In some cases for multi-year contracts, a portion of the contract
fee is paid at the time the study or trial is started with the balance of the
contract fee payable in installments, sometimes performance based, over the
study or trial duration. For example, in clinical and periapproval trials,
installment payments may be related to investigator recruitment, patient
enrollment or delivery of a database.

     Most of Covance's contracts for the provision of its services are
terminable by the customer either immediately or upon notice. Contracts may be
terminated for a variety of reasons, including the failure of a product to
satisfy safety requirements, unexpected or undesired results of the product,
the customer's decision to forego or terminate a particular study, insufficient
enrollment or investigator recruitment, or the Company's failure to properly
discharge its obligations thereunder.


Backlog

     Certain of Covance's studies and projects are performed over an extended
period of time, which may be as long as several years. With respect to such
studies or projects, Covance maintains an order backlog to track anticipated
net revenues for such work that has yet to be earned. However, Covance does not
maintain an order backlog for certain services it provides because such
services are performed within a short period of time or where it is not
otherwise practical or feasible to maintain an order backlog.

     Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however, Covance will work on a project prior to executing a
letter of intent and the backlog may include the net revenue expected from such
project.

     No assurance can be given that the Company will be able to realize all or
any net revenues included in backlog. Although backlog can be meaningful to
management with respect to a particular study where study-specific information
is known (for example, study duration, performance clauses and other
study-specific contract terms), Covance believes that its aggregate backlog as
of any date is not necessarily a meaningful indicator of future results for a
variety of reasons, including the following. First, studies vary in duration.
For instance, some studies that are included in 1998 backlog may be completed
in 1999, while others may be completed in later years. Second, the scope of
studies may change, which may either increase or decrease their value. Third,
studies included in backlog may be subject to bonus or penalty payments.
Fourth, trials under verbal approvals, letters of intent or contracts included
in backlog are subject to termination or delay at any time by the client or
regulatory authorities. Terminations or delays can result from a number of
reasons. Delayed contracts remain in Covance's backlog pending determination of
whether to continue, modify or cancel the study.

     Based upon the above description, Covance's aggregate backlog at December
31, 1998 and 1997 was approximately $780 million and $625 million,
respectively.


Competition

     The CRO industry is highly fragmented, with participants ranging from
hundreds of small, limited-service providers to a few full service CROs with
global capabilities. Covance primarily competes against in-house departments of
pharmaceutical companies, full-service CROs and, to a lesser extent,
universities and teaching hospitals. Covance believes, based on 1998 net
revenues, that the six largest CROs besides itself include Quintiles
Transnational Corp., Parexel International Corporation, Pharmaceutical Product
Development, Inc., Phoenix International Life Sciences Inc., Kendle
International, Inc. and ClinTrials Research Inc.


                                                                              11
<PAGE>

     There is competition among the larger CROs for both customers and
acquisition candidates. Companies may also choose to limit the CROs with whom
they are willing to work. In addition, there are few barriers to entry for
small, limited-service providers considering entry into the CRO industry. CROs
compete on the basis of several factors, including reputation for on-time
quality performance, expertise and experience in specific therapeutic areas,
scope of service offerings, how well such services are integrated, strengths in
various geographic markets, price, technological expertise and efficient drug
development processes, the ability to acquire, process, analyze and report data
in a time-saving and accurate manner, the ability to manage large-scale
clinical trials both domestically and internationally, expertise and experience
in health economics and outcomes services and size. The Company believes that
it competes favorably in all of these areas.


Relationship With Corning and Quest

     Effective as of the Distribution Date, Corning, Quest and Covance entered
into certain agreements to provide for an orderly transition to the status of
three separate independent companies, to govern their relationship subsequent
to the Distributions and to provide for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Distributions.

     Transaction Agreement. The Transaction Agreement between Corning, Quest
and Covance provided for, among other things, certain conditions precedent to
the Distributions, certain corporate transactions required to effect the
Distributions and other arrangements between Corning, Quest and Covance
subsequent to the Distributions. The Transaction Agreement provided for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate generally, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
business of Covance, Quest and Corning.

     In addition to the specific indemnity described below, Corning, Quest and
Covance are obligated under the Transaction Agreement to indemnify and hold
harmless each other in respect of Indemnifiable Losses (as defined therein)
arising out of or otherwise relating to the management or conduct of their
respective businesses or the breach of any provision of the Transaction
Agreement. The Transaction Agreement also provided that, except as otherwise
set forth therein or in any other agreement, all costs or expenses incurred on
or prior to the Distribution Date in connection with the Distributions are to
be allocated among the parties. Except as set forth in the Transaction
Agreement or any related agreement, each party shall bear its own costs and
expenses incurred after the Distribution Date.

     Spin-Off Tax Indemnification Agreements. Corning and Covance entered into
a tax indemnification agreement (the "Corning/Covance Spin-Off Tax
Indemnification Agreement") pursuant to which, among other things, Covance
agreed with Corning that during the period from December 31, 1996 to December
31, 1998 (the "Restricted Period") (i) it would continue active conduct in its
CRO business, (ii) it would continue to own and manage at least 50% of the
assets which it owned immediately after the Distribution Date, and (iii) it
would refrain from certain stock issuances, mergers or liquidations, or any
revisions to its Rights Plan (as defined therein). Covance also agreed to
indemnify Corning for Taxes (as defined therein) arising from certain
violations of the Corning/Covance Spin-Off Tax Indemnification Agreement and
for Taxes arising as a result of the purchase of 20% or more of Covance Stock
during the Restricted Period or the commencement of a tender or purchase offer
by a third party for 20% or more of Covance stock. If the Company's obligations
under the Corning/Covance Spin-Off Tax Indemnification Agreement were breached
and, as a result thereof, one or both of the Distributions do not qualify for
the treatment stated in the Private Letter Ruling issued by the Internal
Revenue Service (the "IRS Ruling"), the Company would be required to indemnify
Corning for Taxes imposed, and such indemnification obligations could exceed
the Company's net asset value at such time.

     Quest and Covance also entered into a tax indemnification agreement which
was essentially the same as the Corning/Covance Spin-Off Tax Indemnification
Agreement, except that Covance made representations and covenants to and
indemnified Quest, as opposed to Corning. Quest and Covance also entered into a
second tax indemnification agreement which is essentially the same as the
spin-off tax indemnification agreement between Corning and Quest, except that
Quest made representations and covenants to and indemnified Covance as opposed
to Corning.

     The various tax indemnification agreements described above also require
Covance to take such actions as Corning and Quest may reasonably request to
preserve the favorable tax treatment provided for in the rulings obtained from
the IRS in respect of the Distributions.

     Tax Sharing Agreement. Corning, Quest and Covance entered into a tax
sharing agreement (the "Tax Sharing Agreement") which allocated responsibility
for federal income and various other taxes ("Taxes") among the three companies.
The Tax Sharing Agreement provides that, except for Taxes arising as a result
of the failure of either or both of the Distributions to qualify for the
treatment stated in the IRS Ruling (which Taxes are allocated either pursuant
to the tax indemnification agreements described above or as described below),
Corning is liable for and will pay the federal income taxes of the consolidated
group that includes


12
<PAGE>

Quest and Covance and their subsidiaries, provided, however, that Quest and
Covance were required to reimburse Corning for taxes for periods beginning
after December 31, 1995 in which they were members of the Corning consolidated
group and for which tax returns have not been filed as of the Distribution
Date. This reimbursement obligation is based on the hypothetical separate
federal tax liability of Quest and Covance, calculated on a separate
consolidated basis, subject to certain adjustments. Under the Tax Sharing
Agreement, in the case of adjustments by a taxing authority of a consolidated
federal income tax or certain other tax returns prepared by Corning which
includes Quest or Covance, then, subject to certain exceptions, Corning is
liable for and will pay any tax assessments, and is entitled to any tax
refunds, resulting from such audit.

     The Tax Sharing Agreement further provided that, if either of the
Distributions fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the tax
indemnification agreements described above), Taxes imposed upon or incurred by
Corning, Quest or Covance as a result of such failure are to be allocated among
Corning, Quest and Covance in such a manner as will take into account the
extent to which the actions or inactions of each may have contributed to such
failure, and Corning, Quest and Covance each will indemnify and hold harmless
the other from and against the Taxes so allocated. If it is determined that
none of the companies contributed to the failure of such Distribution to
qualify for the tax treatment stated in the IRS Ruling, the liability for taxes
will be borne by each company in proportion to its relative average market
capitalization as determined by the average closing price for the common stock
of each company during the 20 trading-day period immediately following the
Distribution Date. In the event that either of the Distributions fails to
qualify for the tax treatment stated in the IRS Ruling and the liability for
taxes as a result of such failure is allocated among Corning, Quest and the
Company, the liability so allocated to the Company could exceed the net asset
value of Covance.


Government Regulation

     The laboratory, manufacturing and packaging services performed by Covance
are subject to various regulatory requirements designed to ensure the quality
and integrity of the testing, manufacturing and packaging processes. The
industry standards for conducting preclinical laboratory testing are embodied
in the GLP and GMP regulations and for central laboratory operations in the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). Covance's central
laboratory in Geneva has also been certified by the College of American
Pathologists ("CAP"). GMP sets forth the requirements for manufacturing
facilities. The standards of GLP and GMP are required by the FDA, by the
Department of Health in the United Kingdom and by similar regulatory
authorities in other parts of the world. GLP and GMP stipulate requirements for
facilities, equipment and professional staff. The regulations require
standardized procedures for studies, for recording and reporting data and for
retaining appropriate records. To help satisfy its compliance obligations,
Covance has established quality assurance controls at its laboratory and
manufacturing facilities which monitor ongoing compliance with GLP and GMP
regulations and CLIA, as applicable, by auditing test data and conducting
inspections of testing and manufacturing procedures.

     The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. The FDA and many other
regulatory authorities require that test results submitted to such authorities
be based on studies conducted in accordance with GCP. These regulations
require, but are not limited to, the following: (1) complying with specific
requirements governing the selection of qualified investigators; (2) obtaining
specific written commitments from the investigators; (3) verifying that patient
informed consent is obtained; (4) ensuring adverse drug reactions are medically
evaluated and reported; (5) monitoring the validity and accuracy of data; (6)
verifying drug or device accountability; (7) instructing investigators and
studies staff to maintain records and reports; and (8) permitting appropriate
governmental authorities access to data for their review. Covance must also
maintain reports for each study for specified periods for auditing by the study
sponsor and by the FDA. As with GLP and GMP, noncompliance with GCP can result
in the disqualification of data collection during the clinical trial.

     Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
International Conference on Harmonization-Good Clinical Practice Guidelines
("ICH-GCP Guidelines"), and the requirements of the applicable country.
Although the U.S. is a signatory to the ICH-GCP Guidelines, the FDA has not
adopted all of the guidelines as statutory regulations, but has currently
adopted them only as guidelines. In addition, FDA regulations and guidelines
serve as a basis for Covance's North American and Asian/Pacific standard
operating procedures. From an international perspective, when applicable,
Covance has implemented common standard operating procedures across regions to
assure consistency whenever it is feasible and appropriate to do so.

     Covance's animal import and breeding facilities are also subject to a
variety of federal and state laws and regulations, including The Animal Welfare
Act and the rules and regulations promulgated thereunder by the United States
Department of Agriculture ("USDA"). These regulations establish the standards
for the humane treatment, care and handling of animals by dealers and research
facilities. Covance's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to comply with
applicable regulations for the humane treatment of the animals in its custody.


                                                                              13
<PAGE>

Besides being licensed by the USDA as both a dealer and research facility, this
business is also accredited by the American Association for the Accreditation
of Laboratory Animal Care and has registered assurance with the United States
National Institutes of Health Office of Protection for Research Risks.

     The use of controlled substances in testing for drugs with a potential for
abuse is regulated by the U.S. Drug Enforcement Administration (the "DEA"). All
Covance laboratories and packaging sites using controlled substances for
testing or packaging purposes are licensed by the DEA.

     Covance's United States laboratories are subject to licensing and
regulation under federal, state and local laws relating to hazard communication
and employee right-to-know regulations, the handling and disposal of medical
specimens and hazardous waste and radioactive materials, as well as to the
safety and health of laboratory employees. All Covance laboratories are subject
to applicable federal and state laws and regulations relating to the storage
and disposal of all laboratory specimens including the regulations of the
Environmental Protection Agency, the Nuclear Regulatory Commission, the
Department of Transportation, the National Fire Protection Agency and the
Resource Conservation and Recovery Act. Although Covance believes that it is
currently in compliance in all material respects with such federal, state and
local laws, failure to comply could subject Covance to denial of the right to
conduct business, fines, criminal penalties and other enforcement actions.

     In addition to its comprehensive regulation of safety in the workplace,
the Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. These regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations
and other measures designed to minimize exposure to chemicals, and transmission
of blood-borne and airborne pathogens. Furthermore, relevant Covance employees
receive initial and periodic training focusing on compliance with applicable
hazardous materials regulations and health and safety guidelines.

     The regulations of the U.S. Department of Transportation, the U.S. Public
Health Service and the U.S. Postal Service apply to the surface and air
transportation of laboratory specimens. Covance's laboratories also comply with
the International Air Transport Association regulations, which govern
international shipments of laboratory specimens. Furthermore, when the
materials are sent to a foreign country, the transportation of such materials
becomes subject to the laws, rules and regulations of such foreign country.


Intellectual Property

     Covance has developed certain computer software and technically derived
procedures that provide separate services and are intended to maximize the
quality and effectiveness of its services. Although Covance's intellectual
property rights are important to its results of operations, Covance believes
that such factors as the technical expertise, knowledge, ability and experience
of Covance's professionals are more important, and that, overall, these
technological capabilities provide significant benefits to its clients.


Employees

     At December 31, 1998, Covance had approximately 7,200 full-time employees,
approximately 34% of whom are employed outside of the United States.
Approximately 76 of Covance's employees hold M.D. degrees, 219 hold Ph.D.
degrees, 21 hold Pharm.D. degrees, 33 hold D.V.M. degrees and 927 hold masters
or other postgraduate degrees. Management believes that its relations with its
employees are good.


Item 2. Properties

     Covance both owns and leases its facilities. Covance's principal executive
offices are located in Princeton, New Jersey where it leases approximately
318,000 square feet of space in two buildings. The lease for one of the
buildings expires in 2004 and the other in 2013. The building subject to the
later expiration is intended primarily to accommodate the growth of the
corporate office and Princeton clinical operations. This building became
operational in January 1999 and is being leased for a 15-year period. In
mid-1997, Covance leased a 32,000 square-foot office facility in Walnut Creek,
California to accommodate the growth of its clinical development services on
the West Coast. The lease is for a 5-year term. In early 1997, the Company
leased an additional 18,000 square feet at its Radnor, Pennsylvania
periapproval facility, bringing the total square feet being rented there to
approximately 60,000. The Radnor lease expires in 2002 and has one three-year
renewal term. Covance leases approximately 67,000 square feet in Washington
D.C. for its health economics and outcomes research activities which lease
expires in 2000. Covance also leases an aggregate of 69,500 square feet in
several buildings in Maidenhead, United Kingdom for its clinical, periapproval
operations and health economics and outcomes services, and in late 1997 added
an additional 27,000 square feet to accommodate expanding operations in that
location. Covance owns its 397,000 square-foot preclinical laboratory located
in


14
<PAGE>

Madison, Wisconsin, its 279,000 square-foot preclinical laboratory in
Harrogate, United Kingdom and its 50,000 square-foot preclinical laboratory in
Munster, Germany. Covance leases most of its 201,000 square-foot preclinical
laboratory in Vienna, Virginia. The leases expire in 2009. It also owns several
of the buildings in Vienna, Virginia. Covance also leases its 152,000
square-foot pharmaceutical laboratory in Indianapolis, Indiana, which lease was
recently extended to 2013, with renewal options, in connection with the lease
of an additional 112,000 square-foot, "build-to-suit" adjoining facility, which
became operational in June 1998. Covance leases its 51,000 square-foot
pharmaceutical laboratory in Geneva, Switzerland, which lease expires in 2000.
Covance's domestic packaging operations are conducted from its principal
packaging facility in Allentown, Pennsylvania. The packaging leases are for
approximately 100,000 square feet of space and they all expire in 1999. In
1998, construction of a new 200,000 square foot packaging facility in Allentown
commenced and is expected to be completed in the second quarter of 1999. This
site is intended to allow Covance to consolidate packaging operations and
accommodate future growth needs. In addition, in October 1996, Covance
purchased a 91,000 square-foot former pharmaceutical manufacturing facility in
Horsham, United Kingdom. With its renovation completed in June 1997, the
Horsham facility is used to provide pharmaceutical packaging, clinical and
periapproval services. Also in 1997, Covance began construction on a new,
purpose-designed, 45,000 square-foot facility in Allschwil, Switzerland to
further enhance its packaging capabilities in Europe, and to replace its
existing 20,000 square-foot facility, located in Basel, Switzerland. The new
Allschwil facility became operational in April 1998. Covance also owns or
leases other facilities in the United States, Canada, Europe, Asia and Latin
America.

     Covance Biotechnology's 109,000 square-foot biomanufacturing facility,
located in Research Triangle Park, North Carolina, is financed through several
tax retention operating leases provided by a commercial lending institution
("Bank"). The lease expires in December 2006. The annual minimum lease payments
are approximately $5.7 million. At the expiration of the lease term, Covance
Biotechnology is liable for the unamortized balance of the cost of the
facility, currently estimated to be approximately $37.0 million. Covance
Biotechnology may also choose to purchase the facility at specific dates over
the 10 year period. Using current estimates, the purchase price would be
approximately $52.0 million at the end of 1997 (the first year of the lease),
decreasing on an amortizing basis to approximately $37.0 million at the end of
2006 (the tenth year of the lease).


Item 3. Legal Proceedings

     Covance is party to lawsuits and administrative proceedings incidental to
the normal course of its business. Covance does not believe that any
liabilities related to such lawsuits or proceedings will have a material effect
on its financial condition or results of operations.


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

     None.


                                    PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     The Company's Common Stock is traded on the New York Stock Exchange
(symbol: CVD). The following table sets forth the high and low sales prices on
the New York Stock Exchange since January 14, 1997, when the Company's Common
Stock commenced trading on a "regular way" basis.


Quarter                            High           Low
-------                            ----           ---
   First Quarter 1997 ..........   $ 22.875       $ 15.500
   Second Quarter 1997 .........   $ 20.625       $ 14.625
   Third Quarter 1997 ..........   $ 23.187       $ 18.125
   Fourth Quarter 1997 .........   $ 22.750       $ 17.063
   First Quarter 1998 ..........   $ 24.875       $ 17.688
   Second Quarter 1998 .........   $ 24.750       $ 20.125
   Third Quarter 1998 ..........   $ 28.875       $ 21.625
   Fourth Quarter 1998 .........   $ 29.563       $ 23.375

     As of February 10, 1999, there were 8,897 holders of record of the
Company's Common Stock.

     The Company has not paid any dividends during 1998 or 1997. The Company
does not currently intend to pay dividends in the foreseeable future, but
rather, intends to reinvest earnings in its business. The Company is also
restricted (subject to certain exceptions) from paying dividends on its Common
Stock by certain covenants contained in a credit agreement to which the Company
is a party.


                                                                              15
<PAGE>
Item 6. Selected Financial Data

     The following table presents selected historical consolidated financial
data of Covance as of and for each of the years ended December 31, 1998, 1997,
1996, 1995 and 1994. This data has been derived from the audited consolidated
financial statements of Covance.

     The selected historical consolidated financial data should be read in
conjunction with the audited Covance consolidated financial statements and
notes thereto ("Audited Covance Consolidated Financial Statements") filed
elsewhere herein. Historical consolidated financial data may not be indicative
of Covance's future performance. See the Audited Covance Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,            
                                                    ----------------------------------------------------------------------------
                                                         1998          1997             1996              1995           1994   
                                                    ------------- -------------  ----------------- ----------------- -----------
                                                                   (Dollars in thousands, except per share data) 
<S>                                                   <C>           <C>              <C>               <C>            <C>       
Income Statement Data:                                                               
Net revenues ......................................   $ 731,574     $ 590,651        $494,828          $409,174       $319,501  
Costs and expenses:                                                                                                             
 Cost of revenue ..................................     484,128       389,785         324,345           270,726        213,490  
 Selling, general and administrative ..............     117,844        92,329          80,014            64,201         48,892  
 Depreciation and amortization ....................      37,723        30,877          25,204            22,070         18,520  
 Spin-off related charge ..........................          --            --          27,404                --             --  
 Restructuring charge .............................          --            --              --             4,616             --  
                                                      ---------     ---------        --------          --------       --------  
  Total ...........................................     639,695       512,991         456,967           361,613        280,902  
                                                      ---------     ---------        --------          --------       --------  
Income from operations ............................      91,879        77,660          37,861(a)         47,561(b)      38,599  
                                                      ---------     ---------        --------          --------       --------  
Other expense, net:                                                                                                             
 Interest expense, net ............................       7,361         8,314           6,791             5,269          4,307  
 Other expense (income) ...........................         373           167           1,116              (784)          (712) 
                                                      ---------     ---------        --------          --------       --------  
  Other expense, net ..............................       7,734         8,481           7,907             4,485          3,595  
                                                      ---------     ---------        --------          --------       --------  
Income before taxes and equity investee results ...      84,145        69,179          29,954(a)         43,076(b)      35,004  
Taxes on income ...................................      35,099        29,367          17,377            18,445         14,924  
Equity investee loss (gain) .......................         438            58            (139)              405            435  
                                                      ---------     ---------        --------          --------       --------  
Net income ........................................   $  48,608     $  39,754        $ 12,716(a)       $ 24,226(b)    $ 19,645  
                                                      =========     =========        ========          ========       ========  
Basic earnings per share ..........................   $    0.84     $    0.69        $   0.22(a)        N/A              N/A    
Diluted earnings per share ........................   $    0.83     $    0.69             N/A(c)        N/A              N/A    
                                                                      
Balance Sheet Data:                                                                                                             
Working capital ...................................   $  81,488     $  59,488        $ 65,946          $ 18,472       $ 12,961  
Total assets ......................................   $ 593,415     $ 484,014        $451,047          $322,510       $271,992  
Long-term debt ....................................   $ 149,909     $ 132,423        $163,000          $ 89,836       $ 75,178  
Stockholders' equity ..............................   $ 225,015     $ 157,057        $110,704          $ 82,517       $ 63,908  

Other Financial Data:                                                                                                           
Gross margin ......................................       33.8%         34.0%           34.5%             33.8%          33.2% 
Operating margin ..................................       12.6%         13.1%           13.2%(d)          12.8%(e)       12.1% 
Net margin ........................................        6.6%          6.7%            6.6%(d)           6.6%(e)        6.1% 

Current ratio .....................................        1.42          1.35            1.43              1.15           1.12 
Debt to capital ...................................        0.40          0.46            0.60              0.52           0.54 
Book value per share ..............................        3.88          2.74            1.94               N/A            N/A 
Net days sales outstanding ........................          55            48              50                47             33  
</TABLE>
---------
  (a) Excluding the impact of the fourth quarter 1996 one-time spin-off related
      charge totaling $27,404 ($19,725 net of tax), income from operations,
      income before taxes and equity investee results and net income for the
      year ended December 31, 1996 were $65,265, $57,358 and $32,441,
      respectively, and basic earnings per share ("EPS") was $0.57.

  (b) Excluding the impact of the second quarter 1995 restructuring charge
      totaling $4,616 ($2,770 net of tax), income from operations, income
      before taxes and equity investee results and net income for the year
      ended December 31, 1995 were $52,177, $47,692 and $26,996, respectively.

  (c) Since Covance common stock began "regular way" trading on the NYSE on
      January 14, 1997, computation of diluted EPS for 1996 is not possible.

  (d) Operating margin and net margin exclude the impact of the fourth quarter
      1996 one-time spin-off related charge. Including the impact of this
      charge, operating income and net margin were 7.7% and 2.6%, respectively.

  (e) Operating margin and net margin exclude the impact of the second quarter
      1995 restructuring charge. Including this charge, operating income and
      net margin were 11.6% and 5.9%, respectively.
16
<PAGE>

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


Overview

     Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the pharmaceutical, biotechnology
and medical device industries. In addition, and to a lesser extent, Covance
provides services such as health economics and outcomes for managed care
organizations, hospitals and other health care providers and laboratory testing
to the chemical, agrochemical and food industries. The foregoing services
comprise two segments for financial reporting purposes: early development
services (preclinical and Phase I clinical); and late-stage development
services (clinical and clinical support services). Covance believes it is one
of the largest biopharmaceutical CROs, based on 1998 annual net revenues, and
one of a few that is capable of providing comprehensive global product
development services. Covance offers its clients high quality services designed
to reduce product development time, enabling them to introduce their products
into the marketplace faster and thus, maximize the period of market exclusivity
and monetary return on their research and development investments.
Additionally, Covance's comprehensive services and broad experience provides
clients with a variable cost alternative to fixed cost internal development
capabilities.

     Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is generally recognized under either the
percentage of completion method of accounting or as services are rendered or
products are delivered. The contracts may contain provisions for renegotiation
for cost overruns arising from changes in the scope of work. Renegotiated
amounts are included in net revenues when earned and realization is assured. In
some cases, for multi-year contracts a portion of the contract fee is paid at
the time the trial is initiated, with performance-based installments payable
over the contract duration as milestones are achieved. Covance routinely
subcontracts with independent physician investigators in connection with either
single or multi-site clinical trials. Investigator fees are not reflected in
net revenues or expenses since such fees are granted by customers on a
"pass-through basis" without risk or reward to Covance. While most contracts
are terminable either immediately or upon notice by the client, they typically
require payment of expenses to wind down a study, payment of fees earned to
date, and, in some cases, a termination fee or a payment of some portion of the
fees or profit that could have been earned under the contract if it had not
been terminated early.

     Covance's cost of revenue includes appropriate amounts necessary to
complete the revenue and earnings process, and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These
costs, as a percentage of net revenues, tend and are expected to fluctuate from
one period to another (generally within a range of up to 200 basis points in
either direction), principally as a result of changes in labor utilization and
the mix of service offerings involving hundreds of studies conducted during any
period of time.


Results of Operations

     Year ended December 31, 1998 Compared with Year Ended December 31, 1997.
Net revenues increased 23.9% to $731.6 million for 1998 from $590.7 million for
1997. Net revenues from Covance's late-stage development segment grew 31.9%,
benefiting from the continuing trend in outsourcing of clinical development
activities. Net revenues from Covance's early development segment grew 10.1%.


     Cost of revenue increased 24.2% to $484.1 million for 1998 from $389.8
million for 1997 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.2% for 1998 from 66.0% for
1997.


     Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising
and promotional expenses, administrative travel and allocable expenses
(facility charges and information technology costs), increased 27.6% to $117.8
million for 1998 from $92.3 million for 1997. As a percentage of net revenues,
selling, general and administrative expense increased to 16.1% for 1998 from
15.6% for 1997. The increase in selling, general and administrative expense of
27.6% is attributable to a number of factors, including higher sales and
marketing expenses and higher recruitment expenses during 1998 as compared to
1997.


     Depreciation and amortization increased 22.2% to $37.7 million or 5.2% of
net revenues for 1998 from $30.9 million or 5.2% of net revenues for 1997.
Depreciation and amortization from Covance's late-stage development and early
development segments totaled $22.4 million and $15.3 million, respectively.


     Income from operations increased $14.2 million or 18.3% to $91.9 million
for 1998 from $77.7 million for 1997. Income from operations as a percentage of
net revenues decreased from 13.1% for 1997 to 12.6% for 1998, primarily as a
result of the increase in cost of revenue and selling, general and
administrative expense, as discussed above. Income from operations from
Covance's late-stage development and early development segments for the year
ended December 31, 1998 totaled $57.6 million


                                                                              17
<PAGE>

and $34.2 million, respectively, as compared to $45.2 million and $32.4
million, respectively, for the year ended December 31, 1997.

     Other expense (net) decreased $0.8 million to $7.7 million for 1998 from
$8.5 million for 1997, due to a reduction in net interest expense of $1.0
million, partially offset by an increase in net foreign exchange transaction
losses of $0.2 million, in 1998 as compared to 1997.

     Covance's effective tax rate decreased to 41.7% for 1998 from 42.5% for
1997. Since Covance operates on a global basis, its effective tax rate is
subject to variation from year to year as the geographic distribution of its
pre-tax earnings changes.

     Net income increased $8.9 million or 22.3% to $48.6 million for 1998 from
$39.8 million for 1997.

     Year ended December 31, 1997 Compared with Year Ended December 31, 1996.
Net revenues increased 19.4% to $590.7 million for 1997 from $494.8 million for
1996. Excluding the impact of 1996 acquisitions and the impact on net revenues
of foreign exchange differences between both years, growth in net revenues was
18.1%. Net revenues from Covance's late-stage development segment, excluding
the impact of acquisitions and the impact on net revenues of foreign exchange
rate differences between both years, grew 30.3%, benefiting from the continuing
trend in outsourcing of clinical development activities. Net revenues from
Covance's early development segment grew 6.2%.

     Cost of revenue increased 20.2% to $389.8 million for 1997 from $324.3
million for 1996 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.0% for 1997 from 65.5% for
1996. This increase is primarily attributable to Covance's biomanufacturing
operations. During the first eleven months of 1996, all costs incurred in
Covance's biomanufacturing operations were of an administrative nature as the
biomanufacturing facility was being prepared for revenue producing operations
(which began in December 1996). Once the biomanufacturing operations began
generating revenue, many expenses shifted from administrative to cost of
revenue.

     Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising
and promotional expenses, administrative travel and allocable expenses
(facility charges and information technology costs), increased 15.4% to $92.3
million for 1997 from $80.0 million for 1996. As a percentage of net revenues,
selling, general and administrative expense decreased to 15.6% for 1997 from
16.2% for 1996. The decrease in selling, general and administrative expense as
a percentage of net revenues is primarily a result of two factors. The shift in
expenses in Covance's biomanufacturing operations, as discussed above, accounts
for most of the reduction in selling, general and administrative expense as a
percentage of net revenues for 1997 compared to 1996. Second, as a wholly-owned
business of Corning, certain administrative activities were historically
performed on Covance's behalf by Corning. Charges incurred for these services
totaled $3.4 million, or 0.7% of net revenues, in 1996. While these charges are
no longer incurred as a result of Covance's spin-off from Corning, they have
been substantially, but not entirely, replaced by internal costs as additional
resources continue to be added to perform the services previously provided by
Corning, as well as to perform functions new to Covance as a separate publicly
traded company.

     Depreciation and amortization increased 22.5% to $30.9 million or 5.2% of
net revenues for 1997 from $25.2 million or 5.1% of net revenues for 1996 as
the growth in these non-cash charges outpaced the increase in net revenues.
Depreciation and amortization from Covance's late-stage development and early
development segments totaled $16.2 million and $14.7 million, respectively.

     Inclusive of a special non-recurring charge in 1996, income from
operations increased $39.8 million to $77.7 million for 1997 from $37.9 million
for 1996. During the fourth quarter of 1996, Covance recorded a large one-time
charge totaling $27.4 million ($19.7 million after tax) associated with its
spin-off from Corning. This charge consisted of the cost to establish and fund
two employee stock ownership plans ($16.7 million) and the direct expenses
incurred to establish Covance as a separate publicly traded company ($10.7
million). Excluding the impact of the 1996 spin-off related charge, income from
operations increased $12.4 million or 19.0% to $77.7 million for 1997 as
compared to $65.3 million for 1996. Income from operations from Covance's
late-stage development and early development segments for the year ended
December 31, 1997 totaled $45.2 million and $32.4 million, respectively, as
compared to $39.2 million and $26.1 million, respectively, for the year ended
December 31, 1996, excluding the impact of the 1996 spin-off related charge.

     Other expense (net) increased $0.6 million to $8.5 million for 1997 from
$7.9 million for 1996, due to an increase in net interest expense of $1.5
million, partially offset by a decrease in net foreign exchange transaction
losses of $0.9 million, in 1997 as compared to 1996.

     Covance's effective tax rate, excluding the special non-recurring charge
in 1996, decreased to 42.5% for 1997 from 43.7% for 1996. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic distribution of its pre-tax earnings changes.


18
<PAGE>

     Net income increased to $39.8 million for 1997 from $12.7 million for
1996. Excluding the after tax impact of the 1996 spin-off related charge, net
income increased $7.3 million or 22.5%.


Quarterly Results

     Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant drug development trials,
termination of drug development trials, acquisitions and exchange rate
fluctuations. Delays and terminations of studies or trials are often the result
of actions taken by clients or regulatory authorities and are not typically
controllable by Covance. Since a large amount of Covance's operating costs are
relatively fixed while revenue is subject to fluctuation, minor variations in
the commencement, progress or completion of drug development trials may cause
significant variations in quarterly operating results.

     The following table presents unaudited quarterly operating results of
Covance for each of the eight most recent fiscal quarters during the period
ended December 31, 1998. In the opinion of Covance, this information has been
prepared on the same basis as the Audited Covance Consolidated Financial
Statements and reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results of operations for
those periods. This quarterly financial data should be read in conjunction with
the Audited Covance Consolidated Financial Statements included elsewhere
herein. Operating results for any quarter are not necessarily indicative of the
results that may be reported in any future period.


<TABLE>
<CAPTION>
                                                                         Quarter Ended                         
                               ----------------------------------------------------------------------------------------------------
                                 Dec. 31,    Sept. 30,    June 30,     Mar. 31,     Dec. 31,    Sept. 30,    June 30,     Mar. 31, 
                                   1998         1998        1998         1998         1997         1997        1997         1997   
                               ------------ ----------- ------------ ------------ ------------ ----------- ------------ -----------
                                                          (Dollars in thousands, except per share data)         
<S>                             <C>          <C>         <C>          <C>          <C>          <C>         <C>          <C>     
Net revenues .................  $ 198,789    $ 182,187   $ 182,089    $ 168,509    $  158,072   $151,464    $ 145,392    $ 135,723 
Operating expenses ...........    175,801      157,912     157,787      148,195       138,675    130,562      125,170      118,584 
                                  -------      -------     -------      -------       -------    -------      -------      ------- 
Income from operations .......     22,988       24,275      24,302       20,314        19,397     20,902       20,222       17,139 
Other expense, net ...........      2,241        1,803       1,882        1,808         2,217      2,127        1,648        2,489 
                                  -------      -------     -------      -------       -------    -------      -------      ------- 
Income before taxes and ......                                                                                                     
 equity investee results .....     20,747       22,472      22,420       18,506        17,180     18,775       18,574       14,650 
Taxes on income ..............      8,522        9,329       9,388        7,860         7,216      8,058        7,940        6,153 
Equity investee loss (gain) ..         --           80         164          194           215       (142)         115         (130)
                                  -------      -------     -------      -------       -------    -------      -------      ------- 
Net income ...................  $  12,225    $  13,063   $  12,868    $  10,452    $    9,749   $ 10,859    $  10,519    $   8,627 
                                =========    =========   =========    =========    ==========   ========    =========    ========= 
Basic earnings per share .....  $    0.21    $    0.22   $    0.22    $    0.18    $     0.17   $   0.19    $    0.18    $    0.15 
Diluted earnings per share ...  $    0.21    $    0.22   $    0.22    $    0.18    $     0.17   $   0.19    $    0.18    $    0.15 
</TABLE>


Liquidity and Capital Resources

     Covance has a centralized domestic cash management function whereby cash
received from operations is generally swept daily to a centrally managed
concentration account. Cash disbursements for operations are funded as needed
from the concentration account. From time to time excess cash balances are
maintained at Covance, generally for specific cash requirements.

     In November 1996, Covance borrowed $160 million under a newly established
five-year $250 million senior revolving credit facility ("the Credit Facility")
to repay Corning and affiliates for all intercompany borrowings and income tax
liabilities existing at that time. At December 31, 1998, there was $140.0
million of outstanding borrowings and $11.3 million in outstanding letters of
credit, resulting in a remaining availability of $98.7 million under the Credit
Facility. Covance has several different interest rate options available to it
under the Credit Facility. Interest on all outstanding borrowings under the
Credit Facility during 1998 was computed based upon the London Interbank
Offered Rate plus a margin and approximated 5.8% per annum. The Credit Facility
expires in November 2001 and contains various covenants which, among other
things, may restrict Covance from engaging in certain financing activities and
prohibits Covance from paying cash dividends on the Covance Common Stock during
a default or an event of default, as defined in the Credit Facility, or if
after giving effect to the payment of such dividends Covance would not be in
compliance with the financial covenants of the Credit Facility. At December 31,
1998, Covance was in compliance with the terms of the Credit Facility.

     As of December 31, 1998, Covance Biotechnology had $3.0 million in
short-term debt outstanding with the North Carolina Biotechnology Center. This
debt matures in December 1999 and is guaranteed by Covance. In addition,
Covance Biotechnology has a $10.0 million short-term revolving credit facility
with a bank, of which $10.0 million of borrowings were outstanding as of
December 31, 1998. This short-term revolving credit facility carries interest
at a rate substantially equivalent to the rate in effect on Covance's
borrowings under the Credit Facility and is guaranteed by Covance.


                                                                              19
<PAGE>

     In October 1997, a foreign subsidiary of Covance borrowed 13.5 million
Swiss Francs from a bank. This loan bears interest at a fixed rate of 2.9% per
annum and matures in October 2000. In connection with this loan, Covance
provided a letter of credit in favor of the lender which may be drawn upon in
event of default. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.


     Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Management believes that a combination of borrowings under the Credit Facility,
cash generated from operations and possible future capital market financings
will provide Covance with sufficient financial flexibility and ready access to
cash on both a short-term and a long-term basis to fund, as required, capital
expenditures, potential future acquisitions and other longer-term growth
opportunities.


     During the year ended December 31, 1998, Covance's operations provided net
cash of $64.1 million, a decrease of $12.5 million from the corresponding 1997
amount. Cash flows from net earnings adjusted for non-cash activity provided
$98.1 million during 1998, up $13.4 million or 15.9% from the corresponding
1997 amount of $84.7 million. The change in net operating assets used $34.0
million in cash during 1998, primarily due to an increase in accounts
receivable, while this net change used $8.1 million in cash during 1997.
Covance's ratio of current assets to current liabilities was 1.42 at December
31, 1998 and 1.35 at December 31, 1997.


     Investing activities for the years ended December 31, 1998 and 1997
included capital spending to expand existing operations and purchase equipment
to enhance scientific technology capabilities. During 1998 and 1997, Covance
spent approximately $74.9 million and $56.5 million, respectively, on capital
expenditures for maintenance and upgrade of existing equipment, outfitting of
new facilities and computer equipment and software for newly hired employees.
Investing activities for the year ended December 31, 1998 also included
acquisitions. In the fourth quarter of 1998, Covance acquired GDXI, Inc. and
Berkeley Antibody Company, Inc. for cash payments totaling approximately $26
million.


     As discussed in Note 9 to the Audited Covance Consolidated Financial
Statements, Covance has, and may from time to time in the future, enter into
build-to-suit operating lease arrangements. These transactions may allow
Covance to purchase the underlying facility and / or equipment or cancel the
lease arrangement on various dates over the lease term. In the event of
cancellation, Covance may be obligated under residual value guarantee
provisions of the leases. Covance has one lease arrangement whereby it has a
contingent residual value guarantee payment in the event that Covance
terminates the lease and the sale of the underlying facility and equipment
results in sales proceeds by the lessor in an amount less than the lessor's
unamortized investment in the lease arrangement. Under these circumstances,
Covance's maximum payment would approximate $35 million at the end of 1997 (the
first year of the lease) and decreases to approximately $25 million at the end
of 2006 (the tenth year of the lease), assuming Covance terminates the lease
and the sales proceeds received by the lessor were zero.


Foreign Currency

     Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical services. The first risk occurs as revenue
recognized for services rendered is denominated in a currency different from
the currency in which the subsidiary's expenses are incurred. As a result, the
subsidiary's net revenues and resultant earnings can be affected by
fluctuations in exchange rates. While some contracts provide that currency
fluctuations from the rates in effect at the time the contract is executed are
the responsibility of the customer and others provide that currency
fluctuations from the rates in effect at the time the contract is executed up
to a specified threshold (generally plus or minus a few percentage points) are
absorbed by Covance while fluctuations in excess of the threshold are the
customer's responsibility, most contracts do not specifically address
responsibility for currency fluctuations. Historically, fluctuations in
exchange rates from those in effect at the time contracts were executed have
not had a material effect upon Covance's consolidated financial results.


     The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer
payments against such invoices. Because the contract is denominated in a
currency other than the subsidiary's local currency, Covance recognizes a
receivable at the time of invoicing for the local currency equivalent of the
foreign currency invoice amount. Changes in exchange rates from the time the
invoice is prepared and payment from the customer is received will result in
Covance receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by Covance as a foreign
currency transaction gain or loss, as applicable, and is reported in other
expense (income) in Covance's Consolidated Statements of Income.


20
<PAGE>

     Finally, Covance's consolidated financial statements are denominated in
U.S. dollars. Accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of each
foreign subsidiary's financial results into U.S. dollars for purposes of
reporting Covance's consolidated financial results. The process by which each
foreign subsidiary's financial results are translated into U.S. dollars is as
follows: income statement accounts are translated at average exchange rates for
the period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical
exchange rates. Translation of the balance sheet in this manner affects the
stockholders' equity account, referred to as the cumulative translation
adjustment account. This account exists only in the foreign subsidiary's U.S.
dollar balance sheet and is necessary to keep the foreign balance sheet stated
in U.S. dollars in balance. To date such cumulative translation adjustments
have not been material to Covance's consolidated financial position.


Taxes

     Since Covance conducts operations on a global basis, Covance's effective
tax rate has and will continue to depend upon the geographic distribution of
its pretax earnings among locations with varying tax rates. Covance's profits
are further impacted by changes in the tax rates of the various jurisdictions.
See Note 5 to the Audited Covance Consolidated Financial Statements.


Inflation

     While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an
inflation or cost of living adjustment for the portion of the services to be
performed beyond one year from the contract date. As a result, Covance believes
that the effects of inflation generally do not have a material adverse effect
on its operations or financial condition.


Year 2000 Issues

     Information systems are an integral part of the services and products
Covance provides. Covance has formed a group, led by its Year 2000 Project
Director working in conjunction with a steering committee of executives from
Covance, to implement Covance's Year 2000 assessment and remediation plan (the
"Plan") from an internal, supplier and customer perspective. Presently, there
are approximately 51 full-time employee equivalents who are dedicated to the
Year 2000 project. This Plan is being executed under the guidance of Covance's
senior management, including the Chief Executive Officer and the Board of
Directors. Specifically, the Plan is managed at the operational level by the
General Manager and Group President of each applicable business location. In
addition, each business location undergoes periodic comprehensive management
reviews with other executives of Covance, including the Chief Executive
Officer, the Chief Financial Officer and the General Counsel concerning the
Year 2000 readiness of such location. The Board of Directors also periodically
reviews with Covance's management the progress under the Plan.

     State of Readiness. The Plan is intended to provide a comprehensive and
rigorous methodology for identifying and addressing the risks of Year 2000
problems to Covance. Its goal is to minimize the number and seriousness of any
defects and related disruptions or problems stemming from Year 2000 issues and
to quickly repair any that do occur. Covance's Plan has been divided into six
phases: inventory, risk assessment, evaluation, remediation, validation and
implementation.

     The inventory is intended to cover all of Covance's systems and processes
that involve the use of dates irrespective of whether or not the system is
deemed Year 2000 compliant, including computer related hardware, computer
related software, internally developed systems, devices, equipment, scientific
instrumentation, outsourced services, outsourced products and client systems
that Covance interacts with. The inventory phase also involves assessing
systems interrelationships to minimize the adverse effects non-compliant data
or systems could have on remediated systems. Risk assessment involves
determining the potential impact to Covance's operations because of Year 2000
non-compliance. Specifically, the most business critical systems are
prioritized and potential material liabilities identified. Evaluation involves
determining whether a system is Year 2000 compliant. The inventory, risk
assessment and evaluation phases of the Plan commenced in October 1997 and were
substantially completed for internal systems in May 1998.

     In conjunction with the inventory, risk assessment and evaluations phases,
Covance has undertaken a company-wide and operation specific Year 2000
awareness campaign for purposes of employee awareness and involvement. Covance
believes that employee awareness will serve to maximize the completeness of its
Year 2000 inventory and enhance the effectiveness of the Plan generally.

     Also as part of the inventory, assessment and evaluation phases, Covance
is conducting an assessment of material third-party relationships for Year 2000
compliance. These third parties include investigational sites, utility
companies, telecommunications companies, business specific product suppliers,
such as software, animal feed and reagent suppliers or providers,
transportation companies, and payroll and benefit services companies. Important
vendors, suppliers and service providers are being requested


                                                                              21
<PAGE>

to supply Covance with certification that their systems are (or in some cases
notification that they are not) Year 2000 compliant. Generally, where
certification cannot be obtained, or even when certification is obtained but
the risk of disruption to Covance's business is considered so potentially
severe, Covance is investigating alternative sources and considering
stockpiling supplies to guard against potential shortages. However, there can
be no assurances that Covance's suppliers, vendors and service providers will
attain Year 2000 compliance or that suitable alternative suppliers, vendors and
service providers can be engaged. It is possible that delays, increased costs
or supplier, vendor or service provider failures could have a material adverse
impact on Covance's business, financial condition, results of operations and
cash flows, by, for example, negatively effecting Covance's ability to meet its
contractual or regulatory obligations or service its customers.

     While Covance is taking steps to raise awareness of the Year 2000 issue
among its customers, Covance does not believe it is appropriate to require
clients to certify their Year 2000 readiness and compliance. For the fiscal
year ended December 31, 1998, Covance had no single customer which accounted
for greater than 10% of its net revenues and only one customer which accounted
for more than 5% of its net revenues. However, in the event a significant
customer or group of customers were adversely effected by Year 2000 related
problems, Covance could experience a reduction of business and revenue and a
consequent material adverse effect on its business, financial condition,
results of operations and cash flows.

     Remediation is defined as the phase of the Plan where systems are fixed to
maximize Year 2000 compliance so that they are able to properly calculate dates
without interfering with the proper operation of other components of the
system. Remediation includes, without limitation, the repair, replacement or
removal of non-compliant systems. Covance is presently in the process of
remediating its systems and will continue to do so, as necessary, for the
duration of the Plan.

     In the validation phase of the Plan, remediated systems are required to be
tested and the testing to be documented. In addition, systems deemed compliant
in the evaluation phase are required to be documented as are vendor and
supplier systems. The validation phase is scheduled to be substantially
completed for business critical systems by March 1999.

     The final phase of the Plan is the implementation phase where remediated
systems, which have undergone and completed validation, are put into
operational use and observed for interaction with other aspects and components
of systems that may or may not be related to the Year 2000 issue to ensure
non-disruption of essential functions. This phase is scheduled to be 95%
completed for internal business critical systems by August 1999 and completed
for business critical systems by December 1999.

     Costs of Year 2000 Project. Covance has, beginning in early 1998, and
expects to continue through the end of the year 2000, to incur costs and make
expenditures relating to the Year 2000 project. These costs and expenditures
can be broadly classified into two categories: amounts that will be expensed as
incurred (internal payroll relating to employees newly hired or redeployed to
work on the Year 2000 project, external consultants and the net book value of
non-Year 2000 compliant equipment to be replaced); and amounts that will be
capitalized and depreciated over the useful lives of the associated assets (the
purchase price of new hardware, software and other equipment acquired to
replace existing hardware, software and other equipment that is not Year 2000
compliant).

     Covance currently estimates that the costs of internal payroll, external
consultants and the net book value of equipment to be replaced (amounts that
have and will be expensed as incurred) will total between $7.5 million and $9.0
million over the three year period ending December 31, 2000. Of these amounts,
a total of $2.3 million has been incurred and expensed during the year ended
December 31, 1998. Covance currently estimates that the cost of new hardware,
software and other equipment to be acquired in replacement of existing non-Year
2000 compliant hardware, software and other equipment (amounts that will be
capitalized and depreciated over the useful lives of the related assets) will
total between $7.0 million and $8.5 million and will primarily be incurred over
the two year period ending December 31, 1999. Of these amounts, capitalizable
expenditures totaling $1.7 million have been made during the year ended
December 31, 1998. The primary source of funds for all costs to be incurred and
expenditures to be made is expected to be provided by Covance's operating cash
flows.

     Risks of Year 2000 Problems. Worst-case scenarios resulting from Year 2000
problems deemed by Covance to be most reasonably likely include the following:
loss of power and other utility services which could result in disruption to
existing and future studies generally, harm to specimens and test samples used
in studies and an adverse impact on the health and well being of the animals;
inability to obtain timely and sufficient supplies of reagents, lab ware or
animal feed, which could result in the inability to perform existing and future
laboratory and central laboratory studies and an adverse impact on the health
and well being of the animals; computer hardware, software and embedded
technology failure which could disrupt Covance's equipment, systems and
networks resulting in an inability to perform existing and future studies
and/or an adverse impact on the health and well being of patients; the loss of
telecommunications capabilities (both voice and data), which could result in an
inability for Covance to internally communicate or to communicate with, among
others, its clients and investigational sites; and the inability of Covance's
third party investigational sites to become Year 2000 compliant, which could
result in the loss to Covance of their services. Any one or more of these or
other events could result in business slowdowns or suspensions, subject Covance
to liability


22
<PAGE>

for breach of contract or personal injury and have a material adverse effect on
Covance's business, financial condition, results of operations and cash flows.

     While deferrals of scheduled information technology projects as a result
of the need to remediate Year 2000 problems are not presently expected to have
a material adverse effect on Covance's business, financial condition, results
of operations and cash flows, in the event the implementation of the Plan
requires greater expenditures or more qualified employees than presently
estimated or qualified information technology workers become more difficult or
expensive to attract and retain, certain significant projects may be subject to
deferral. If such deferrals occur, they may have a material adverse effect on
Covance's business, financial condition, results of operations and cash flows.

     Contingency Plans. Covance has developed and is continuing to develop
contingency plans for handling these critical areas in the event remediation is
unsuccessful. Contingency plans include the utilization of back-up generators
for power supply; identifying alternative suppliers for reagents, animal feed
and other supplies as well as stockpiling significant quantities of such
supplies in advance of the year 2000; porting from one long distance carrier to
another and utilizing cell phones and call access cards when available; and
manning interactive voice response system phones with staff and manually
randomizing systems on paper to ensure the continued validity of studies.
Contingency plans not yet developed will be developed on a case by case basis
and are scheduled to be in place by September 1999. Contingency plans
themselves; however, are subject to variables and uncertainties and therefore
there can be no assurance that Covance will correctly anticipate the level,
impact or duration of non-compliance of computer hardware, software, systems or
suppliers, vendors or service providers (which may supply inaccurate
information to Covance or otherwise be unable to provide their service or
product free of defect or disruption arising from Year 2000 problems) or that
its contingency plans will be sufficient to mitigate the impact of
non-compliance. Thus, there can be no assurance that the Year 2000 problem,
even after giving effect to the implementation of applicable contingency plans,
will not materialize and such occurrence could have a material adverse impact
on Covance's business, financial condition, results of operations and cash
flows.

     Forward Looking Statements. Statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as in
certain other parts of this Annual Report on Form 10-K that look forward in
time, are forward looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance, expectations, predictions, and
assumptions and other statements which are other than statements of historical
facts. All such forward looking statements are based on the current
expectations of management and are subject to, and are qualified by, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by those statements. These risks and uncertainties
include, but are not limited to, Covance's ability to identify and correct all
relevant computer codes and embedded chips, Covance's ability to attract and
retain qualified information technology personnel to address and remediate Year
2000 problems, the availability or affordability of alternative sources for
critical supplies and services, the effect of the Year 2000 problem on
Covance's suppliers, customers and other third parties, Covance's ability to
estimate costs of Year 2000 remediation and predict problems and costs that
might arise with respect to Year 2000 issues, and Covance's ability to address
other Year 2000 issues, and risks and uncertainties set forth in Covance's
filings with the Securities and Exchange Commission including without
limitation its Annual Report on Form 10-K.


                                                                              23
<PAGE>

New Accounting Pronouncements

     In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for the
accounting treatment of various costs typically incurred during the development
or purchase of computer software for internal use. SOP 98-1 is effective for
fiscal periods beginning after December 15, 1998 (calendar year 1999 for
Covance). Historically, Covance's policy has been to expense internal costs
associated with software developed for internal use. Upon adoption of SOP 98-1
in 1999, Covance may capitalize certain internal software development costs,
which under Covance's current policy would have been expensed. Had Covance
accounted for internal software development costs in 1998 in accordance with
SOP 98-1, results of operations, financial position and cash flows would not
have been materially different.

     In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs; requiring such
costs be expensed as incurred. SOP 98-5 is effective for fiscal periods
beginning after December 15, 1998 (calendar year 1999 for Covance). Application
of SOP 98-5 is not expected to have a material impact on Covance's consolidated
results of operations, financial position or cash flows.


Item 7a. Quantitative and Qualitative Disclosures About Market Risk

     See Management's Discussion and Analysis of Financial Condition and
Results of Operations

24
<PAGE>

Item 8. Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                          <C>
                                                                                              Page
                                                                                              ----
Report of PricewaterhouseCoopers LLP--Independent Accountants ............................     26
Consolidated Balance Sheets--December 31, 1998 and 1997 ..................................     27
Consolidated Statements of Income--Years ended December 31, 1998, 1997 and 1996 ..........     28
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 ......     29
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998, 1997 and
  1996 ...................................................................................     30
Notes to Consolidated Financial Statements ...............................................     31
</TABLE>

 

                                                                              25
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of Covance Inc.


     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of stockholders'
equity appearing on pages 27 through 41 present fairly, in all material
respects, the financial position of Covance Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.



/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, NJ
January 20, 1999
 

26
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                          DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                                                              1998         1997
(Dollars in thousands)                                                     ----------   ----------
<S>                                                                        <C>          <C>
Assets
Current Assets:
 Cash and cash equivalents .............................................    $ 19,263     $ 28,027
 Accounts receivable, net ..............................................     139,145      104,789
 Unbilled services .....................................................      41,589       40,980
 Inventory .............................................................      26,726       18,088
 Deferred income taxes .................................................       9,671       10,474
 Prepaid expenses and other assets .....................................      38,095       28,120
                                                                            --------     --------
   Total Current Assets ................................................     274,489      230,478
Property and equipment, net ............................................     237,587      193,129
Goodwill, net ..........................................................      71,999       50,979
Other assets ...........................................................       9,340        9,428
                                                                            --------     --------
   Total Assets ........................................................    $593,415     $484,014
                                                                            ========     ========
Liabilities and Stockholders' Equity
Current Liabilities:
 Accounts payable ......................................................    $ 33,381     $ 24,344
 Accrued payroll and benefits ..........................................      41,505       39,647
 Accrued expenses and other liabilities ................................      39,117       30,702
 Unearned revenue ......................................................      60,226       62,099
 Short-term debt .......................................................      13,000       10,000
 Income taxes payable ..................................................       5,772        4,198
                                                                            --------     --------
   Total Current Liabilities ...........................................     193,001      170,990
Long-term debt .........................................................     149,909      132,423
Deferred income taxes ..................................................      12,416       10,758
Other liabilities ......................................................      13,074       12,786
                                                                            --------     --------
   Total Liabilities ...................................................     368,400      326,957
                                                                            --------     --------
Commitments and Contingent Liabilities
Stockholders' Equity:
 Common stock--Par value $0.01 per share; 140,000,000 shares authorized;
  58,417,536 and 57,678,977 shares issued and outstanding at
  December 31, 1998 and 1997, respectively .............................         584          577
 Paid-in capital .......................................................      75,853       58,276
 Retained earnings .....................................................     146,372       97,764
 Accumulated other comprehensive income--
   Cumulative translation adjustment ...................................       2,206          440
                                                                            --------     --------
   Total Stockholders' Equity ..........................................     225,015      157,057
                                                                            --------     --------
   Total Liabilities and Stockholders' Equity ..........................    $593,415     $484,014
                                                                            ========     ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                                                              27
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                  1998             1997              1996
(Dollars in thousands, except per share data)                -------------   ---------------   ---------------
<S>                                                          <C>             <C>               <C>
Net revenues .............................................    $   731,574     $    590,651      $    494,828
Cost and expenses:
 Cost of revenue .........................................        484,128          389,785           324,345
 Selling, general and administrative .....................        117,844           92,329            80,014
 Depreciation and amortization ...........................         37,723           30,877            25,204
 Spin-off related charge .................................             --               --            27,404
                                                              -----------     ------------      ------------
   Total .................................................        639,695          512,991           456,967
                                                              -----------     ------------      ------------
Income from operations ...................................         91,879           77,660            37,861
                                                              -----------     ------------      ------------
Other expense, net:
 Interest expense, net ...................................          7,361            8,314             6,791
 Other expense ...........................................            373              167             1,116
                                                              -----------     ------------      ------------
   Other expense, net ....................................          7,734            8,481             7,907
                                                              -----------     ------------      ------------
Income before taxes and equity investee results ..........         84,145           69,179            29,954
Taxes on income ..........................................         35,099           29,367            17,377
Equity investee loss (gain) ..............................            438               58              (139)
                                                              -----------     ------------      ------------
Net income ...............................................    $    48,608     $     39,754      $     12,716
                                                              ===========     ============      ============
Basic earnings per share .................................          $0.84            $0.69             $0.22
Weighted average shares outstanding--basic ...............     58,050,114       57,254,042        57,063,644

Diluted earnings per share ...............................          $0.83            $0.69            N/A
Weighted average shares outstanding--diluted .............     58,774,334       57,463,587            N/A

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

28

<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                    1998           1997           1996
(Dollars in thousands)                                          ------------   ------------   ------------
<S>                                                             <C>            <C>            <C>
Cash flows from operating activities:
Net income ..................................................    $   48,608     $  39,754      $  12,716
Adjustments to reconcile net income to net cash provided
 by operating activities:
 Depreciation and amortization ..............................        37,723        30,877         25,204
 Stock issued under employee benefit and stock
  compensation plans ........................................         6,929         5,523             --
 Deferred income tax provision ..............................         4,420         7,856         (3,188)
 ESOP component of spin-off related charge ..................            --            --         16,673
 Related party charges ......................................            --            --          2,052
 Other ......................................................           429           673            237
 Changes in operating assets and liabilities, net of
   effects of acquisitions:
  Accounts receivable .......................................       (31,877)      (11,089)       (12,444)
  Unbilled services .........................................          (609)       (1,667)       (18,568)
  Inventory .................................................        (8,342)       (1,678)        (1,911)
  Accounts payable ..........................................         8,087        (2,308)         2,327
  Accrued liabilities .......................................         7,441         6,297         15,800
  Unearned revenue ..........................................        (2,247)        4,305         14,701
  Income taxes payable ......................................         1,574           748        (13,606)
  Other assets and liabilities, net .........................        (7,997)       (2,662)       (10,135)
                                                                 ----------     ---------      ---------
Net cash provided by operating activities ...................        64,139        76,629         29,858
                                                                 ----------     ---------      ---------
Cash flows from investing activities:
 Capital expenditures .......................................       (74,945)      (56,538)       (46,941)
 Acquisition of businesses, net of cash acquired ............       (25,546)           --        (33,883)
 Other, net .................................................           129           196             34
                                                                 ----------     ---------      ---------
Net cash used in investing activities .......................      (100,362)      (56,342)       (80,790)
                                                                 ----------     ---------      ---------
Cash flows from financing activities:
 Repayments of long-term debt ...............................            --       (40,000)            --
 Proceeds from short-term debt ..............................            --        10,000             --
 Proceeds from long-term debt ...............................        20,000         9,423        160,000
 Stock issued under employee stock purchase and stock
  option plans ..............................................         7,459         2,901             --
 Due to Corning Incorporated and affiliates .................            --            --        (88,361)
 Dividends paid to Corning ..................................            --            --         (3,359)
                                                                 ----------     ---------      ---------
Net cash provided by (used in) financing activities .........        27,459       (17,676)        68,280
                                                                 ----------     ---------      ---------
Net change in cash and cash equivalents .....................        (8,764)        2,611         17,348
Cash and cash equivalents, beginning of year ................        28,027        25,416          8,068
                                                                 ----------     ---------      ---------
Cash and cash equivalents, end of year ......................    $   19,263     $  28,027      $  25,416
                                                                 ==========     =========      =========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                                                              29
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                               Accumulated
                                                                                  Other        Compre-        Total
                                            Common    Paid-in     Retained    Comprehensive    hensive    Stockholders'
                                             Stock    Capital     Earnings        Income        Income       Equity
(Dollars in thousands)                     -------- ----------- ------------ --------------- ----------- --------------
<S>                                        <C>      <C>         <C>          <C>             <C>         <C>
Balance, December 31, 1995 ...............   --      $ 30,816     $ 48,653      $  3,048                    $ 82,517
 Comprehensive income:
 Net income ..............................   --            --       12,716            --      $ 12,716        12,716
 Currency translation adjustment .........   --            --           --           105           105           105
                                                                                              --------
  Total comprehensive income .............   --            --           --            --      $ 12,821            --
                                                                                              ========
Dividends paid to Corning ................   --            --       (3,359)           --                      (3,359)
Capital contribution .....................   --         2,052           --            --                       2,052
Adjustment to reflect par value of
 shares issued in spin-off
 (56,208,644 shares) ..................... $562          (562)          --            --                          --
ESOP contribution ........................    9        16,664           --            --                      16,673
                                           ----      --------     --------      --------                    --------
Balance, December 31, 1996 ...............  571        48,970       58,010         3,153                     110,704
 Comprehensive income:
 Net income ..............................   --            --       39,754            --      $ 39,754        39,754
 Currency translation adjustment .........   --            --           --        (2,713)       (2,713)       (2,713)
                                                                                              --------
  Total comprehensive income .............   --            --           --            --      $ 37,041            --
                                                                                              ========
Capital contribution .....................   --           888           --            --                         888
Shares issued under various
 employee benefit and stock
 compensation plans ......................    6         8,245           --            --                       8,251
Stock option exercises ...................   --           173           --            --                         173
                                           ----      --------     --------      --------                    --------
Balance, December 31, 1997 ...............  577        58,276       97,764           440                     157,057
 Comprehensive income:
 Net income ..............................   --            --       48,608            --      $ 48,608        48,608
 Currency translation adjustment .........   --            --           --         1,766         1,766         1,766
                                                                                              --------
  Total comprehensive income .............   --            --           --            --      $ 50,374            --
                                                                                              ========
Capital contribution .....................   --         3,196           --            --                       3,196
Shares issued under various
 employee benefit and stock
 compensation plans ......................    5        10,511           --            --                      10,516
Stock option exercises ...................    2         3,870           --            --                       3,872
                                           ----      --------     --------      --------                    --------
Balance, December 31, 1998 ............... $584      $ 75,853     $146,372      $  2,206                    $225,015
                                           ====      ========     ========      ========                    ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


30
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

1. Organization

     Covance Inc. and its subsidiaries ("Covance") is a leading contract
research organization providing a wide range of integrated product development
services on a worldwide basis to the pharmaceutical, biotechnology and medical
device industries. In addition and to a lesser extent, Covance provides
services such as health economics and outcomes for managed care organizations,
hospitals and other health care providers and laboratory testing to the
chemical, agrochemical and food industries. Covance's operations constitute two
segments for financial reporting purposes. The first segment, early development
services, is comprised of preclinical and Phase I clinical service offerings.
The second segment, late-stage development services, is comprised of clinical
and clinical support services. At the present time, operations are principally
focused in the United States and Europe.


2. Summary of Significant Accounting Policies

  Principles of Consolidation

     The consolidated financial statements include the accounts of all entities
controlled by Covance, including Covance Biotechnology Services Inc. ("Covance
Biotechnology"), a majority owned business. All significant intercompany
accounts and transactions are eliminated. The equity method of accounting is
used for investments in affiliates in which Covance owns between 20 and 50
percent.


  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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.


  Foreign Currencies

     For subsidiaries outside of the United States that operate in a local
currency environment, income and expense items are translated to United States
dollars at average rates of exchange prevailing during the year, assets and
liabilities are translated at year-end exchange rates and equity accounts are
translated at historical exchange rates. Translation adjustments are
accumulated in a separate component of stockholders' equity in the Consolidated
Balance Sheets and are included in the determination of comprehensive income in
the Consolidated Statements of Stockholders' Equity. Transaction gains and
losses are included in the determination of net income in the Consolidated
Statements of Income. Transaction losses totaled $0.4 million, $0.2 million and
$1.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.


  Cash and Cash Equivalents

     Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at date of purchase and consist
principally of amounts temporarily invested in money market funds.


  Financial Instruments

     The fair value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and long and short-term debt are not materially
different than their carrying amounts as reported at December 31, 1998 and
1997.

     Accounts receivable and unbilled services represent amounts due from
Covance customers who are concentrated primarily in the pharmaceutical and
biotechnology industries. Covance monitors the creditworthiness of its
customers to which it grants credit terms in the ordinary course of business.
Although Covance customers are concentrated primarily within these two
industries, management considers the likelihood of material credit risk
exposure as remote. In addition, in some cases Covance requires advance payment
for a portion of the contract price from its customers upon the signing of a
contract for services. Historically, bad debts have been minimal.


                                                                              31
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

  Inventory

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


  Property and Equipment

     Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight-line method at rates adequate to allocate the cost
of the applicable assets over their estimated useful lives, which range in term
from three to thirty years.


  Goodwill

     Goodwill (investment costs in excess of the fair value of net tangible
assets acquired) is capitalized and amortized on a straight-line basis over the
period expected to be benefited, which generally ranges from twenty to forty
years.


  Impairment of Long-Lived Assets

     Assessments of the recoverability of long-lived assets are conducted when
events or changes in circumstances occur that indicate that the carrying value
of the asset may not be recoverable. The assessment of possible impairment is
based upon the ability to recover the asset from the expected future
undiscounted cash flows of related operations.


  Revenue Recognition

     Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is generally recognized under either the
percentage of completion method of accounting or as services are rendered or
products are delivered. Contracts may contain provisions for renegotiation in
the event of cost overruns due to changes in the level of work scope.
Renegotiated amounts are included in revenue when earned and realization is
assured. Provisions for losses to be incurred on contracts are recognized in
full in the period in which it is determined that a loss will result from
performance of the contractual arrangement. Most service contracts may be
terminated for a variety of reasons by Covance's customers either immediately
or upon notice. The contracts often require payments to Covance to recover
costs incurred, including costs to wind down the study, and payment of fees
earned to date, and in some cases to provide Covance with a portion of the fees
or profits that would have been earned under the contract had the contract not
been terminated early.

     Unbilled services are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms. In general,
amounts become billable upon the achievement of milestones or in accordance
with predetermined payment schedules. Unbilled services are billable to
customers within one year from the respective balance sheet date. Unearned
revenue is recorded for cash received from customers for which revenue has not
been recognized at the balance sheet date.

     Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not reflected
in revenue or expense since such fees are granted by customers on a
"pass-through basis" without risk or reward to Covance. Amounts receivable from
customers in connection with billed and unbilled investigator fees and out-
of-pocket pass-through costs are included in prepaid expenses and other current
assets in the accompanying Consolidated Balance Sheets and totaled $27.3
million and $20.1 million at December 31, 1998 and 1997, respectively.


  Costs and Expenses

     Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process and encompasses direct labor and related
benefit charges, other direct costs and allocable expenses (including facility
charges, indirect labor and information technology costs). Selling, general and
administrative expenses primarily consist of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative travel
and allocable expenses (facility charges and information technology costs).
Advertising expense is recognized as incurred.


32
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

  Taxes on Income

     Covance uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases using enacted
tax rates in effect for the year in which the temporary differences are
expected to reverse. The effect on deferred taxes of a change in enacted tax
rates is recognized in income in the period when the change is effective. See
Note 5.


  Comprehensive Income

     During 1998, Covance adopted Financial Accounting Standards Board ("FASB")
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in the financial statements and requires the reporting of
comprehensive income in addition to net income from operations. Covance has
elected to present comprehensive income in its Consolidated Statements of
Stockholders' Equity. Covance's total comprehensive income represents net
income plus the change in the cumulative translation adjustment equity account
for the periods presented. The adoption of SFAS 130 did not affect results of
operations or financial position.


  Segment Reporting

     During 1998, Covance also adopted FASB Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131,
which supersedes FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise, establishes standards for the way that public business
enterprises report information about operating segments in financial
statements. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131 did not affect results of operations or financial position. See Note
10 for segment disclosure.


  Supplemental Cash Flow Information

     Cash paid for interest for the years ended December 31, 1998, 1997 and
1996 totaled $9.1 million, $9.1 million and $6.5 million, respectively. Cash
paid for income taxes for the years ended December 31, 1998, 1997 and 1996
totaled $25.5 million, $27.9 million and $25.5 million, respectively.


  Earnings Per Share

     Earnings per share is computed in accordance with FASB Statement No. 128,
Earnings Per Share. Basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of shares outstanding during
the period. The computation of diluted EPS is similar to the computation of
basic EPS, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.

     In computing diluted earnings per share for the years ended December 31,
1998 and 1997, the denominator was increased by 724,220 shares and 209,545
shares, respectively; representing the dilution of stock options outstanding at
December 31, 1998 and 1997 with exercise prices less than the average market
price of Covance's Common Stock during each respective period. Excluded from
the computation of diluted earnings per share at December 31, 1998 were options
to purchase 185,650 shares of common stock at prices ranging from $24.56 to
$29.13 per share because the exercise prices of such options were greater than
the average market price of Covance's Common Stock during 1998. Excluded from
the computation of diluted earnings per share at December 31, 1997 were options
to purchase 1,474,585 shares of common stock at prices ranging from $19.00 to
$20.56 per share because the exercise prices of such options were greater than
the average market price of Covance's Common Stock during 1997. Since Covance's
Common Stock began "regular way" trading on the NYSE in January 1997,
computation of diluted earnings per share for 1996 is not possible. Basic
earnings per share has been presented for 1996 based upon the number of Covance
shares issued and outstanding as a result of the Spin-Off Distribution (see
Note 8).


                                                                              33
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

3. Property and Equipment

     Property and equipment at December 31, 1998 and 1997 consist of the
following:



<TABLE>
<CAPTION>
                                                               1998            1997
                                                          -------------   -------------
<S>                                                       <C>             <C>
   Property and equipment at cost:
    Land ..............................................    $    6,859      $    6,859
    Buildings and improvements ........................       137,682         126,594
    Equipment .........................................       212,681         156,872
    Furniture, fixtures & leasehold improvements ......        62,888          50,994
    Construction-in-progress ..........................        14,952          14,492
                                                           ----------      ----------
                                                              435,062         355,811
   Less: Accumulated depreciation and amortization.....      (197,475)       (162,682)
                                                           ----------      ----------
   Property and equipment, net ........................    $  237,587      $  193,129
                                                           ==========      ==========
</TABLE>

     Depreciation and amortization expense aggregated $35.2 million, $28.0
million and $23.2 million for 1998, 1997 and 1996, respectively.


4. Acquisitions and Goodwill

     In November 1998, Covance acquired the stock of GDXI, Inc. (now known as
Covance Central Diagnostics Inc.) and the assets and liabilities of Berkeley
Antibody Company, Inc. (now known as Covance Antibody Services Inc.) for cash
payments totaling approximately $26 million in separate transactions accounted
for as purchase business combinations. The goodwill resulting from these
transactions aggregated $23.4 million.


     In October 1996, Covance acquired the stock of CRS Pacamed AG (now known
as Covance Pharmaceutical Packaging Services AG) for a cash payment of
approximately $14.4 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction aggregated
$10.3 million.


     In March 1996, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash
payment of approximately $14.9 million in a transaction accounted for as a
purchase business combination. In accordance with the terms of the asset
purchase agreement, Covance is contingently obligated to pay up to an
additional $17.2 million in contingent purchase price if HTA achieves certain
established earnings targets for the three year period ending March 1999. The
goodwill resulting from the initial cash payment on this transaction aggregated
$13.7 million.


     In January 1995, Covance acquired National Packaging Systems, Inc. ("NPS",
now known as Covance Pharmaceutical Packaging Services Inc.) for an initial
cash payment of $14.0 million in a transaction accounted for as a purchase
business combination. In October 1996, Covance paid, pursuant to the terms of
the acquisition agreement, an additional $7.0 million in contingent purchase
price to former NPS shareholders as NPS achieved certain established earnings
targets for the period January 1995 through September 1996. The goodwill
resulting from this transaction aggregated $16.1 million.


     Results of operations for these entities have been included in the
accompanying consolidated financial statements beginning on the respective
dates of acquisition. Pro forma information for these entities has not been
presented, due to their insignificance to Covance taken as a whole.


     Goodwill associated with these and prior acquisitions aggregated $72.0
million and $51.0 million, net of accumulated amortization of $10.0 million and
$7.5 million at December 31, 1998 and 1997, respectively. Amortization expense
aggregated $2.5 million, $2.3 million and $1.7 million for 1998, 1997 and 1996,
respectively.


34
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

5. Taxes on Income

     The components of income before taxes and the related provision (benefit)
for taxes on income for 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                         1998         1997         1996
                                                      ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>
   Income before taxes and equity investee results:
    Domestic ......................................    $63,401      $48,927      $ 23,259
    International .................................     20,744       20,252         6,695
                                                       -------      -------      --------
     Total ........................................    $84,145      $69,179      $ 29,954
                                                       =======      =======      ========
   Federal income taxes:
    Current provision .............................    $23,179      $14,968      $ 17,108
    Deferred (benefit) provision ..................       (324)       2,700        (6,311)
   International income taxes:
    Current provision .............................      3,648        3,987         1,248
    Deferred provision ............................      2,472        2,387         1,635
   State and other income taxes:
    Current provision .............................      6,714        5,840         4,174
    Deferred benefit ..............................       (590)        (515)         (477)
                                                       -------      -------      --------
     Net income tax provision .....................    $35,099      $29,367      $ 17,377
                                                       =======      =======      ========
</TABLE>

     The differences between the provision for income taxes and income taxes
computed using the Federal statutory income tax rate for 1998, 1997 and 1996
are as follows:


<TABLE>
<CAPTION>
                                                                 1998         1997         1996
                                                              ----------   ----------   ----------
<S>                                                               <C>          <C>          <C>
   Taxes at statutory rate ................................       35.0%        35.0%        35.0%
   State and local taxes, net of Federal benefit ..........        4.7          5.1          8.0
   Non-deductible spin-off related charge .................         --           --          7.1
   Goodwill amortization ..................................        1.0          1.1          2.1
   Impact of international operations .....................       (1.3)        (1.0)         1.8
   Other, net .............................................        2.3          2.3          4.0
                                                                  ----         ----         ----
     Total ................................................       41.7%        42.5%        58.0%
                                                                  ====         ====         ====
</TABLE>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:



<TABLE>
<CAPTION>
                                                             1998            1997
                                                        -------------   -------------
<S>                                                     <C>             <C>
   Current deferred tax assets:
    Liabilities not currently deductible ............     $   5,926       $   8,007
    Net operating losses ............................         5,084           3,793
    Other ...........................................           727             592
                                                          ---------       ---------
    Gross current deferred tax assets ...............        11,737          12,392
    Less: Valuation allowance .......................        (2,066)         (1,918)
                                                          ---------       ---------
    Net current deferred tax assets .................     $   9,671       $  10,474
                                                          =========       =========
   Noncurrent deferred tax assets:
    Liabilities not currently deductible ............     $   6,436       $   5,842
    Less: Valuation allowance .......................        (1,579)         (1,212)
                                                          ---------       ---------
    Net noncurrent deferred tax assets ..............         4,857           4,630
   Noncurrent deferred tax liabilities:
    Property and equipment ..........................       (17,273)        (15,388)
                                                          ---------       ---------
    Net noncurrent deferred tax liabilities .........     $ (12,416)      $ (10,758)
                                                          =========       =========
</TABLE>

                                                                              35
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

     Covance currently provides income taxes on the earnings of foreign
subsidiaries to the extent those earnings are taxable or are expected to be
remitted. Taxes have not been provided on $48.8 million of accumulated foreign
unremitted earnings because those earnings are expected to remain invested
indefinitely. It is not practical to estimate the amount of additional tax that
might be payable if such accumulated earnings were remitted. Additionally, if
such accumulated earnings were remitted, certain countries impose withholding
taxes that, subject to certain limitations, are available for use as a tax
credit against any Federal income tax liability arising from such remittance.


     Prior to December 31, 1996, Covance was an indirect wholly-owned business
of Corning Incorporated ("Corning"). During that time, Covance and its
subsidiaries had operated under a tax sharing agreement with Corning, pursuant
to which they computed their provision for income taxes on a separate return
basis and paid to Corning the separate Federal income tax return liability so
computed. Covance's operations through December 31, 1996 were included in the
Federal income tax return filed by Corning.


     On December 31, 1996, Corning distributed to its stockholders, on a pro
rata tax-free basis, all of its ownership interest in Covance (the "Spin-Off
Distribution") and as a result, Covance began to file its own separate Federal
income tax return beginning in 1997. In connection with the Spin-Off
Distribution, Covance entered into a tax indemnification agreement with Corning
and a former affiliate of Corning that prohibited Covance for a period of two
years after the date of the Spin-Off Distribution from taking certain actions
that might jeopardize the favorable tax treatment of the Spin-Off Distribution
under Section 355 of the Internal Revenue Code of 1986, as amended, and
provided Corning and the former affiliate of Corning with certain rights of
indemnification against Covance. The tax indemnification agreement also
required Covance to take such actions as Corning and the former affiliate of
Corning may request to preserve the favorable tax treatment provided for in any
rulings obtained from the Internal Revenue Service in respect of the Spin-Off
Distribution.


     Covance also entered into a tax sharing agreement with Corning and a
former affiliate of Corning which allocated responsibility for federal, state
and local taxes relating to taxable periods before the Spin-Off Distribution
and provided for computing and apportioning tax liabilities and tax benefits
for such periods.


6. Short and Long-Term Debt

     Covance has a $250 million senior revolving credit facility (the "Credit
Facility") with a syndicate of banks, as to which there was $140.0 million of
outstanding borrowings and $11.3 million in outstanding letters of credit at
December 31, 1998. Under the Credit Facility, borrowings can be made in a
number of different currencies until November 2001 at which time all
outstanding loans must be paid in full. In addition, Covance has several
different interest rate options under the Credit Facility. Interest on all
outstanding borrowings during 1998 was computed based upon the London Interbank
Offered Rate ("LIBOR") plus an applicable margin and approximated 5.8% per
annum. Covance has the option to prepay the loans outstanding under the Credit
Facility in whole or in part at any time, subject to payment of breakage costs,
in certain circumstances. The Credit Facility contains certain covenants and
requires the maintenance of key ratios, as defined in the Credit Facility.


     As of December 31, 1998, Covance Biotechnology had $3.0 million in
short-term debt outstanding with the North Carolina Biotechnology Center. This
debt matures in December 1999 and is guaranteed by Covance. In addition,
Covance Biotechnology has a $10.0 million short-term revolving credit facility
with a bank, of which $10.0 million of borrowings were outstanding as of
December 31, 1998. This short-term revolving credit facility carries interest
at a rate substantially equivalent to the rate in effect on Covance's
borrowings under the Credit Facility and is guaranteed by Covance.


     In October 1997, a foreign subsidiary of Covance borrowed 13.5 million
Swiss Francs from a bank. This loan bears interest at a fixed rate of 2.9% per
annum and matures in October 2000. These funds were used to repay certain
cross-currency intercompany obligations and to fund capital expenditures.


7. Employee Benefit Plans

     Covance has several defined contribution plans covering substantially all
of its full-time employees. Contributions to these plans aggregated $9.4
million, $8.1 million and $6.6 million for 1998, 1997 and 1996, respectively.


36
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

8. Stockholders' Equity

  Spin-off--Common Stock

     Under the terms of the Spin-Off Distribution, shareholders of record of
Corning common stock on December 31, 1996 received one share of Covance common
stock for each four shares of Corning common stock held, resulting in Covance
issuing approximately 56.2 million shares of its common stock.


  Preferred Stock

     Covance is authorized to issue up to 10.0 million shares of Series
Preferred Stock, par value $1.00 per share (the "Covance Series Preferred
Stock"). The Covance Board of Directors has the authority to issue such shares
from time to time, without stockholder approval, and to determine the
designations, preferences, rights, including voting rights, and restrictions of
such shares, subject to the Delaware General Corporate Laws. Pursuant to this
authority, the Covance Board of Directors has designated 1.0 million shares of
the Covance Series Preferred Stock as Covance Series A Preferred Stock. No
other class of Covance Series Preferred Stock has been designated by the Board.
As of December 31, 1998 no Covance Series Preferred Stock has been issued or is
outstanding.


  Dividends--Common Stock

     Covance's Board of Directors may declare dividends on the shares of
Covance Common Stock out of legally available funds (subject to any
preferential rights of any outstanding Covance Series Preferred Stock).
However, Covance has no present intention to declare dividends for the
foreseeable future, but instead intends to retain earnings to provide funds for
the operation and expansion of its business. In addition, the Credit Facility
prohibits Covance from paying cash dividends on the Covance Common Stock during
a default or event of default, as defined in the Credit Facility, or when after
giving effect to the payment of such dividends Covance would not be in
compliance with the financial covenants of the Credit Facility. While owned by
Corning, Covance paid to Corning dividends of $3.4 million during 1996.


  Stock Compensation Plans

     In December 1996, Covance adopted, in connection with the Spin-Off
Distribution, the Employee Equity Participation Program ("EEPP"). The EEPP
consists of two plans: (a) a stock option plan (the "Covance Stock Option
Plan"); and (b) an incentive stock plan (the "Covance Incentive Stock Plan").
The Covance Stock Option Plan of the EEPP, which is administered by the Covance
Compensation and Organization Committee of the Board of Directors, provides for
the grant to eligible employees of either non-qualified or incentive stock
options, or both, to purchase shares of Covance Common Stock at no less than
fair market value on the date of grant. Options granted are not exercisable for
at least twelve months and expire no more than ten years from date of grant.
The Covance Incentive Stock Plan of the EEPP authorizes the Covance
Compensation and Organization Committee to award eligible employees shares, or
the right to receive shares, of Covance Common Stock. The shares awarded may be
subject to certain restrictions prohibiting sale or other disposition and may
be subject to forfeiture, in certain circumstances. A maximum of 6.0 million
shares may be optioned or granted to eligible employees under the EEPP.

     Covance also established in December 1996 an employee stock purchase plan
(the "ESPP") pursuant to which Covance may make available for sale to employees
shares of its common stock at a price equal to 85% of the lower of the market
value on the first or last day of each calendar quarter. The ESPP, which is
administered by the Covance Compensation and Organization Committee, is
intended to give Covance employees the opportunity to purchase shares of
Covance Common Stock through payroll deductions. A maximum of 1.0 million
shares may be purchased by Covance employees under the ESPP. During 1998 and
1997, a total of 204,573 shares and 190,928 shares of common stock,
respectively, were issued under the ESPP.

     From 1990 through 1996, certain employees of Covance were granted
incentive stock awards or options, or a combination thereof, to purchase shares
of Corning common stock, under existing Corning stock award and option plans.
In connection with the Spin-Off Distribution, options outstanding under the
Corning stock option plans held by Covance employees and incentive share awards
made to Covance employees were replaced by substitute awards under a newly
established conversion equity plan (the "CEP"). The CEP has essentially all of
the same characteristics as the EEPP. The replacement stock awards have the
same terms and conditions as the Corning stock awards they replaced. The
replacement stock options have the same vesting provisions,


                                                                              37
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

option periods and other terms and conditions and retain the same ratio of
exercise price per share to market value per share and the same aggregate
difference between market value and exercise price as the Corning stock options
they replaced.

     During 1998 and 1997, Covance recorded compensation expense of $1.7
million and $1.1 million, respectively, in connection with stock issued to
certain members of Covance's executive management under the Covance Incentive
Stock Plan. During 1996, certain members of Covance management participated in
various stock compensation programs sponsored by Corning resulting in Covance
recognizing compensation expense of $1.5 million.

     Covance has adopted the disclosure-only provisions of FASB Statement No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation, and accordingly,
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Had Covance elected to recognize compensation
expense in accordance with the provisions of SFAS 123 for the stock option
awards and for the stock purchased by Covance employees under the ESPP or
Corning employee stock purchase program, as applicable, its net income in 1998,
1997 and 1996 would have been $39.5 million, $35.9 million and $10.8 million,
respectively, its basic and diluted earnings per share would have been $0.68
and $0.67, respectively, in 1998; its basic and diluted earnings per share
would both have been $0.63 in 1997; and its basic earnings per share would have
been $0.19 in 1996. The fair value of the Covance stock options used to compute
the net income and earnings per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1998, 1997 and 1996, respectively:
expected volatility of 49.0%, 33.3% and 24.5%; risk free interest rate of
5.47%, 6.50% and 6.34%; and an expected holding period of seven years, seven
years and five years.

     The following table sets forth Covance's stock option activity during 1998
and 1997, and during 1996 on a pro forma basis, the stock option activity for
the Covance stock options issued in replacement of the Corning stock options
under the CEP (grant dates are original Corning option grant dates):



<TABLE>
<CAPTION>
                                                           Number          Weighted
                                                          of Shares        Average
                                                       (in thousands)       Price
                                                      ----------------   -----------
<S>                                                       <C>                <C>
   Options outstanding, December 31, 1995 .........           802.3        $ 15.58
    Granted .......................................           268.6        $ 17.61
    Exercised .....................................            (8.4)       $ 13.43
                                                           --------
   Options outstanding, December 31, 1996 .........         1,062.5        $ 16.11
    Granted .......................................         1,763.1        $ 19.49
    Exercised .....................................           (11.8)       $ 14.62
    Forfeited .....................................           (66.6)       $ 18.63
                                                           --------
   Options outstanding, December 31, 1997 .........         2,747.2        $ 18.01
    Granted .......................................         1,867.3        $ 21.33
    Exercised .....................................          (241.9)       $ 16.70
    Forfeited .....................................          (397.1)       $ 19.62
                                                           --------
   Options outstanding, December 31, 1998 .........         3,975.5        $ 19.42
                                                           ========
</TABLE>

     The weighted average fair value of the stock options granted during 1998,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $12.42 per share.


38
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

<TABLE>
<CAPTION>
  The following table sets forth the status of all options outstanding at December 31, 1998:


                                  Stock Options Outstanding                  Stock Options Exercisable
                      --------------------------------------------------   ------------------------------
                                              Weighted
       Option              Number              Average         Weighted         Number          Weighted
       Price              of Shares           Remaining         Average        of Shares        Average
       Range           (in thousands)     Contractual Life       Price      (in thousands)       Price
-------------------   ----------------   ------------------   ----------   ----------------   -----------
<S>                   <C>                <C>                  <C>          <C>                <C>
$11.66--$16.49               729.7           6.1 years         $ 15.09            458.5         $ 14.63
$17.25--$24.56             3,097.8           8.5 years         $ 20.10            850.4         $ 19.16
$25.81--$29.13               148.0           9.8 years         $ 26.69               --              --
</TABLE>

     In connection with the Spin-Off Distribution, Covance recorded a one-time
charge totaling $27.4 million ($19.7 million net of tax), consisting of the
cost of establishing and funding two employee stock ownership plans
(collectively, the "ESOP") and the direct costs (accounting, legal and other
professional fees) incurred to effect the Spin-Off Distribution and to
establish Covance as a separate publicly traded entity. As a result of the ESOP
contribution, Covance recorded a one-time charge of $16.7 million, representing
the fair market value of the shares (approximately 855,000) issued into the
ESOP. The shares contributed were allocated among the plan participants based
upon a percentage of each employee's annual compensation.


9. Commitments and Contingent Liabilities

     Minimum annual rental commitments under noncancellable operating leases,
primarily office and laboratory facilities in effect at December 31, 1998 are
as follows:



<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
<S>                           <C>
  1999 ....................    $29,677
  2000 ....................    $26,301
  2001 ....................    $22,787
  2002 ....................    $13,900
  2003 ....................    $12,074
  2004 and beyond .........    $60,011
</TABLE>

     Operating lease rental expense aggregated $27.0 million, $26.0 million and
$16.1 million for 1998, 1997 and 1996, respectively.

     Covance has, and may from time to time in the future, enter into
build-to-suit operating lease arrangements. These transactions may allow
Covance to purchase the underlying facility and / or equipment or cancel the
lease arrangement on various dates over the lease term. In the event of
cancellation, Covance may be obligated under residual value guarantee
provisions of the leases. Covance has one lease arrangement whereby it has a
contingent residual value guarantee payment in the event that Covance
terminates the lease and the sale of the underlying facility and equipment
results in sales proceeds by the lessor in an amount less than the lessor's
unamortized investment in the lease arrangement. Under these circumstances,
Covance's maximum payment would approximate $35 million at the end of 1997 (the
first year of the lease) and decreases to approximately $25 million at the end
of 2006 (the tenth year of the lease), assuming Covance terminates the lease
and the sales proceeds received by the lessor were zero.


                                                                              39
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

10. Segment Information

     Covance has two reportable segments: early development and late-stage
development. The early development segment includes Covance's preclinical and
Phase I clinical service capabilities. The late-stage development segment
includes Covance's clinical and clinical support service capabilities. Early
development services involve evaluating the safety, early efficacy and
pharmacokinetic profile of a new compound. It is at this stage that a
pharmaceutical company, based on available data, will generally make a "go or
no-go" decision about the future development of a drug. Late-stage development
services are geared toward demonstrating the clinical effectiveness of a
compound, obtaining regulatory approval and maximizing the drug's commercial
potential.

     Covance evaluates performance and allocates resources based on operating
earnings. The accounting policies of the reportable segments are the same as
those described in Note 2.


<TABLE>
<CAPTION>
                                                   Early           Late-Stage
                                                Development        Development           Total
                                             ----------------   ----------------   ----------------
<S>                                          <C>                <C>                <C>
   Net revenues from external customers:
    1998                                        $ 239,483          $ 492,091          $ 731,574
    1997                                        $ 217,558          $ 373,093          $ 590,651
    1996                                        $ 202,662          $ 292,166          $ 494,828
 
   Depreciation and amortization:
    1998                                        $  15,362          $  22,361          $  37,723
    1997                                        $  14,644          $  16,233          $  30,877
    1996                                        $  13,402          $  11,802          $  25,204
 
   Operating income:
    1998                                        $  34,245          $  57,634          $  91,879
    1997                                        $  32,487          $  45,173          $  77,660
    1996                                        $  26,058(a)       $  39,207(a)       $  65,265(a)
 
   Segment assets:
    1998                                        $ 219,326          $ 374,089          $ 593,415
    1997                                        $ 199,432          $ 284,582          $ 484,014
    1996                                        $ 210,485          $ 240,562          $ 451,047
 
   Capital expenditures:
    1998                                        $  23,392          $  51,553          $  74,945
    1997                                        $  16,375          $  40,163          $  56,538
    1996                                        $  15,000          $  31,941          $  46,941
</TABLE>

---------
  (a) Exclusive of a one-time spin-off related charge totaling $27.4 million.

40
<PAGE>

                         COVANCE INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                        December 31, 1998, 1997 and 1996
               (Dollars in thousands, unless otherwise indicated)

11. Geographic Information

<TABLE>
<CAPTION>
                                                United        United
                                                States       Kingdom        Other         Total
                                             -----------   -----------   -----------   -----------
<S>                                          <C>           <C>           <C>           <C>
   Net revenues from external customers(1)
     1998 ................................    $500,463      $118,820      $112,291      $731,574
     1997 ................................    $402,642      $102,704      $ 85,305      $590,651
     1996 ................................    $352,109      $ 85,057      $ 57,662      $494,828
   Long-lived assets(2)
     1998 ................................    $132,671      $ 75,009      $ 29,907      $237,587
     1997 ................................    $101,170      $ 70,059      $ 21,900      $193,129
     1996 ................................    $ 90,332      $ 59,071      $ 18,406      $167,809

---------
  (1) Net revenues are attributable to geographic locations based on the physical
  location where the services are performed.
  (2) Long-lived assets represents the net book value of property, plant and equipment.
</TABLE>


12. Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
     The following is a summary of unaudited quarterly financial information for 1998 and 1997:

                                                        First           Second          Third           Fourth
Year Ended December 31, 1998                           Quarter         Quarter         Quarter         Quarter
-------------------------------------------------   -------------   -------------   -------------   -------------
<S>                                                 <C>             <C>             <C>             <C>
   Net revenues .................................     $ 168,509       $ 182,089       $ 182,187       $ 198,789
   Income from operations .......................     $  20,314       $  24,302       $  24,275       $  22,988
   Net income ...................................     $  10,452       $  12,868       $  13,063       $  12,225
   Basic and diluted earnings per share .........     $    0.18       $    0.22       $    0.22       $    0.21
</TABLE>


<TABLE>
<CAPTION>
                                                        First           Second          Third           Fourth
Year Ended December 31, 1997                           Quarter         Quarter         Quarter         Quarter
-------------------------------------------------   -------------   -------------   -------------   -------------
<S>                                                 <C>             <C>             <C>             <C>
   Net revenues .................................     $ 135,723       $ 145,392       $ 151,464       $ 158,072
   Income from operations .......................     $  17,139       $  20,222       $  20,902       $  19,397
   Net income ...................................     $   8,627       $  10,519       $  10,859       $   9,749
   Basic and diluted earnings per share .........     $    0.15       $    0.18       $    0.19       $    0.17
</TABLE>

                                                                              41
<PAGE>

                                   PART III


Item 10. Directors and Executive Officers of the Registrant

  (a) Identification of Directors.

     Incorporated by reference to the Company's definitive Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended.

  (b) Identification of Officers.

     Christopher A. Kuebler, 45, has been Covance's President and Chief
Executive Officer since November 1994. From March 1993 through November 1994,
he was the Corporate Vice President, European Operations for Abbott
Laboratories Inc. ("ALI"), a diversified health care company. From January 1991
until March 1993, Mr. Kuebler was the Vice President, Sales and Marketing for
ALI's Pharmaceutical Division. Mr. Kuebler has been a member of the Covance
Board since November 1994, and was elected Chairman in November 1996. Mr.
Kuebler also serves in various executive officer and director capacities of
Covance's subsidiaries.

     Richard J. Andrews, 51, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Andrews has served as President of
the Client Relations Group--Europe, since September 1998 and the Group
President of Central Laboratory Services ("Central Labs"), since June 1994 and
served as the President of Central Lab's Swiss operations ("CLS") since January
1993. Central Labs and CLS provide the Company's central laboratory services.
Prior to January 1993, Mr. Andrews served in various executive capacities in
Europe, including Worldwide Business Director, for Dupont International S.A., a
multinational chemical and pharmaceutical company. Mr. Andrews also serves as a
director of several of Covance's subsidiaries.

     Michael Giannetto, 36, has been the Company's Controller since July 1996
and a Corporate Vice President since February 1998. From November 1996 to
February 1998, Mr. Giannetto was a Vice President of Covance. From March 1995
to July 1996, Mr. Giannetto was the Business Controller for Covance. From
December 1992 to March 1995, Mr. Giannetto was the Manager of Financial
Reporting and Technical Accounting for Corning Life Sciences Inc. ("CLSI"), an
affiliate of the Company prior to the Distribution Date. Prior to December
1992, Mr. Giannetto was a Senior Audit Manager for Deloitte & Touche.

     Charles C. Harwood, Jr., 45, has been the Company's Corporate Senior Vice
President and Chief Financial Officer since July 1996. From November 1994 to
July 1996, Mr. Harwood was the Company's Vice President and Chief Financial
Officer. From May 1993 to November 1994, Mr. Harwood was Executive Director,
Finance of Covance. From January 1993 to May 1993, Mr. Harwood was Chief
Financial Officer and Vice President of Finance with Integrated Telecom
Technologies, Inc. Prior to January 1993, Mr. Harwood worked for seven years in
the field of commercial real estate development and six years with the
Hewlett-Packard Company in its Medical Products Division. Mr. Harwood also
serves as a director of several of Covance's subsidiaries.

     Jeffrey S. Hurwitz, 38, has been the Company's Corporate Senior Vice
President, General Counsel and Secretary since July 1996. From November 1994 to
July 1996, Mr. Hurwitz was Covance's Vice President, General Counsel and
Secretary. From October 1993 to November 1994, Mr. Hurwitz was Covance's
General Counsel and Secretary. From May 1992 to October 1993, Mr. Hurwitz was
an Assistant Counsel and Assistant Secretary for CLSI. From August 1991 to May
1992, Mr. Hurwitz was an Assistant Counsel for Corning, an affiliate of the
Company prior to the Distribution Date. From February 1991 to June 1991, Mr.
Hurwitz was an Associate with the law firm of Luskin & Stern. Prior to February
1991, Mr. Hurwitz was an Associate with the law firm of Shearman & Sterling.
Mr. Hurwitz also serves as a director of several of Covance's subsidiaries.

     Kim D. Lamon, M.D., Ph.D., 46, has been a Corporate Senior Vice President
of Covance since July 1996. In addition, Dr. Lamon has been the Group
President, Clinical Development Services since May 1996. From April 1994 until
May 1996, he was the Executive Vice President, Chief Medical Officer for Quest
Diagnostics Incorporated, an affiliate of the Company prior to the Distribution
Date, and Senior Vice President, Science and Technology for CLSI. From July
1992 until April 1994, Dr. Lamon was Senior Vice President, Clinical Research
and Development and Executive Medical Director for Rhone-Poulenc Rorer ("RPR"),
a pharmaceutical company. Prior to July 1992, Dr. Lamon was Senior Vice
President, Clinical Research and Regulatory Affairs at RPR. Dr. Lamon received
his M.D. and Ph.D. in Pharmacology from Thomas Jefferson University. Since
1989, Dr. Lamon has been an Adjunct Assistant Professor of Pharmacology at
Thomas Jefferson University. Dr. Lamon also serves as a director of several of
Covance's subsidiaries.

     Paul H. Sartori, Ph.D., 52, has been a Corporate Senior Vice
President--Human Resources of Covance since January 1999. From January 1997
through December 1998, Dr. Sartori was Executive Vice President of External
Affairs and Human Resources


42
<PAGE>

for Novartis Corporation, a global life sciences company. From January 1995
through December 1996, Dr. Sartori was Senior Vice President--Human Resources &
Communications for the pharmaceuticals division of Ciba-Giegy Corporation and
from December 1988 to December 1994 he was Senior Vice President--Human
Resources of that division.

     James D. Utterback, 43, has been a Corporate Senior Vice President of
Covance since July 1996 and President of the Client Relations Group--North
America and Asia of Covance since September 1998. From August 1996 to September
1998, Mr. Utterback was Group President, Global Ventures for Covance. From
August 1995 to August 1998, Mr. Utterback was also responsible for Covance's
global packaging operations and from May 1994 until August 1995, Mr. Utterback
was the Senior Vice President, Human Resources and Quality for CLSI. Prior to
May 1994, Mr. Utterback served in various executive capacities, including Chief
Executive Officer in South Africa, for RPR. Mr. Utterback has worked in the
pharmaceutical industry since 1985, living in Europe, Africa and the United
States. Mr. Utterback also serves as a director of several of Covance's
subsidiaries.

     Michael G. Wokasch, 47, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Wokasch has been the Group President,
Early Development Services since July 1995. Early Development Services provide
the Company's preclinical services and Phase I clinical services. From January
1992 until July 1995, Mr. Wokasch served as Divisional Vice President of Sales
of ALI. From October 1991 to January 1992, Mr. Wokasch served as Director for
New Product/Marketing/  Development & Scientific Relations at ALI. Prior to
October 1991, Mr. Wokasch was a Director, New Product Development at ALI. Mr.
Wokasch also serves as a director of several of Covance's subsidiaries.


Item 11. Executive Compensation

     Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.


Item 12. Security Ownership by Certain Beneficial Owners and Management of
Covance

     Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.


Item 13. Certain Relationships and Related Transactions

     Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.


                                                                              43
<PAGE>

                                    PART IV


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


(a) Documents filed as part of this report.


  1. Financial Statements. The financial statements filed as part of this
     report are listed on the Index to Consolidated Financial Statements on
     page 25.


  2. Financial Statement Schedules. Schedules are omitted because they are not
     applicable or the required information is shown in the consolidated
     financial statements or notes thereto.


  3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed as
     part of, or incorporated by reference in, this report are listed in (c)
     below and in the accompanying Exhibit Index.


(b) Reports on Form 8-K.
     None.


(c) Item 601 Exhibits.


<TABLE>
<S>      <C>
 2.1     Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical Laboratories
         Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
         Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
         1996.
 3.1     Certificate of Incorporation. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10,
         filed with the SEC on November 19, 1996.
 3.2     By-Laws. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10, filed with the SEC
         on November 19, 1996.
 4.1     Form of Common Stock Certificate. Incorporated by reference to Registrant's filing on Amendment No. 3 on
         Form 10, filed with the SEC on November 25, 1996.
 4.2     Rights Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31, 1996.
         Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
         1997.
10.1     Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and Covance Inc.,
         dated December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
         year ended December 31, 1996.
10.2     Spin-Off Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated December 31,
         1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 1996.
10.3     Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories Inc.,
         December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996.
10.4     Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance Inc., dated
         December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996.
10.5     Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of Georgia, N.A. and Lenders
         named therein, dated November 26,1996. Incorporated by reference to Registrant's Annual Report on Form
         10-K for the fiscal year ended December 31, 1996.
10.6     Employee Stock Ownership Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for
         the fiscal year ended December 31, 1996.
</TABLE>

44
<PAGE>


<TABLE>
<S>       <C>
10.7      Stock Purchase Savings Plan, as amended. Incorporated by reference to Registrant's Annual Report on Form
          10-K for the fiscal year ended December 31, 1996.
10.8      Employee Stock Purchase Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the
          fiscal year ended December 31, 1996.
10.9      Employee Equity Participation Plan. Incorporated by reference to Registrant's filing on Amendment No. 3 on
          Form 10, filed with the SEC on November 25, 1996.
10.10     Amended and Restated Supplemental Executive Retirement Plan. Filed herewith.
10.11     Restricted Share Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
          year ended December 31, 1996.
10.12     Non-Employee Directors' Amended and Restated Restricted Stock Plan. Filed herewith.
10.13     Directors' Deferred Compensation Plan, as amended. Incorporated by reference to Registrant's Annual Report
          on Form 10-K for the fiscal year ended December 31, 1997.
10.14     Employment Agreement between Christopher Kuebler and Covance Inc. Incorporated by reference to
          Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.15     Corporate Senior Vice President Employment Letters and Schedule. Incorporated by reference to Registrant's
          Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.16     Variable Compensation Plan. Filed herewith.
10.17     Conversion Equity Plan. Incorporated by reference to Registrant's filing on a Registration Statement on Form
          S-8, Registration No. 333-29467, filed with the SEC on June 18, 1997.
10.18     Non-Employee Directors' Stock Option Plan. Filed herewith.
10.19     Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors. Filed herewith.
10.20     Amendment No. 1 to Employment Agreement between Christopher Kuebler and Covance Inc. Filed herewith.
10.21     Amendment No. 1 to Corporate Senior Vice President Employment Letters. Filed herewith.
21        Subsidiaries. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10, filed with the
          SEC on November 19, 1996.
23        Consent of PricewaterhouseCoopers LLP. Filed herewith.
27        Financial Data Schedule. (Edgar filing only).
</TABLE>

(d) Financial Statement Schedules.
     None.

                                                                              45
<PAGE>

                                  SIGNATURES

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


<TABLE>
<S>                      <C>
                         COVANCE INC.
Dated: March 4, 1999     By: /s/ Christopher A. Kuebler
                         Christopher A. Kuebler
                         Chairman of the Board, President
                         and Chief Executive Officer
</TABLE>

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


<TABLE>
<S>                                  <C>                                         <C>
Signature                                            Title                            Date
---------                                            -----                            ----


/s/ Christopher A. Kuebler           Chairman of the Board                       March 4, 1999
--------------------------           President and Chief Executive Officer 
Christopher A. Kuebler               (Principal Executive Officer)         
                                     
/s/ Charles C. Harwood, Jr.          Corporate Senior Vice President             March 4, 1999
--------------------------           and Chief Financial Officer     
Charles C. Harwood, Jr.              (Principal Financial Officer)  
                                                                                       
/s/ Michael Giannetto                Corporate Vice President and Controller     March 4, 1999
--------------------------           (Principal Accounting Officer) 
Michael Giannetto                    

/s/ Robert M. Baylis                 Director                                    March 4, 1999
--------------------------
Robert M. Baylis

/s/ Van C. Campbell                  Director                                    March 4, 1999
--------------------------
Van C. Campbell

/s/ Irwin Lerner                     Director                                    March 4, 1999
--------------------------
Irwin Lerner

/s/ J. Randall MacDonald             Director                                    March 4, 1999
--------------------------
J. Randall MacDonald

/s/ Nigel W. Morris                  Director                                    March 4, 1999
--------------------------
Nigel W. Morris

/s/ Kathleen G. Murray               Director                                    March 4, 1999
--------------------------
Kathleen G. Murray

/s/ William C. Ughetta               Director                                    March 4, 1999
--------------------------
William C. Ughetta
</TABLE>


46
<PAGE>

                                 EXHIBIT INDEX




<TABLE>
 
<S>         <C>
Exhibit
Number      Description
-----       ----
 2.1        Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical Laboratories
            Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
            Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
            1996.
 3.1        Certificate of Incorporation. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10,
            filed with the SEC on November 19, 1996.
 3.2        By-Laws. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10, filed with the SEC
            on November 19, 1996.
 4.1        Form of Common Stock Certificate. Incorporated by reference to Registrant's filing on Amendment No. 3 on
            Form 10, filed with the SEC on November 25, 1996.
 4.2        Rights Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31, 1996.
            Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
            1997.
10.1        Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and Covance Inc.,
            dated December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
            year ended December 31, 1996.
10.2        Spin-Off Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated December 31,
            1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended
            December 31, 1996.
10.3        Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories Inc.,
            December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1996.
10.4        Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance Inc., dated
            December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
            ended December 31, 1996.
10.5        Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of Georgia, N.A. and Lenders
            named therein, dated November 26,1996. Incorporated by reference to Registrant's Annual Report on Form
            10-K for the fiscal year ended December 31, 1996.
10.6        Employee Stock Ownership Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for
            the fiscal year ended December 31, 1996.
10.7        Stock Purchase Savings Plan, as amended. Incorporated by reference to Registrant's Annual Report on Form
            10-K for the fiscal year ended December 31, 1996.
10.8        Employee Stock Purchase Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the
            fiscal year ended December 31, 1996.
10.9        Employee Equity Participation Plan. Incorporated by reference to Registrant's filing on Amendment No. 3 on
            Form 10, filed with the SEC on November 25, 1996.
10.10       Amended and Restated Supplemental Executive Retirement Plan. Filed herewith.
10.11       Restricted Share Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
            year ended December 31, 1996.
10.12       Non-Employee Directors' Amended and Restated Restricted Stock Plan. Filed herewith.
10.13       Directors' Deferred Compensation Plan, as amended. Incorporated by reference to Registrant's Annual Report
            on Form 10-K for the fiscal year ended December 31, 1997.
</TABLE>

                                                                              47
<PAGE>


<TABLE>
<S>        <C>
 
Exhibit
Number     Description
-----      --------------------------------------------------------------------------------------------------------------
10.14      Employment Agreement between Christopher Kuebler and Covance Inc. Incorporated by reference to
           Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.15      Corporate Senior Vice President Employment Letters and Schedule. Incorporated by reference to Registrant's
           Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.16      Variable Compensation Plan. Filed herewith.
10.17      Conversion Equity Plan. Incorporated by reference to Registrant's filing on a Registration Statement on Form
           S-8, Registration No. 333-29467, filed with the SEC on June 18, 1997.
10.18      Non-Employee Directors' Stock Option Plan. Filed herewith.
10.19      Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors. Filed herewith.
10.20      Amendment No. 1 to Employment Agreement between Christopher Kuebler and Covance Inc.
           Filed herewith.
10.21      Amendment No. 1 to Corporate Senior Vice President Employment Letters. Filed herewith.
  21       Subsidiaries. Incorporated by reference to Registrant's filing on Amendment No. 2 on Form 10, filed with the
           SEC on November 19, 1996.
  23       Consent of PricewaterhouseCoopers LLP. Filed herewith.
  27       Financial Data Schedule. (Edgar filing only).
</TABLE>

48