10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

                                                        [QUEST DIAGNOSTICS LOGO]

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number 1-12215

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

DELAWARE
(State of Incorporation)

16-1387862
(I.R.S. Employer Identification Number)

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                          
Title of Each Class                                          Name of Each Exchange on Which Registered
Common Stock
  with attached Preferred Share Purchase Right               New York Stock Exchange

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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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes   X    No
                                       -----     -----

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes   X    No
                                       -----     -----


As of June 30, 2003, the aggregate market value of the approximately 83 million
shares of voting and non-voting common equity held by non-affiliates of the
registrant was approximately $5.3 billion, based on the closing price on such
date of the registrant's Common Stock on the New York Stock Exchange.

As of February 23, 2004, there were outstanding 103,604,635 shares of Common
Stock, $.01 par value.

Documents Incorporated by Reference



                                                              PART OF FORM 10-K INTO
DOCUMENT                                                        WHICH INCORPORATED
- --------                                                        ------------------
                                                           
Portions of the registrant's Proxy Statement to be filed by
  April 29, 2004............................................         Part III


Such Proxy Statement, except for portions thereof, which have been specifically
incorporated by reference, shall not be deemed "filed" as part of this report on
Form 10-K.







                                     PART I

ITEM 1. BUSINESS

OVERVIEW

    We are the nation's leading provider of diagnostic testing, information and
related services, providing insights that enable physicians, hospitals, managed
care organizations and other healthcare professionals to make decisions to
improve health. We offer patients and physicians the broadest access to
diagnostic laboratory services through our national network of laboratories and
patient service centers. We provide interpretive consultation through the
largest medical and scientific staff in the industry, with over 300 physicians
and Ph.D.'s around the country. We are the leading provider of esoteric testing,
including gene-based testing, and testing for drugs of abuse. We are also a
leading provider of anatomic pathology services and testing for clinical trials.
We empower healthcare organizations and clinicians with state-of-the-art
information technology solutions that can improve practice management and
patient care.

    During 2003, we generated net revenues of $4.7 billion and processed over
130 million requisitions for testing. Each requisition form accompanies a
patient specimen, indicating the tests to be performed and the party to be
billed for the tests. Our customers include physicians, hospitals, managed care
organizations, employers, governmental institutions and other commercial
clinical laboratories.

    We currently operate a nationwide network of approximately 1,925 patient
service centers, principal laboratories located in more than 30 major
metropolitan areas throughout the United States, and approximately 155 smaller
"rapid response" laboratories (including, in each case, facilities operated at
our joint ventures). We are the only company in our industry to provide full
esoteric testing services, including gene-based testing, on both coasts through
our Quest Diagnostics Nichols Institute facilities, located in San Juan
Capistrano, California and Chantilly, Virginia. We also have laboratory
facilities in Mexico City, Mexico and San Juan, Puerto Rico and near London,
England.

    We are a Delaware corporation. We sometimes refer to our subsidiaries and
ourselves as the "Company". We are the successor to MetPath Inc., a New York
corporation that was organized in 1967. From 1982 to 1996, we were a subsidiary
of Corning Incorporated, or Corning. On December 31, 1996, Corning distributed
all of the outstanding shares of our common stock to the stockholders of
Corning. In August 1999, we completed the acquisition of SmithKline Beecham
Clinical Laboratories, Inc., or SBCL, which operated the clinical laboratory
business of SmithKline Beecham plc, or SmithKline Beecham.

    Our principal executive offices are located at One Malcolm Avenue,
Teterboro, New Jersey 07608, telephone number: (201) 393-5000. Our filings with
the Securities and Exchange Commission, or the SEC, including our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, are available free of charge on our website as soon
as reasonably practicable after they are filed with, or furnished to, the SEC.
Our Internet website is located at http://www.questdiagnostics.com.

THE UNITED STATES CLINICAL LABORATORY TESTING MARKET

    Clinical laboratory testing is an essential element in the delivery of
healthcare services. Physicians use laboratory tests to assist in the detection,
diagnosis, evaluation, monitoring and treatment of diseases and other medical
conditions. Clinical laboratory testing is generally categorized as clinical
testing and anatomic pathology testing. Clinical testing is performed on body
fluids, such as blood and urine. Anatomic pathology testing is performed on
tissues and other samples, such as human cells. Most clinical laboratory tests
are considered routine and can be performed by most commercial clinical
laboratories. Tests that are not routine and that require more sophisticated
equipment and highly skilled personnel are considered esoteric tests. Esoteric
tests, including gene-based tests, are generally referred to laboratories that
specialize in performing those tests.

    We believe that the United States diagnostic testing industry had
over $37 billion in annual revenues in 2003. Most laboratory tests are
performed by one of three types of laboratories: commercial clinical
laboratories; hospital-affiliated laboratories; and physician-office
laboratories. In 2003, we believe that hospital-affiliated laboratories
performed over one-half of the clinical laboratory tests in the United States,
commercial clinical laboratories performed approximately one-third of those
tests, and physician-office laboratories performed the balance.

    The underlying fundamentals of the diagnostic testing industry have improved
since the early to mid-1990s, which was a period of declining reimbursement and
reduced test utilization. During the early 1990s, the





industry was negatively impacted by changes in government regulation and
investigations into various billing practices. In addition, the rapid growth of
managed care, as a result of the need to reduce overall healthcare costs, and
excess laboratory testing capacity, led to revenue and profit declines across
the diagnostic testing industry, which in turn led to industry consolidation,
particularly among commercial laboratories. As a result of these dynamics, fewer
but larger commercial laboratories have emerged, which have greater economies of
scale, rigorous programs designed to assure compliance with government billing
regulations and other laws, and a more disciplined approach to pricing services.
These changes have resulted in improved profitability and a reduced risk of
non-compliance with complex government regulations. At the same time, a slowdown
in the growth of managed care and decreasing influence by managed care
organizations on the ordering of clinical laboratory testing by physicians has
contributed to renewed growth in testing volumes and further improvements in
profitability since 1999. Partially offsetting these favorable trends have been
changes in the United States economy during the last several years, which have
resulted in an increase in the number of unemployed and uninsured. In addition,
in an attempt to slow the rapidly rising costs of healthcare, employers and
healthcare insurers have made design changes to healthcare plans which shift a
larger portion of healthcare costs to consumers. We believe these factors have
reduced the utilization of healthcare services in general. Orders for laboratory
testing are generated from physician offices, hospitals and employers. As such,
factors such as the number of unemployed and uninsured and design changes in
healthcare plans, which impact the level of employment or the number of
physicians' office and hospital visits, will impact the utilization of
laboratory testing.

    We believe the diagnostic testing industry has continued to grow during the
last several years despite the slowdown in the United States economy and the
changes in healthcare plan design, and that growth will accelerate as the
economy improves. In addition, over the longer term, growth is expected to
accelerate as a result of the following factors:

    o  general expansion and aging of the United States population;

    o  continuing research and development in the area of genomics and
       proteomics, which is expected to yield new, more sophisticated and
       specialized diagnostic tests;

    o  increasing recognition by consumers and payers of the value of early
       detection and prevention, which can be provided through laboratory
       testing, as a means to improve health and reduce the overall cost of
       healthcare; and

    o  increasing affordability of tests due to advances in technology and cost
       efficiencies.

BUSINESS STRATEGY

    Our mission is to be recognized by our customers and employees as the best
provider of comprehensive and innovative diagnostic testing, information and
related services. The principal components of this strategy are to:

    o  COMPETE THROUGH PROVIDING THE HIGHEST QUALITY SERVICES: We intend to
       become recognized as the quality leader in the healthcare services
       industry. We continue to implement our Six Sigma and standardization
       initiatives throughout all aspects of our organization. Six Sigma is
       a management approach that requires a thorough understanding of customer
       needs and requirements, root cause analysis, process improvements and
       rigorous tracking and measuring. We have integrated our Six Sigma
       initiative with our initiative to standardize operations and processes
       across the Company by adopting identified Company best practices. We
       plan to continue these initiatives during the next several years and
       expect that successful implementation of these initiatives will result
       in measurable improvements in customer satisfaction as well as
       significant economic benefits.

    o  CAPITALIZE ON OUR LEADING POSITION WITHIN THE LABORATORY TESTING MARKET:
       We are the leader in the core clinical laboratory testing business
       offering the broadest national access to clinical laboratory testing
       services, with facilities in substantially all of the major metropolitan
       areas in the United States. We currently operate a nationwide network of
       approximately 1,925 patient service centers, principal laboratories
       located in more than 30 major metropolitan areas throughout the United
       States and about 155 smaller "rapid response" laboratories that enable
       us to serve physicians, managed care organizations, hospitals, employers
       and other healthcare providers and their patients throughout the United
       States. We believe that customers will increasingly seek to utilize
       laboratory testing providers that have a nationwide presence and offer
       a comprehensive range of services and that, as a result, we will be
       able to profitably enhance our market position.

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    o  CONTINUE TO LEAD INNOVATION: We intend to build upon our reputation as a
       leading innovator in the clinical laboratory industry by continuing to
       introduce new tests, technology and services. As the industry leader with
       the largest and broadest network and the leading provider of esoteric
       testing, including gene-based testing, we believe that we are the best
       partner for developers of new technology and tests to introduce their
       products to the marketplace. Through our relationship with members of the
       academic community, pharmaceutical and biotechnology firms, and emerging
       medical technology companies that develop and commercialize novel
       diagnostics, pharmaceutical and device technologies, we believe that we
       are one of the leaders in transferring technical innovation to the
       market (see "Our Services -- New Test Introductions").

       We believe that, with the unveiling of the human genome, new genes and
       the linkages of genes with disease will continue to be discovered at an
       accelerating pace, leading to research that will result in ever more
       complex and thorough predictive, diagnostic and therapeutic testing. We
       believe that we are well positioned to capture much of this growth.

       We continue to invest in the development and improvement of our
       information technology products for customers and providers by developing
       differentiated products that will provide friendlier, easier access to
       ordering and resulting of laboratory tests and patient-centric
       information. In February 2003, we launched our proprietary eMaxx'r'
       Internet portal to physicians nationwide, which enables doctors to order
       diagnostic tests and review laboratory results online, as well as check
       patients' insurance eligibility in real time and view clinical
       information from many sources.

    o  PURSUE STRATEGIC GROWTH OPPORTUNITIES: We intend to continue to leverage
       our network in order to capitalize on targeted strategic growth
       opportunities both inside and outside our core clinical laboratory
       testing business. These opportunities are more fully described under
       "Strategic Growth Opportunities" and include expanding our gene-based
       and specialty testing capabilities, developing information technology
       products for customers and providers, expanding our geographic presence
       across the United States, and continuing to make selective acquisitions.

    o  LEVERAGE OUR SATISFACTION MODEL: Our approach to conducting business
       states that satisfied employees lead to satisfied customers, which in
       turn benefits our stockholders. We regularly survey our employees and
       customers and follow up on their concerns. We emphasize skills training
       for all employees and leadership training for our supervisory employees,
       which includes Six Sigma training to manage high-impact quality
       improvement projects throughout our organization, and annual compliance
       training. We are committed to engaging each of our employees with
       dignity and respect and expect them to treat our customers the same way.
       We believe that our treatment and training of employees, together with
       our competitive pay and benefits, helps increase employee satisfaction
       and performance, thereby enabling us to provide better services to
       our customers.

RECENT ACQUISITIONS

    On February 28, 2003, we completed the acquisition of Unilab Corporation, or
Unilab, the leading commercial clinical laboratory in California. In connection
with the acquisition, we issued approximately 7.4 million shares of Quest
Diagnostics common stock (including 0.3 million shares of Quest Diagnostics
common stock reserved for outstanding stock options of Unilab which were
converted upon the completion of the acquisition into options to acquire shares
of Quest Diagnostics common stock), paid $297 million in cash and repaid $220
million of debt, representing substantially all of Unilab's then existing
outstanding indebtedness.

    In connection with the acquisition of Unilab, as part of a settlement
agreement with the United States Federal Trade Commission, we entered into an
agreement to sell to Laboratory Corporation of America Holdings, Inc., or
LabCorp, certain assets in northern California for $4.5 million, including the
assignment of agreements with four independent physician associations, or IPA,
and leases for 46 patient service centers (five of which also serve as rapid
response laboratories). Approximately $27 million in annual net revenues were
generated by capitated fees under the IPA contracts and associated
fee-for-service testing for physicians whose patients use these patient service
centers, as well as from specimens received directly from the IPA physicians. We
completed the transfer of assets and assignment of the IPA agreements to LabCorp
during the third quarter of 2003.

    As part of the Unilab acquisition, we acquired all of Unilab's operations,
including its primary testing facilities in Los Angeles, San Jose and
Sacramento, California, approximately 365 patient service centers, 35 rapid
response laboratories and approximately 4,100 employees. Following the sale of
certain assets to LabCorp, we closed our previously owned clinical laboratory in
the San Francisco Bay area and completed the integration

                                       3




of remaining customers in the northern California area to Unilab's laboratories
in San Jose and Sacramento. We continue to have two laboratories in the Los
Angeles metropolitan area (our facilities in Van Nuys and Tarzana). We plan to
open a new regional laboratory in the Los Angeles metropolitan area and then
integrate our business in the Los Angeles metropolitan area into the new
facility. We expect to incur up to $20 million of costs through 2005 to
integrate Unilab and our existing California operations. Upon completion of the
Unilab integration, we expect to realize approximately $25 million to $30
million of annual synergies. We expect to achieve this annual rate of synergies
by the end of 2005.

    On April 1, 2002, we acquired American Medical Laboratories, Incorporated,
or AML, and an affiliated company of AML, LabPortal, Inc., a provider of
electronic connectivity products, in an all-cash transaction valued at
approximately $500 million, which included the assumption of approximately $160
million in debt. AML was a national provider of esoteric testing to hospitals
and specialty physicians and a leading provider of diagnostic testing services
in the Nevada and metropolitan Washington, D.C. markets. The Company's
Chantilly, Virginia laboratory, acquired as part of the AML acquisition, has
become our primary esoteric testing laboratory and hospital service center for
the eastern United States, complementing our Nichols Institute esoteric testing
facility in San Juan Capistrano, California. Esoteric testing volumes have been
redirected within our national network to provide customers with improved
turnaround time and customer service. We have completed the transition of
certain routine clinical laboratory testing previously performed in the
Chantilly, Virginia laboratory to other testing facilities within our regional
laboratory network.

    Following an acquisition, the integration process requires the dedication of
significant management resources, which could result in a loss of momentum in
the activities of our business and may cause an interruption of, or
deterioration in, our services as a result of the following difficulties, among
others:

    o  a loss of key customers or employees;

    o  inconsistencies in standards, controls, procedures and policies between
       the acquired company and our existing operations may make it more
       difficult to implement and harmonize company-wide financial, accounting,
       billing, information and other systems;

    o  failure to maintain the quality of services that the Company has
       historically provided;

    o  diversion of management's attention from the day-to-day business of our
       Company as a result of the need to deal with the foregoing disruptions
       and difficulties; and

    o  the added costs of dealing with such disruptions.

    Since most of our clinical laboratory testing is performed under
arrangements that are terminable at will or on short notice, any interruption
of, or deterioration in, our services may also result in a customer's decision
to stop using us for clinical laboratory testing. These events could have a
material adverse impact on our business. However, management believes that the
successful implementation of our integration plans and our value proposition
based on expanded patient access, our broad testing capabilities and most
importantly, the quality of the services we provide, will mitigate customer
attrition.

OUR SERVICES

    Our laboratory testing business consists of routine testing, esoteric
testing, and clinical trials testing. Routine testing generates approximately
80% of our net revenues, esoteric and gene-based testing generates approximately
16% of our net revenues, and clinical trials testing generates less than 3% of
our net revenues. We derive less than 2% of our net revenues from foreign
operations.

ROUTINE TESTING

    Routine tests measure various important bodily health parameters such as the
functions of the kidney, heart, liver, thyroid and other organs. Commonly
ordered tests include:

    o  blood cholesterol level tests;

    o  complete blood cell counts;

    o  Pap tests;

    o  HIV-related tests;

    o  urinalyses;

    o  pregnancy and other prenatal tests; and

    o  alcohol and other substance-abuse tests.

                                       4




    We perform routine testing through our network of major laboratories, rapid
response laboratories, or "stat" labs, and patient service centers. We also
perform routine testing at the hospital laboratories we manage. Major
laboratories offer a full line of routine clinical tests. Rapid response
laboratories are local facilities where we can quickly perform an abbreviated
group of routine tests for customers that require rapid turnaround times.
Patient service centers are facilities where specimens are collected. These
centers are typically located in or near a building used by medical
professionals.

    We operate 24 hours a day, 365 days a year. We perform and report most
routine procedures within 24 hours. Most test results are delivered
electronically.

ESOTERIC TESTING

    Esoteric tests are those tests that require more sophisticated technology,
equipment and materials, professional "hands-on" attention and more highly
skilled professional and technical personnel, and may be performed less
frequently than routine tests. Because it is not cost-effective for most
clinical laboratories to perform a low volume of esoteric tests in-house, they
generally refer many of these tests to an esoteric clinical testing laboratory
that specializes in performing these more complex tests. Due to their
complexity, esoteric tests are generally reimbursed at higher levels than
routine tests.

    Our two esoteric testing laboratories, which conduct business as Quest
Diagnostics Nichols Institute, are among the leading esoteric clinical testing
laboratories in the world. In 1998, our esoteric testing laboratory in San Juan
Capistrano, California, became the first clinical laboratory in North America to
achieve ISO-9001 certification. Our esoteric testing laboratory in Chantilly,
Virginia, acquired as part of the AML acquisition, now enables us to provide
full esoteric testing services, including gene-based testing, on the east coast.
Our two esoteric testing laboratories perform hundreds of esoteric tests that
are not routinely performed by our regional laboratories. These esoteric tests
are generally in the following fields:

    o  endocrinology and metabolism (the study of glands, their hormone
       secretions and their effects on body growth and metabolism);

    o  genetics (the study of chromosomes, genes and their protein products and
       effects);

    o  hematology (the study of blood and bone marrow cells) and coagulation
       (the process of blood clotting);

    o  immunology (the study of the immune system including antibodies, immune
       system cells and their effects);

    o  microbiology and infectious diseases (the study of microscopic forms of
       life including bacteria, viruses, fungi and other infectious agents);

    o  oncology (the study of abnormal cell growth including benign tumors and
       cancer);

    o  serology (a science dealing with the body fluids and their analysis,
       including antibodies, proteins and other characteristics);

    o  special chemistry (more sophisticated testing requiring special expertise
       and technology); and

    o  toxicology (the study of chemicals and drugs and their effects on the
       body's metabolism).

NEW TEST INTRODUCTIONS

    We intend to build upon our reputation as a leading innovator in the
clinical laboratory industry by continuing to introduce new diagnostic tests. As
the industry leader with the largest and broadest network and the leading
provider of esoteric testing, including gene-based testing, we believe that we
are the best partner for developers of new technology and tests to introduce
their products to the marketplace.

    During 2003, we continued to be a leading innovator in the industry through
both tests that we developed at Nichols Institute, the largest provider of
molecular diagnostic testing in the United States, as well as through
relationships with technology developers. During 2003, we developed and
introduced:

    o  more than 15 comprehensive panels utilizing our menu of over 100 tests to
       assist physicians with diagnosis and management of patients with bleeding
       or blood clotting disorders;

    o  over 15 new infectious disease tests including DNA assays for West Nile
       and SARS infection; and

    o  a biomarker assay that provides information on recurrence risk and
       biologic behavior of node negative breast cancer to guide therapy for
       the 30% of women with node negative disease.

                                       5




    During 2003, we inaugurated a molecular endocrinology laboratory, with
introduction of the first commercial DNA tests for central and nephrogenic
Diabetes Insipidus (DI), Congenital Adrenal Hyperplasia (CAH), and Thyroid
Hormone Resistance (THR). The DI tests bypass the complicated perturbation tests
used for differential diagnosis of the several disorders. CAH testing is offered
as a DNA analysis for the most common mutations and as a CAH complete gene
sequencing for the 60 deleterious mutations known to be associated with this
wide spectrum of adrenal function disorders. The THR testing provides definitive
diagnosis for children with hypothyroidism of variable extent associated with
the defective hormone receptor.

    Through our relationship with members of the academic community and
pharmaceutical and biotechnology firms, as well as our collaboration with
emerging medical technology companies that develop and commercialize novel
diagnostics, pharmaceutical and device technologies, we believe that we are one
of the leaders in transferring technical innovation to the market. During 2003,
we entered into a variety of strategic technology arrangements including:

    o  an agreement with Enterix, Inc. under which we have begun to offer the
       Insure'TM' test, an FDA-cleared fecal immunochemical screening test for
       colorectal cancer. Unlike other non-invasive colorectal cancer screening
       technologies, the Insure'TM' test is easy for patients to use and
       requires no handling of fecal matter;

    o  an agreement with diaDexus under which we are expanding our heart disease
       test offering through the Lp-PLA2 test, which enables physicians to
       detect a new risk factor for cardiovascular disease by measuring
       levels of the enzyme lipoprotein-associated phospholipase A2; and

    o  a relationship with Thermo Electron under which we are developing a
       biochip-based test for the detection of cystic fibrosis (CF) gene
       mutations during prenatal screening.

    Through our research and development, marketing and commercial alliance with
Roche Diagnostics, we were the first laboratory to offer several new tests
developed by Roche, including its Elecsys NT-proBNP test (which aids in the
diagnosis of congestive heart failure). Our relationship with Celera Diagnostics
gives us access to potentially significant markers for the risk of
cardiovascular disease, the leading cause of death in the United States, and
diabetes. Our relationship with Correlogic Systems has gained access to its new
ovarian cancer blood test, which we hope will be available to the marketplace in
2004 and will be the first protein pattern recognition blood test to detect
ovarian cancer in women who are already considered high risk.

    We believe that, with the unveiling of the human genome, new genes and the
linkages of genes with disease will continue to be discovered at an accelerating
pace, leading to research that will result in ever more complex and thorough
predictive, diagnostic and therapeutic testing. We believe that we are well
positioned to capture much of this growth.

CLINICAL TRIALS TESTING

    We believe that we are the world's second largest provider of clinical
laboratory testing performed in connection with clinical research trials on new
drugs in the world. Clinical research trials are required by the Food and Drug
Administration, or FDA, and other international regulatory authorities to assess
the safety and efficacy of new drugs. We have clinical trials testing centers in
the United States and in England. We also provide clinical trials testing in
Australia, Singapore, and South Africa through arrangements with third parties.
Clinical trials involving new drugs are increasingly being performed both inside
and outside the United States. Approximately 45% of our net revenues from
clinical trials testing in 2003 represented testing for GlaxoSmithKline plc, or
GSK. We currently have a long-term contractual relationship with GSK, under
which we are the primary provider of testing to support GSK's clinical trials
testing requirements worldwide.

OTHER SERVICES AND PRODUCTS

    We manufacture and market diagnostic test kits and systems primarily for
esoteric testing under the Nichols Institute Diagnostics brand name. These are
sold principally to hospitals, clinical laboratories and dialysis centers,
both domestically and internationally. Our MedPlus subsidiary is a developer and
integrator of clinical connectivity and data management solutions for healthcare
organizations and clinicians primarily through its ChartMaxx'r' electronic
medical record system. During 2003, we began deploying eMaxx'r', a new
physician's Internet portal across the United States. The Internet portal was
developed by MedPlus and can provide physicians a "patient-centric" view of
laboratory test results and other clinical information on-line.

                                       6




PAYERS AND CUSTOMERS

    We provide testing services to a broad range of healthcare providers. We
consider a "payer" as the party that pays for the test and a "customer" as the
party who refers the test to us. Depending on the billing arrangement and
applicable law, the payer may be (1) the physician or other party (such as
another laboratory or an employer) who referred the testing to us, (2) the
patient, or (3) a third party who pays the bill for the patient, such as an
insurance company, Medicare or Medicaid. Some states, including New York, New
Jersey and Rhode Island, prohibit us from billing physician clients. We consider
a managed care organization as both our customer and a payer, when it contracts
with us on an exclusive or semi-exclusive basis on behalf of its patients.

    During 2003, only two customers accounted for more than 5% of our net
revenues, and no single customer accounted for more than 7% of our net revenues.
We believe that the loss of any one of our customers would not have a material
adverse effect on our financial condition, results of operations or cash flows.

PAYERS

    The following table shows current estimates of the breakdown of the
percentage of our total volume of requisitions and total clinical laboratory net
revenues during 2003 applicable to each payer group:




                                                                             NET REVENUES AS
                                                                                  % OF
                                                      REQUISITION VOLUME     TOTAL CLINICAL
                                                           AS % OF           LABORATORY NET
                                                         TOTAL VOLUME           REVENUES
                                                         ------------           --------
                                                                     
Patient.............................................        2%- 5%               5%-10%
Medicare and Medicaid...............................       15%-20%              15%-20%
Physicians, Hospitals, Employers and Other
  Monthly-Billed Payers.............................       35%-40%              20%-25%
Third Party Fee-for-Service.........................       30%-35%              40%-45%
Managed Care-Capitated..............................       10%-15%               5%-10%


CUSTOMERS

    Physicians

    Physicians requiring testing for patients are the primary source of our
clinical laboratory testing volume. We typically bill physician accounts on a
fee-for-service basis. Fees billed to physicians are based on the laboratory's
client fee schedule and are typically negotiated. Fees billed to patients and
insurance companies are based on the laboratory's patient fee schedule, subject
to any limitations on fees negotiated with the insurance companies or with
physicians on behalf of their patients. Medicare and Medicaid reimbursements are
based on fee schedules set by governmental authorities.

    Managed Care Organizations and Other Insurance Providers

    Health insurers, which typically contract with a limited number of clinical
laboratories for their members, represent approximately one-half of our total
testing volumes and one-half of our net revenues. Larger health insurers
typically prefer to use large commercial clinical laboratories because they can
provide services on a national or regional basis and can manage networks of
local or regional laboratories to provide even broader access to their members
and physicians. In addition, larger laboratories are better able to achieve the
low-cost structures necessary to profitably service large health insurers and
can provide test utilization data across their various plans in a consistent
format. In certain markets, such as California, many health insurers delegate
their covered members to independent physician associations, which in turn
contract with laboratories for clinical laboratory services.

    Over the last decade, health insurers have been consolidating, resulting in
fewer but larger insurers with significant bargaining power in negotiating fee
arrangements with healthcare providers, including clinical laboratories. These
health insurers demand that clinical laboratory service providers accept
discounted fee structures or assume all or a portion of the financial risk
associated with providing testing services to their members through capitated
payment contracts. Under these capitated payment contracts, the Company and
health insurers agree to a predetermined monthly contractual rate for each
member of the health insurer's plan regardless of the number or cost of services
provided by the Company. Some services, such as various esoteric tests, new
technologies and anatomic pathology services, may be carved out from a capitated
rate and, if carved

                                       7




out, are charged on a fee-for-service basis. We work closely with health
insurers as they evaluate new tests; however, as innovation in the testing
area increases, there is no guarantee that health insurers will agree to carve
out these services or reimburse them at rates that reflect the true cost or
value associated with such services.

    In recent years, there has been a shift in the way major insurers contract
with clinical laboratories. Health insurers have begun to offer more freedom of
choice to their affiliated physicians, including greater freedom to determine
which laboratory to use and which tests to order. Accordingly, most of our
agreements with major health insurers are non-exclusive contracts. As a result,
under these non-exclusive arrangements, physicians have more freedom of choice
in selecting laboratories, and laboratories are likely to compete more on the
basis of service and quality rather than price alone. Also, health insurers have
been giving patients greater freedom of choice and patients have increasingly
been selecting plans (such as preferred provider organizations and consumer
driven plans) that offer a greater choice of providers. Pricing for these
preferred provider organizations is typically negotiated on a fee-for-service
basis, which generally results in higher revenue per requisition than under a
capitated fee arrangement. Despite these trends, health insurers continue to
aggressively seek cost reductions in order to keep their premiums to their
customers competitive. If we are unable to agree on pricing with a health
insurer, we would become a "non-participating" provider and could then only
bill the ordering physician or the patient rather than the health insurer.
This "non-participating" status could lead to loss of business since the
physician is likely to refer testing to a participating provider whose testing
is covered by the patient's health insurance benefit plan. We cannot assure
investors that we will continue to be successful in negotiating contracts
with major insurers. Loss of multiple major insurer or other payer agreements
could have a material adverse effect on our financial condition, results of
operations and cash flows.

    We offer QuestNet'TM', an innovative product to develop and manage a
customized network of clinical laboratory providers for health insurers. Through
QuestNet'TM', physicians and members are provided multiple choices for clinical
laboratory testing while health insurers realize cost reductions under a single
capitated arrangement.

    Hospitals

    We provide services to hospitals throughout the United States that vary from
esoteric testing to helping manage their laboratories. We believe that we are
the industry's market leader in servicing hospitals. Our hospital customers
account for approximately 13% of our net revenues, the majority of which
represents services billed to the hospitals under reference testing
arrangements, based on negotiated fee schedules, for certain testing that the
hospitals do not perform internally. Hospitals generally maintain an on-site
laboratory to perform testing on patients and refer less frequently needed and
highly specialized procedures to outside laboratories, which typically charge
the hospitals on a negotiated fee-for-service basis. We believe that most
hospital laboratories perform approximately 90% to 95% of their patients'
clinical laboratory tests. In addition, many hospitals compete with commercial
clinical laboratories for outreach (non-hospital patients) testing. Most
physicians have admitting privileges or other relationships with hospitals as
part of their medical practice. Many hospitals leverage their relationships with
community physicians and encourage the physicians to send their outreach testing
to the hospital's laboratory. In addition, hospitals that own physician
practices generally require the physicians to refer tests to the hospital's
affiliated laboratory. As a result, hospital-affiliated laboratories can be both
customers and competitors for commercial clinical laboratories.

    During 2002, in conjunction with the acquisition of AML, we launched
dedicated sales and service teams focused on serving the unique needs of
hospital customers. We believe that the combination of full-service, bi-coastal
esoteric testing capabilities, medical and scientific professionals for
consultation, innovative connectivity products, focus on Six Sigma quality and
dedicated sales and service professionals has positioned us to be a partner of
choice for hospital customers.

    We have joint venture arrangements with leading integrated health delivery
networks in several metropolitan areas. These joint venture arrangements, which
provide testing for affiliated hospitals as well as for unaffiliated physicians
and other healthcare providers in their geographic areas, serve as our principal
laboratory facilities in their service areas. Typically, we have either a
majority ownership interest in, or day-to-day management responsibilities for,
our hospital joint venture relationships. We also manage the laboratories at a
number of other hospitals.

                                       8




    Employers, Governmental Institutions and Other Clinical Laboratories

    We provide testing services to federal, state and local governmental
agencies and to large employers. We believe that we are the leading provider of
clinical laboratory testing to employers for drugs of abuse. We also provide
wellness testing to employers to enable employees to take an active role in
improving their health. Testing services for employers account for approximately
3% of our net revenues. The volume of testing services for employers, which
generally have relatively low profit margins, has declined significantly during
2001 through 2003 driven by a slowdown in hiring. We also perform esoteric
testing services for other commercial clinical laboratories that do not have a
full range of testing capabilities. All of these customers are charged on a
fee-for-service basis.

    Consumers

    Consumers are becoming increasingly interested in managing their own health
and health records. Currently, almost all the testing we perform is ordered
directly by a physician, who then receives the test results. However, over time,
we believe that consumers will increasingly want to order clinical laboratory
tests themselves. To that end, we offer a focused menu of clinical laboratory
testing directly to consumers in certain states. Consumers pay for and receive
the test results directly. In each case, a physician reviews the order and
result. We believe this market will continue to grow over time.

SALES AND MARKETING

    We market to and service our customers through our direct sales force,
customer service and patient service representatives and couriers.

    We focus our sales efforts on obtaining and retaining profitable accounts.
We have an active account management process to evaluate the profitability of
all of our accounts. Where appropriate, we change the service levels, terminate
accounts that are not profitable or adjust pricing.

    Our sales force is organized by customer type with the majority of
representatives focused on marketing laboratory services to physicians,
including specialty physicians such as oncologists, cardiologists and
gastroenterologists. Additionally, we have a managed care sales organization
that maintains relationships with regional and national insurance and managed
care organizations. We also have a hospital sales organization that focuses on
meeting the unique needs of hospitals and leverages the specialized capabilities
of our Nichols Institute esoteric testing laboratories. Supporting our hospital
and physician sales teams are genomics and esoteric testing specialists, who are
specially trained and focused on marketing and selling more complex tests to our
customers. A smaller portion of our sales force focuses on selling substance-of-
abuse testing to employers.

    Customer service representatives perform a number of services for patients
and customers. They monitor services, answer questions and help resolve
problems. Our couriers pick up specimens from most clients daily.

    Our corporate marketing function is organized by customer and is responsible
for developing and executing marketing strategies, new product launches, and
promotional and advertising support. The marketing function is also responsible
for customer satisfaction surveys, market research, tradeshow administration,
database marketing tools, and marketplace trending and analysis.

STRATEGIC GROWTH OPPORTUNITIES

    In addition to expanding our core clinical laboratory business through
internal growth and pursuing our strategy to become a leading provider of
medical information, we intend to continue to leverage our network in order to
capitalize on targeted growth opportunities both inside and outside our core
laboratory testing business. These opportunities include:

    o  GENE-BASED AND OTHER ESOTERIC TESTS: We intend to remain a leading
       innovator in the clinical laboratory industry by continuing to introduce
       new tests, technology and services. We estimate that the current United
       States market in esoteric testing, including gene-based testing, is $3
       billion to $4 billion per year. We believe that we have the largest
       gene-based testing business in the United States, with greater than
       $500 million in net revenues during 2003, and that this business has been
       growing by more than 20% per year. We believe that the unveiling of the
       human genome, the discovery of new genes and the linkages of these genes
       with disease will result in more complex and thorough predictive,
       diagnostic and therapeutic testing. We believe that we are well
       positioned to realize this growth. We intend to focus on
       commercializing diagnostic applications of discoveries in the areas of
       functional genomics (the analysis

                                       9




       of genes and their functions) and proteomics (the discovery of new
       proteins made possible by the human genome project).

    o  ANATOMIC PATHOLOGY: While we are one of the leading providers of anatomic
       pathology services in the United States, we have traditionally been
       strongest in cytology, and specifically in the analysis of Pap tests to
       detect cervical cancer. During the last several years, we have led the
       industry in converting over 80% of our Pap smear business to the use of
       liquid-based technology for cervical cancer screening, a higher quality
       and more profitable product offering. We intend to continue to expand our
       anatomic pathology business into higher growth segments, including
       histology (tissue pathology), and actively participate in the emerging
       use of molecular testing as a screening tool in conjunction with Pap
       tests. We estimate that the current United States market for anatomic
       pathology services is approximately $6 billion per year. We estimate
       that cytology represents about $1 billion per year of this market, and
       that tissue pathology represents about $5 billion per year of this
       market. We generated approximately $500 million in net revenues from
       such services during 2003.

    o  INFORMATION TECHNOLOGY: We continue to invest in the development and
       improvement of information technology products for customers and
       providers by developing differentiated products that will provide
       friendlier, easier access to ordering and resulting of laboratory tests
       and patient-centric information. In February 2003, we launched our
       proprietary eMaxx'r' Internet portal to physicians nationwide. The
       eMaxx'r' Internet portal enables doctors to order diagnostic tests and
       review laboratory results online, as well as check patients' insurance
       eligibility in real time and view clinical information from many sources.
       In pilot markets, physicians are also able to use eMaxx'r' to prescribe
       pharmaceuticals. This service allows us to replace older technology
       desktop products that we currently provide to many physicians and
       thereby streamline our support structure. Demand has been growing for
       our information technology solutions as physician offices have expanded
       their usage of the Internet. By the end of 2003, we were receiving
       approximately 25% of all test orders and delivering about 35% of all
       test results via the Internet.

       The eMaxx'r' Internet portal was developed by MedPlus Inc., or MedPlus,
       which we acquired in November 2001. MedPlus' ChartMaxx'r' and eMaxx'r'
       patient record systems are designed to support the creation and
       management of electronic patient records, by bringing together in one
       patient-centric view information from various sources, including the
       physician's records and laboratory and hospital data. We intend to
       expand the services offered through our portal over time as other
       strategic arrangements are realized, which will enhance our ability to
       introduce a broad range of electronic services to healthcare providers.

    o  SELECTIVE REGIONAL ACQUISITIONS: The clinical laboratory industry remains
       highly fragmented. We expect to continue to acquire other regional
       clinical laboratories that can be integrated with our existing
       laboratories, thereby enabling us to reduce costs and improve
       efficiencies through the elimination of redundant facilities and
       equipment, and reductions in personnel (see "Recent Acquisitions" for a
       discussion of our recent acquisitions). We may also consider
       acquisitions of ancillary businesses as part of our overall growth
       strategy, such as our November 2001 acquisition of MedPlus, which
       develops clinical connectivity products designed to enhance patient
       care (see "Information Technology").

INFORMATION SYSTEMS

    Information systems are used extensively in virtually all aspects of our
business, including laboratory testing, billing, customer service, logistics,
and management of medical data. Our success depends, in part, on the continued
and uninterrupted performance of our information technology, or IT systems.
Computer systems are vulnerable to damage from a variety of sources, including
telecommunications or network failures, malicious human acts and natural
disasters. Moreover, despite network security measures, some of our servers are
potentially vulnerable to physical or electronic break-ins, computer viruses and
similar disruptive problems. Despite the precautionary measures that we have
taken to prevent unanticipated problems that could affect our IT systems,
sustained or repeated system failures that interrupt our ability to process test
orders, deliver test results or perform tests in a timely manner could adversely
affect our reputation and result in a loss of customers and net revenues.

    During the 1980s and early 1990s when we acquired many of our laboratory
facilities, our regional laboratories were operated as local, decentralized
units, and we did not standardize their billing, laboratory and some of their
other information systems. As a result, by the end of 1995 we had many different
information

                                       10




systems for billing, test results reporting, and other transactions. Over
time, the growth in the size and network of our customers and the increasing
complexity of billing demonstrated a greater need for standardized systems.

    During 2002, we began implementation of a standard laboratory information
system and a standard billing system. We expect that deployment of the
standardized systems will take several more years to complete and will result in
significantly more centralized systems than we have today. We expect the
integration of these systems will improve operating efficiency and provide
management with more timely and comprehensive information with which to make
management decisions. However, failure to properly implement this
standardization process could materially adversely impact us. During system
conversions of this type, workflow may be re-engineered to take advantage of
enhanced system capabilities, which may cause temporary disruptions in service.
In addition, the implementation process, including the transfer of databases and
master files to new data centers, presents significant conversion risks that
need to be managed carefully.

BILLING

    Billing for laboratory services is complicated. Depending on the billing
arrangement and applicable law, we must bill various payers, such as patients,
insurance companies, Medicare, Medicaid, doctors and employer groups, all of
which have different requirements. Additionally, auditing for compliance with
applicable laws and regulations as well as internal compliance policies and
procedures adds further complexity to the billing process. Among many other
factors complicating billing are:

    o  pricing differences between our fee schedules and the reimbursement rates
       of the payers;

    o  disputes with payers as to which party is responsible for payment; and

    o  disparity in coverage and information requirements among various payers.

    We incur significant additional costs as a result of our participation in
Medicare and Medicaid programs, as billing and reimbursement for clinical
laboratory testing is subject to considerable and complex federal and state
regulations. These additional costs include those related to: (1) complexity
added to our billing processes; (2) training and education of our employees and
customers; (3) compliance and legal costs; and (4) costs related to, among other
factors, medical necessity denials and advance beneficiary notices. Compliance
with applicable laws and regulations, as well as internal compliance policies
and procedures, adds further complexity and costs to the billing process.
Changes in laws and regulations could negatively impact our ability to bill our
clients. The Centers for Medicare & Medicaid Services, or CMS (formerly the
Health Care Financing Administration), establishes procedures and continuously
evaluates and implements changes in the reimbursement process.

    We believe that most of our bad debt expense, which was 4.8% of our net
revenues in 2003, is primarily the result of missing or incorrect billing
information on requisitions received from healthcare providers rather than
credit related issues. In general, we perform the requested tests and report
test results regardless of whether the billing information is incorrect or
missing. We subsequently attempt to contact the provider to obtain any missing
information and rectify incorrect billing information. Missing or incorrect
information on requisitions adds complexity to and slows the billing process,
creates backlogs of unbilled requisitions, and generally increases the aging of
accounts receivable. When all issues relating to the missing or incorrect
information are not resolved in a timely manner, the related receivables are
written off to the allowance for doubtful accounts.

    We have implemented "best practices" for billing that have significantly
reduced the percentage of requisitions with missing billing information from
approximately 16% at the beginning of 1996 to approximately 4% in 2003. These
initiatives, together with our Six Sigma and standardization initiatives and
progress in dealing with Medicare medical necessity documentation requirements,
have significantly reduced bad debt expense as a percentage of net revenues from
about 7% during 1996 to 4.8% during 2003. We believe that in the longer term,
with a continuing focus on process discipline and the increased use of
electronic ordering by our customers, bad debt as a percentage of net revenues
can be reduced to 4% or less (see "Regulation of Reimbursement for Clinical
Laboratory Services").

COMPETITION

    While there has been significant consolidation in the clinical laboratory
testing business in recent years, our industry remains fragmented and highly
competitive. We compete with three types of laboratory providers:
hospital-affiliated laboratories, other commercial clinical laboratories and
physician-office laboratories. We are the leading clinical laboratory provider
in the United States, with net revenues of $4.7 billion during 2003, and
facilities in substantially all of the country's major metropolitan areas. Our
largest competitor is LabCorp. In

                                       11




addition, we compete with, and service, many smaller regional and local
commercial clinical laboratories, as well as laboratories owned by physicians
and hospitals (see "Payers and Customers -- Customers").

    We believe that healthcare providers consider a number of factors when
selecting a laboratory, including:

    o  service capability and quality;

    o  accuracy, timeliness and consistency in reporting test results;

    o  number and type of tests performed by the laboratory;

    o  number, convenience and geographic coverage of patient service centers;

    o  reputation in the medical community; and

    o  pricing.

    We believe that we compete favorably in each of these areas.

    We believe that large commercial clinical laboratories may be able to
increase their share of the overall clinical laboratory testing market due to
their large service networks and lower cost structures. These advantages should
enable larger clinical laboratories to more effectively serve large customers,
including managed care organizations. In addition, we believe that consolidation
in the clinical laboratory testing business will continue. However, a majority
of the clinical laboratory testing is likely to continue to be performed by
hospitals, which generally have affiliations with community physicians that
refer testing to us (see "Payers and Customers -- Customers -- Hospitals"). As
a result of these affiliations, we compete against hospital-affiliated
laboratories primarily on the basis of service capability and quality as well
as other non-pricing factors. Our failure to provide service superior to
hospital-affiliated laboratories and other laboratories could negatively
impact our net revenues.

    The diagnostic testing industry is faced with changing technology and new
product introductions. Advances in technology may lead to the development of
more cost-effective tests that can be performed outside of a commercial clinical
laboratory such as (1) point-of-care tests that can be performed by physicians
in their offices and (2) home testing that can be performed by patients or by
physicians in their offices. Development of such technology and its use by our
customers would reduce the demand for our laboratory testing services and
negatively impact our net revenues (see "Regulation of Clinical Laboratory
Operations").

QUALITY ASSURANCE

    Our goal is to continually improve the processes for collection, storage and
transportation of patient specimens, as well as the precision and accuracy of
analysis and result reporting. Our quality assurance efforts focus on
proficiency testing, process audits, statistical process control and personnel
training for all of our laboratories and patient service centers. We continue to
implement our Six Sigma and standardization initiatives to help achieve our goal
of becoming recognized as the undisputed quality leader in the healthcare
services industry. Our Nichols Institute facility in San Juan Capistrano was the
first clinical laboratory in North America to achieve ISO-9001 certification.
Two of our clinical trials laboratories, our diagnostic kits facility and one of
our routine laboratories have also achieved ISO-9001 certification. These
certifications are international standards for quality management systems.

    INTERNAL PROFICIENCY TESTING, QUALITY CONTROL AND AUDITS. Quality control
samples are processed in parallel with the analysis of patient specimens. The
results of tests on quality control samples are monitored to identify trends,
biases or imprecision in the analytical processes. We also perform internal
process audits as part of our comprehensive Quality Assurance program.

    EXTERNAL PROFICIENCY TESTING AND ACCREDITATION. All of our laboratories
participate in various external quality surveillance programs. They include
proficiency testing programs administered by the College of American
Pathologists, or CAP, as well as some state agencies.

    CAP is an independent, non-governmental organization of board certified
pathologists. CAP is approved by CMS to inspect clinical laboratories to
determine compliance with the standards required by the Clinical Laboratory
Improvement Amendments of 1988, or CLIA. CAP offers an accreditation program to
which laboratories may voluntarily subscribe. All of our major regional
laboratories are accredited by CAP. Accreditation includes on-site inspections
and participation in the CAP (or equivalent) proficiency testing program.

                                       12




REGULATION OF CLINICAL LABORATORY OPERATIONS

    The clinical laboratory industry is subject to significant federal and state
regulation, including inspections and audits by governmental agencies.
Governmental authorities may impose fines or criminal penalties or take other
actions to enforce laws and regulations, including revoking a clinical
laboratory's federal certification to operate a clinical laboratory operation.
Changes in regulation may increase the costs of performing clinical laboratory
tests, increase the administrative requirements of claims or decrease the amount
of reimbursement.

    CLIA AND STATE REGULATION. All of our laboratories and (where applicable)
patient service centers are licensed and accredited by the appropriate federal
and state agencies. CLIA regulates virtually all clinical laboratories by
requiring they be certified by the federal government and comply with various
operational, personnel and quality requirements intended to ensure that their
clinical laboratory testing services are accurate, reliable and timely. CLIA
does not preempt state laws that are more stringent than federal law. For
example, state laws may require additional personnel qualifications, quality
control, record maintenance and/or proficiency testing. The cost of compliance
with CLIA makes it cost prohibitive for many physicians to operate clinical
laboratories in their offices. However, manufacturers of laboratory equipment
and test kits could seek to increase their sales by marketing point-of-care
laboratory equipment to physicians and by selling test kits approved for home
use to both physicians and patients. Diagnostic tests approved or cleared by the
FDA for home use are automatically deemed to be "waived" tests under CLIA and
may be performed in physician office laboratories with minimal regulatory
oversight as well as by patients in their homes.

    DRUG TESTING. The Substance Abuse and Mental Health Services Administration,
or SAMHSA, regulates drug testing for public sector employees and employees of
certain federally regulated businesses. SAMHSA has established detailed
performance and quality standards that laboratories must meet to perform drug
testing on these employees. All laboratories that perform such testing must be
certified as meeting SAMHSA standards.

    CONTROLLED SUBSTANCES. The federal Drug Enforcement Administration, or DEA,
regulates access to controlled substances used to perform drugs of abuse
testing. Laboratories that use controlled substances are licensed by the DEA.

    MEDICAL WASTE, HAZARDOUS WASTE AND RADIOACTIVE MATERIALS. Clinical
laboratories are also subject to federal, state and local regulations relating
to the handling and disposal of regulated medical waste, hazardous waste and
radioactive materials. We generally use outside vendors to dispose of such
waste.

    FDA. The FDA has regulatory responsibility over instruments, test kits,
reagents and other devices used to perform diagnostic testing by clinical
laboratories. In the past, the FDA has claimed regulatory authority over
laboratory-developed tests, but has exercised enforcement discretion in not
regulating most laboratory-developed tests performed by high complexity
CLIA-certified laboratories. In December 2000, the Department of Health and
Human Services, or HHS, Secretary's Advisory Committee on Genetic Testing
recommended that the FDA be the lead federal agency to regulate genetic testing.
In late 2002, a new HHS Secretary's Advisory Committee on Genetics, Health and
Society was appointed to replace the prior Advisory Committee, but it has not
yet made any final recommendations. In the meantime, the FDA is considering
revising its regulations on analyte specific reagents, which are used in
laboratory-developed tests, including laboratory developed genetic testing.
Representatives of clinical laboratories (including Quest Diagnostics) and the
American Clinical Laboratory Association (our industry trade association) have
met with representatives of the FDA to address industry issues pertaining to
potential FDA regulation of genetic testing in general and issues with regard to
the impact of potential increased oversight over analyte specific reagents. We
expect those discussions to continue. Increased FDA regulation of the reagents
used in laboratory-developed testing could lead to increased costs and delays in
introducing new tests, including genetic tests.

    OCCUPATIONAL SAFETY. The federal Occupational Safety and Health
Administration, or OSHA, has established extensive requirements relating
specifically to workplace safety for healthcare employers. This includes
developing and implementing multi-faceted programs to protect workers from
exposure to blood-borne pathogens, such as HIV and hepatitis B and C, including
preventing or minimizing any exposure through sharps or needle stick injuries.

    SPECIMEN TRANSPORTATION. Transportation of most clinical laboratory
specimens and hazardous materials is subject to regulation by the Department of
Transportation, the Public Health Service, the United States Postal Service and
the International Civil Aviation Organization.

    CORPORATE PRACTICE OF MEDICINE. Many states, including some in which our
principal laboratories are located, prohibit corporations from engaging in the
practice of medicine. The corporate practice of medicine doctrine has been
interpreted in certain states to prohibit corporations from employing licensed
healthcare professionals to provide services on the corporation's behalf. The
scope of the doctrine, and how it applies,

                                       13




varies from state to state. In certain states these restrictions affect our
ability to directly provide anatomic pathology services and/or to provide
clinical laboratory services directly to consumers.

PRIVACY AND SECURITY OF HEALTH INFORMATION; STANDARD TRANSACTIONS

    Pursuant to the Health Insurance Portability and Accountability Act of 1996,
or HIPAA, the Secretary of HHS has issued final regulations designed to improve
the efficiency and effectiveness of the health care system by facilitating the
electronic exchange of information in certain financial and administrative
transactions while protecting the privacy and security of the information
exchanged. Three principal regulations have been issued in final form: privacy
regulations, security regulations, and standards for electronic transactions.

    The HIPAA privacy regulations, which fully came into effect in April 2003,
establish comprehensive federal standards with respect to the uses and
disclosures of protected health information by health plans, healthcare
providers and healthcare clearinghouses. The regulations establish a complex
regulatory framework on a variety of subjects, including:

    o  the circumstances under which uses and disclosures of protected health
       information are permitted or required without a specific authorization by
       the patient, including but not limited to treatment purposes, activities
       to obtain payment for our services, and our health care operations
       activities;

    o  a patient's rights to access, amend and receive an accounting of certain
       disclosures of protected health information;

    o  the content of notices of privacy practices for protected health
       information; and

    o  administrative, technical and physical safeguards required of entities
       that use or receive protected health information.

    We have implemented the HIPAA privacy regulations, as required by law. The
HIPAA privacy regulations establish a "floor" and do not supersede state laws
that are more stringent. Therefore, we are required to comply with both federal
privacy standards and varying state privacy laws. In addition, for healthcare
data transfers relating to citizens of other countries, we need to comply with
the laws of other countries. The federal privacy regulations restrict our
ability to use or disclose patient-identifiable laboratory data, without patient
authorization, for purposes other than payment, treatment or healthcare
operations (as defined by HIPAA) except for disclosures for various public
policy purposes and other permitted purposes outlined in the final privacy
regulations. The privacy regulations provide for significant fines and other
penalties for wrongful use or disclosure of protected health information,
including potential loss of licensure and civil and criminal fines and
penalties. Although the HIPAA statute and regulations do not expressly provide
for a private right of damages, we also could incur damages under state laws to
private parties for the wrongful use or disclosure of confidential health
information or other private personal information.

    The final HIPAA security regulations, which establish requirements for
safeguarding electronic patient information, were published on February 20, 2003
and became effective on April 21, 2003, although healthcare providers have until
April 20, 2005 to comply. We are conducting an analysis to determine the proper
security measures to reasonably and appropriately comply with the standards and
implementation specifications by the compliance deadline of April 20, 2005.

    The final HIPAA regulations for electronic transactions, which we refer to
as the transaction standards, establish uniform standards for electronic
transactions and code sets, including the electronic transactions and code sets
used for claims, remittance advices, enrollment and eligibility. The transaction
standards became effective in October 2002, although covered entities were
eligible to obtain a one-year extension if approved through an application to
the Secretary of HHS. We received this one-year extension through October 16,
2003 from HHS.

    HHS issued guidance on July 24, 2003 stating that it would not penalize a
covered entity for post-implementation date transactions that are not fully
compliant with the transactions standards, if the covered entity could
demonstrate its good faith efforts to comply with the standards. HHS' stated
purpose for this flexible enforcement position was to "permit health plans to
mitigate unintended adverse effects on covered entities' cash flow and business
operations during the transition to the standards, as well as on the
availability and quality of patient care." We continue to work in good faith to
complete the implementation of these standards with those payers who either were
not ready to exchange files in the standard formats as of the compliance date,
or who have varying interpretations of the requirements. Working with these
payers requires that we continue to trade electronic claims files and payments
in legacy formats, even after the compliance deadline of October 16, 2003.

                                      14




    On September 23, 2003, CMS announced that it would implement a contingency
plan for the Medicare program to accept electronic transactions that are not
fully compliant with the transaction standards after the October 16, 2003
compliance deadline. The CMS contingency plan, as announced, allows Medicare
carriers to continue to accept and process Medicare claims in the pre-October 16
electronic formats to give healthcare providers additional time to complete the
testing process, provided that they continue to make a good faith effort to
comply with the new standards. Almost all other payers have followed the lead of
CMS, accepting legacy formats until both parties to the transactions are ready
to implement the new electronic transaction standards.

    As part of its plan, CMS is expected to regularly reassess the readiness of
its healthcare providers to determine how long the contingency plan will remain
in effect. Many of our payers were not ready to implement the transaction
standards by the October 2003 compliance deadline or were not ready to test or
trouble-shoot claims submissions. We are working in good faith with payers that
have not converted to the new standards to reach agreement on each payer's data
requirements and to test claims submissions.

    The HIPAA transaction standards are complex, and subject to differences in
interpretation by payers. For instance, some payers may interpret the standards
to require us to provide certain types of information, including demographic
information not usually provided to us by physicians. As a result of
inconsistent interpretations of transaction standards by payers or our inability
to obtain certain billing information not usually provided to us by physicians,
we could face increased costs and complexity, a temporary disruption in
receipts and ongoing reductions in reimbursements and net revenues. We are
working closely with our payers to establish acceptable protocols for claims
submissions and with our trade association and an industry coalition to
present issues and problems as they arise to the appropriate regulators and
standards setting organizations.

    Compliance with all of the HIPAA requirements requires significant capital
and personnel resources from all healthcare organizations, not just Quest
Diagnostics. While we believe that our total costs to comply with HIPAA will not
be material to our results of operations or cash flows, the potential need for
additional customer contact to obtain data for billing as a result of different
interpretations of the current regulations could impose significant additional
costs on us.

REGULATION OF REIMBURSEMENT FOR CLINICAL LABORATORY SERVICES

    OVERVIEW. The healthcare industry has experienced significant changes in
reimbursement practices during the past several years. Government payers, such
as Medicare (which principally serves patients 65 years and older) and Medicaid
(which principally serves indigent patients), as well as private payers and
large employers, have taken steps and may continue to take steps to control the
cost, utilization and delivery of healthcare services, including clinical
laboratory services. If we cannot offset additional reductions in the payments
we receive for our services by reducing costs, increasing test volume and/or
introducing new procedures, it could have a material adverse impact on our net
revenues and profitability. On the other hand, we believe that laboratory tests
are an effective means to detect certain medical conditions at an earlier point
in time, leading to potential reduction in other healthcare costs such as the
cost of hospitalization.

    Principally as a result of government reimbursement reductions and measures
adopted by CMS to reduce utilization described below, the percentage of our net
revenues derived from Medicare and Medicaid programs declined from approximately
20% in 1995 to approximately 15% in 2002. This percentage increased to
approximately 17% in 2003 principally as a result of our acquisition of Unilab,
which had a higher percentage of its net revenues derived from Medicare and
Medicaid programs. While the cost to comply with Medicare administrative
requirements is disproportionately higher than our cost to bill other payers,
average Medicare reimbursement rates approximate the Company's overall average
reimbursement rate from all sources, making the Medicare business generally less
profitable. However, we believe that our other business may significantly depend
on continued participation in the Medicare and Medicaid programs, because many
customers want a single laboratory to perform all of their clinical laboratory
testing services, regardless of whether reimbursements are ultimately made by
themselves, Medicare, Medicaid or other payers.

    Billing and reimbursement for clinical laboratory testing is subject to
significant and complex federal and state regulation. Penalties for violations
of laws relating to billing federal healthcare programs and for violations of
federal fraud and abuse laws include: (1) exclusion from participation in
Medicare/Medicaid programs; (2) asset forfeitures; (3) civil and criminal fines
and penalties; and (4) the loss of various licenses, certificates and
authorizations necessary to operate some or all of a clinical laboratory's
business. Civil monetary penalties for a wide range of violations are not more
than $10,000 per violation plus three times the amount claimed and, in the case
of kickback violations, not more than $50,000 per violation plus up to three
times the amount

                                       15




of remuneration involved. A parallel civil remedy under the federal False
Claims Act provides for damages not more than $11,000 per violation plus up to
three times the amount claimed.

    REDUCED REIMBURSEMENTS. In 1984, Congress established a Medicare fee
schedule payment methodology for clinical laboratory services performed for
patients covered under Part B of the Medicare program. Congress then imposed a
national ceiling on the amount that carriers could pay under their local
Medicare fee schedules. Since then, Congress has periodically reduced the
national ceilings. The Medicare national fee schedule limitations were reduced
in 1996 to 76% of the 1984 national median of the local fee schedules and in
1998 to 74% of the 1984 national median. The national ceiling applies to tests
for which limitation amounts were established before January 1, 2001. For more
recent tests (tests for which a limitation amount is first established on or
after January 1, 2001), the limitation amount is set at 100% of the median of
all the local fee schedules established for that test in accordance with the
Social Security Act. The Balanced Budget Act of 1997 eliminated the provision
for annual increases to the Medicare national fee schedule based on the consumer
price index from 1998 through 2002. A 1.1% increase based on the consumer price
index became effective on January 1, 2003. The Prescription Drug, Improvement,
and Modernization Act of 2003 eliminated for five years (beginning January 1,
2004) the provision for annual increases to the Medicare national fee schedule
based on the consumer price index, including the adjustment (which would have
been 2.6%) that had been scheduled for January 1, 2004. Thus, by law an
adjustment to the national fee schedule for clinical laboratory services based
on the consumer price index cannot occur before January 1, 2009.

    Pathology services are reimbursed by Medicare based on a resource-based
relative value scale, or RBRVS, that is periodically updated by CMS. Less than
1% of our net revenues are derived from pathology services reimbursed by
Medicare based on RBRVS.

    With regard to the rest of our laboratory services performed on behalf of
Medicare beneficiaries, we must bill the Medicare program directly and must
accept the carrier's fee schedule amount as payment in full. In addition, state
Medicaid programs are prohibited from paying more (and in most instances, pay
significantly less) than Medicare. Major clinical laboratories, including Quest
Diagnostics, typically use two fee schedules for tests billed on a
fee-for-service basis:

    o  "Client" fees charged to physicians, hospitals, and institutions for
       which a clinical laboratory performs testing services on a wholesale
       basis and which are billed on a monthly basis. These fees are generally
       subject to negotiation or discount.

    o  "Patient" fees charged to individual patients and third-party payers,
       like Medicare and Medicaid. These fees generally require separate bills
       for each requisition.

    The fee schedule amounts established by Medicare are typically substantially
lower than patient fees otherwise charged by us, but are sometimes higher than
our fees actually charged to certain other clients. During 1992, the Office of
the Inspector General, or OIG, of the HHS issued final regulations that
prohibited charging Medicare fees substantially in excess of a provider's usual
charges. The OIG, however, declined to provide any guidance concerning
interpretation of these rules, including whether or not discounts to non-
governmental clients and payers or the dual-fee structure might be inconsistent
with these rules.

    A proposed rule released in September 1997 would have authorized the OIG to
exclude providers from participation in the Medicare program, including clinical
laboratories, that charge Medicare and other programs fees that are
"substantially in excess of . . . usual charges . . . to any of [their]
customers, clients or patients." This proposal was withdrawn by the OIG in 1998.
In November 1999, the OIG issued an advisory opinion which indicated that a
clinical laboratory offering discounts on client bills may violate the "usual
charges" regulation if the "charge to Medicare substantially exceeds the amount
the laboratory most frequently charges or has contractually agreed to accept
from non-Federal payers." The OIG subsequently issued a letter clarifying that
the usual charges regulation is not a blanket prohibition on discounts to
private pay customers.

    In September 2003, the OIG published a Notice of Proposed Rulemaking that
would amend the OIG's exclusion regulations addressing excessive claims. Under
the proposed exclusion rule, the OIG would have the authority to exclude a
provider for submitting claims to Medicare that contain charges that are
substantially in excess of the provider's usual charges. The proposal would
define "usual charges" as the average payment from non-government entities, on a
test by test basis, excluding capitated payments; and would define
"substantially in excess" to be an amount that is more than 20% greater than the
usual charge. We believe that the rule is unnecessary because Congress has
already established fee schedules for the services that the rule proposes to
regulate. We also believe that the rule is unworkable and overly burdensome.
Through our industry trade association, we filed comments opposing the proposed
rule and we are working with our trade association and a coalition of other
healthcare providers who also oppose this proposed regulation as drafted. If
this regulation is

                                       16




adopted as proposed, it could potentially reduce the amounts reimbursed to us
by Medicare and other federal payers or affect the fees we charge to other
payers and could also be costly for us to administer.

    The 1997 Balanced Budget Act permits CMS to adjust statutorily prescribed
fees for some medical services, including clinical laboratory services, if the
fees are "grossly excessive." In December 2002, CMS issued an interim final rule
setting forth a process and factors for establishing a "realistic and equitable"
payment amount for all Medicare Part B services (except physician services and
services paid under a prospective payment system) when the existing payment
amounts are determined to be inherently unreasonable. Payment amounts may be
considered unreasonable because they are either grossly excessive or deficient.
We cannot provide any assurances to investors that fees payable by Medicare
could not be reduced as a result of the application of this rule or that the
government might not assert claims for reimbursement by purporting to
retroactively apply this rule or the OIG interpretation concerning "usual
charges."

    Currently, Medicare does not require the beneficiary to pay a co-payment for
clinical laboratory testing. When co-payments were last in effect before
adoption of the clinical laboratory services fee schedules in 1984, clinical
laboratories received from Medicare carriers only 80% of the Medicare allowed
amount and were required to bill Medicare beneficiaries for the unpaid balance
of the Medicare allowed amount. If re-enacted, a co-payment requirement could
adversely affect the revenues of the clinical laboratory industry, including us,
by exposing the testing laboratory to the credit of individuals and by
increasing the number of bills. In addition, a laboratory could be subject to
potential fraud and abuse violations if adequate procedures to bill and collect
the co-payments are not established and followed. The Medicare reform bill
approved by the United State Senate in June 2003 included a co-payment
provision, under which clinical laboratories would receive from Medicare
carriers only 80% of the Medicare allowed amount for clinical laboratory tests
and would be required to bill Medicare beneficiaries for the 20% balance of
the Medicare allowed amount. The co-payment provision was dropped from the
bill as passed (known as Prescription Drug, Improvement, and Modernization Act
of 2003), although the final legislation did include (as discussed above) a
five year freeze on adjustments to the Medicare national fee schedule based on
the consumer price index. Certain Medicaid programs do provide co-payments for
clinical laboratory testing.

    REDUCED UTILIZATION OF CLINICAL LABORATORY TESTING. In recent years, CMS has
taken several steps to reduce utilization of clinical laboratory testing. Since
1995, Medicare carriers have adopted policies under which they do not pay for
many commonly ordered clinical tests unless the ordering physician has provided
an appropriate diagnosis code supporting the medical necessity of the test.
Physicians are required by law to provide diagnostic information when they order
clinical tests for Medicare and Medicaid patients. However, CMS has not
prescribed any penalty for physicians who fail to provide diagnostic information
to laboratories. Moreover, regulations adopted in accordance with HIPAA require
submission of diagnosis codes as part of the standard claims transaction.

    We are generally permitted to bill patients directly for some statutorily
excluded clinical laboratory services. If a patient signs an advance beneficiary
notice, or ABN, we are also generally permitted to bill patients for clinical
laboratory tests that Medicare does not cover due to "medical necessity"
limitations (these tests include limited coverage tests for which the ordering
physician did not provide an appropriate diagnosis code and certain tests
ordered on a patient at a frequency greater than covered by Medicare). An ABN is
a notice signed by the beneficiary which documents the patient's informed
decision to personally assume financial liability for laboratory tests which are
likely to be not covered by Medicare because they are deemed to be not medically
necessary. We do not have any direct contact with most of these patients and, in
such cases, cannot control the proper use of the ABN by the physician or the
physician's office staff. If the ABN is not timely provided to the beneficiary
or is not completed properly, we end up performing tests that we cannot
subsequently bill to the patient if they are not reimbursable by Medicare due to
coverage limitations.

    INCONSISTENT PRACTICES. Currently, many different local carriers administer
Medicare. They have inconsistent policies on matters such as: (1) test coverage;
(2) automated chemistry panels; (3) diagnosis coding; (4) claims documentation;
and (5) fee schedules (subject to the national fee schedule limitations).
Inconsistent carrier rules and policies have increased the complexity of the
billing process for clinical laboratories. As part of the 1997 Balanced Budget
Act, HHS was required to adopt uniform policies on the above matters by January
1, 1999, and replace the current local carriers with no more than five regional
carriers. Although HHS has finalized a number of uniform test coverage/diagnosis
coding policies, it has not taken any final action to replace the local carriers
with five regional carriers. However, in November 2000, CMS published a
solicitation in the Commerce Business Daily seeking two contractors to process
Part B clinical laboratory claims. In the solicitation, CMS stated that the
Secretary has decided to limit the number of carriers processing clinical
diagnostic laboratory test claims to two contractors. The solicitation indicated
that the request for proposals, or RFP, would be released

                                       17




on or before December 31, 2000 but as of February 2004, the RFP had not been
issued; the solicitation did not indicate the effective date for a final
transition to the regional carrier model. CMS plans to achieve standardization
in part through implementing a single claims processing system for all
carriers. This initiative, however, was suspended due to CMS's Year 2000
compliance priorities.

    CARRIER JURISDICTION CHANGES FOR LAB-TO-LAB REFERRALS. On October 31, 2003,
CMS announced its intention to change the manner in which Medicare contractors
currently process claims for lab-to-lab referrals. While laboratories are, under
certain criteria, permitted to directly bill Medicare for tests they refer to
other laboratories, they must be reimbursed at the correct fee schedule amount
based on the Medicare fee schedule in effect in the Medicare carrier region in
which the test was actually performed. Historically, laboratories needed to
enroll with and file claims to multiple carriers in order to bill for such
out-of-area test referrals, to ensure receipt of the appropriate payment amount.
This has proven to be an administratively difficult process, with many obstacles
to obtaining accurate claims payment, including applying the correct fee
schedule. The announced change will enable the laboratory's "home" carrier to
maintain and apply the clinical laboratory fee schedule applicable to the
carrier region where the test was performed. This will streamline the claims
filing process by allowing a laboratory to file all of its claims to its "home"
carrier. As of January 2004, CMS has indicated a July 1, 2004 effective date for
this change.

    COMPETITIVE BIDDING. The Prescription Drug, Improvement and Modernization
Act of 2003 requires CMS to conduct and complete by December 31, 2005, a
demonstration project on the application of competitive acquisition to clinical
laboratory tests. The details of how this federal demonstration project will be
implemented are unknown at this time. Florida has issued a proposal for
competitive bidding for its Medicaid program. If competitive bidding were
implemented on a regional or national basis for clinical laboratory testing,
it could materially adversely affect the clinical laboratory industry and us.

    FUTURE LEGISLATION. Future changes in federal, state and local regulations
(or in the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could adversely affect us. We
cannot predict, however, whether and what type of legislative proposals will be
enacted into law or what regulations will be adopted by regulatory authorities.

    FRAUD AND ABUSE REGULATIONS. Medicare and Medicaid anti-kickback laws
prohibit clinical laboratories from making payments or furnishing other benefits
to influence the referral of tests billed to Medicare, Medicaid or other federal
programs. As noted above, the penalties for violation of these laws may include
criminal and civil fines and penalties and/or suspension or exclusion from
participation in federal programs. Many of the anti-fraud statutes and
regulations, including those relating to joint ventures and alliances, are vague
or indefinite and have not been interpreted by the courts. We cannot predict if
some of the fraud and abuse rules will be interpreted contrary to our practices.

    In November 1999, the OIG issued an advisory opinion concluding that the
industry practice of discounting client bills may constitute a kickback if the
discounted price is below a laboratory's overall cost (including overhead) and
below the amounts reimbursed by Medicare. Advisory opinions are not binding but
may be indicative of the position that prosecutors may take in enforcement
actions. The OIG's opinion, if enforced, could result in fines and possible
exclusion and could require us to eliminate offering discounts to clients below
the rates reimbursed by Medicare. The OIG subsequently issued a letter
clarifying that it did not intend to imply that discounts are a per se violation
of the federal anti-kickback statute, but may merit further investigation
depending on the facts and circumstances presented.

    In addition, since 1992, a federal anti-"self-referral" law, commonly known
as the "Stark" law, prohibits, with certain exceptions, Medicare payments for
laboratory tests referred by physicians who have, personally or through a family
member, an investment interest in, or a compensation arrangement with, the
testing laboratory. Since January 1995, these restrictions have also applied to
Medicaid-covered services. Many states have similar anti-"self-referral" and
other laws that are not limited to Medicare and Medicaid referrals and could
also affect investment and compensation arrangements with physicians. We cannot
predict if some of the state laws will be interpreted contrary to our practices.
In April 2003, the OIG issued a Special Advisory Bulletin addressing what it
described as "questionable contractual arrangements" in contractual joint
ventures. The OIG Bulletin focused on arrangements where a health care provider,
or Owner, expands into a related health care business by contracting with a
health care provider, or Manager, that already is engaged in that line of
business for the Manager to provide related health care items or services to the
patients of the Owner in return for a share of the profits of the new line of
business. While we believe that the Bulletin is directed at "sham" arrangements
intended to induce referrals, we cannot predict whether the OIG might choose to
investigate all contractual joint ventures, including our joint ventures with
various hospitals or hospital systems.

                                       18




GOVERNMENT INVESTIGATIONS AND RELATED CLAIMS

    We are subject to extensive and frequently changing federal, state and local
laws and regulations. We believe that, based on our experience with government
settlements and public announcements by various government officials, the
federal government continues to strengthen its position on healthcare fraud. In
addition, legislative provisions relating to healthcare fraud and abuse give
federal enforcement personnel substantially increased funding, powers and
remedies to pursue suspected cases of fraud and abuse. Many of the regulations
applicable to us, including those relating to billing and reimbursement of tests
and those relating to relationships with physicians and hospitals, are vague or
indefinite and have not been interpreted by the courts. They may be interpreted
or applied by a prosecutorial, regulatory or judicial authority in a manner that
could require us to make changes in our operations, including our billing
practices. If we fail to comply with applicable laws and regulations, we could
suffer civil and criminal penalties, including the loss of licenses or our
ability to participate in Medicare, Medicaid and other federal and state
healthcare programs.

    During the mid-1990s, Quest Diagnostics and SBCL settled government claims
that primarily involved industry-wide billing and marketing practices that both
companies believed to be lawful. The aggregate amount of the settlements for
these claims exceeded $500 million. The federal or state governments may bring
additional claims based on new theories as to our practices that we believe to
be in compliance with law. The federal government has substantial leverage in
negotiating settlements since the amount of potential fines far exceeds the
rates at which we are reimbursed, and the government has the remedy of
excluding a non-compliant provider from participation in the Medicare and
Medicaid programs, which represented approximately 17% of our net revenues
during 2003.

    Although management believes that established reserves for claims are
sufficient, including qui tam cases, of which management is aware, it is
possible that additional information may become available that may cause the
final resolution of these matters to exceed established reserves by an amount
which could be material to our results of operations and cash flows in the
period in which such claims are settled. We do not believe that these issues
will have a material adverse effect on our overall financial condition. However,
we understand that there may be pending qui tam claims brought by former
employees or other "whistle blowers" as to which we have not been provided with
a copy of the complaint and accordingly cannot determine the extent of any
potential liability.

    As an integral part of our compliance program discussed below, we
investigate all reported or suspected failures to comply with federal healthcare
reimbursement requirements. Any non-compliance that results in Medicare or
Medicaid overpayments is reported to the government and reimbursed by us. As a
result of these efforts, we have periodically identified and reported
overpayments. While we have reimbursed these overpayments and have taken
corrective action where appropriate, we cannot assure investors that in each
instance the government will necessarily accept these actions as sufficient.

COMPLIANCE PROGRAM

    Compliance with all government rules and regulations has become a
significant concern throughout the clinical laboratory industry because of
evolving interpretations of regulations and the national debate over healthcare.
We established a compliance program early in 1993.

    We emphasize the development of training programs intended to ensure the
strict implementation and observance of all applicable laws, regulations and
Company policies. Further, we conduct in-depth reviews of procedures, personnel
and facilities to assure regulatory compliance throughout our operations. The
Quality, Safety and Compliance Committee of the Board of Directors requires
periodic reporting of compliance operations from management.

    We seek to conduct our business in compliance with all statutes and
regulations applicable to our operations. Many of these statutes and regulations
have not been interpreted by the courts. We cannot assure investors that
applicable statutes or regulations will not be interpreted or applied by a
prosecutorial, regulatory or judicial authority in a manner that would adversely
affect us. Potential sanctions for violation of these statutes include
significant damages, penalties, and fines, exclusion from participation in
governmental healthcare programs and the loss of various licenses, certificates
and authorization necessary to operate some or all of our business, which
could have a material adverse effect on our business.

                                       19




INTELLECTUAL PROPERTY RIGHTS

    Other companies or individuals, including our competitors, may obtain
patents or other property rights that would prevent, limit or interfere with our
ability to develop, perform or sell our tests or operate our business. As a
result, we may be involved in intellectual property litigation and we may be
found to infringe on the proprietary rights of others, which could force us to
do one or more of the following:

    o  cease developing, performing or selling products or services that
       incorporate the challenged intellectual property;

    o  obtain and pay for licenses from the holder of the infringed intellectual
       property right;

    o  redesign or reengineer our tests;

    o  change our business processes; or

    o  pay substantial damages, court costs and attorneys' fees, including
       potentially increased damages for any infringement held to be willful.

    Patents generally are not issued until several years after an application is
filed. The possibility that, before a patent is issued to a third party, we may
be performing a test or other activity covered by the patent is not a defense
to an infringement claim. Thus, even tests that we develop could become the
subject of infringement claims if a third party obtains a patent covering those
tests.

    Infringement and other intellectual property claims, regardless of their
merit, can be expensive and time-consuming to litigate. In addition, any
requirement to reengineer our tests or change our business processes could
substantially increase our costs, force us to interrupt product sales or delay
new test releases. In the past, we have settled several disputes regarding our
alleged infringement of intellectual property rights of third parties. We are
currently involved in settling several additional disputes. We do not believe
that resolution of these disputes will have a material adverse effect on our
results of operations, cash flows or financial condition. However, infringement
claims could arise in the future as patents could be issued on tests or
processes that we may be performing, particularly in such emerging areas as
gene-based testing and other specialty testing.

INSURANCE

    As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on our client base and reputation.
We maintain various liability insurance programs for claims that could result
from providing or failing to provide clinical laboratory testing services,
including inaccurate testing results and other exposures. Our insurance coverage
limits our maximum exposure on individual claims; however, we are essentially
self-insured for a significant portion of these claims. The basis for claims
reserves incorporates actuarially determined losses based upon our historical
and projected loss experience. Management believes that present insurance
coverage and reserves are sufficient to cover currently estimated exposures.
Although management cannot predict the outcome of any claims made against the
Company, management does not anticipate that the ultimate outcome of any such
proceedings or claims will have a material adverse effect on our financial
position but may be material to our results of operations and cash flows in the
period in which such claims are resolved. Similarly, although we believe that we
will be able to obtain adequate insurance coverage in the future at acceptable
costs, we cannot assure you that we will be able to do so.

EMPLOYEES

    At December 31, 2003 and 2002, we employed approximately 37,200 and 33,400
people, respectively. These totals exclude employees of the joint ventures where
we do not have a majority interest. We have no collective bargaining agreements
with any unions covering any employees in the United States, and we believe that
our overall relations with our employees are good.

                                       20






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

    Some statements and disclosures in this document are forward-looking
statements. Forward-looking statements include all statements that do not relate
solely to historical or current facts and can be identified by the use of words
such as "may", "believe", "will", "expect", "project", "estimate", "anticipate",
"plan" or "continue". These forward-looking statements are based on our current
plans and expectations and are subject to a number of risks and uncertainties
that could significantly cause our plans and expectations, including actual
results, to differ materially from the forward-looking statements. The Private
Securities Litigation Reform Act of 1995, or the Litigation Reform Act, provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation.

    We would like to take advantage of the "safe harbor" provisions of the
Litigation Reform Act in connection with the forward-looking statements included
in this document. Investors are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in this
document. The following important factors could cause our actual financial
results to differ materially from those projected, forecasted or estimated by us
in forward-looking statements:

    (a) Heightened competition, including increased pricing pressure,
        competition from hospitals for testing for non-patients and competition
        from physicians. See "Business -- Competition".

    (b) Impact of changes in payer mix, including any shift from fee-for-service
        to capitated fee arrangements. See "Business -- Payers and
        Customers -- Customers -- Managed Care Organizations and Other Insurance
        Providers".

    (c) Adverse actions by government or other third-party payers, including
        unilateral reduction of fee schedules payable to us, competitive
        bidding, or an increase in the practice of negotiating for exclusive
        contracts that involve aggressively priced capitated payments by managed
        care organizations. See "Business -- Regulation of Reimbursement for
        Clinical Laboratory Services" and "Business -- Payers and
        Customers -- Customers -- Managed Care Organizations and Other Insurance
        Providers".

    (d) The impact upon our testing volume and collected revenue or general or
        administrative expenses resulting from our compliance with Medicare and
        Medicaid administrative policies and requirements of third party payers.
        These include:

        (1) the requirements of Medicare carriers to provide diagnosis codes for
            many commonly ordered tests and the possibility that third party
            payers will increasingly adopt similar requirements;

        (2) the policy of CMS to limit Medicare reimbursement for tests
            contained in automated chemistry panels to the amount that would
            have been paid if only the covered tests, determined on the basis of
            demonstrable "medical necessity", had been ordered;

        (3) continued inconsistent practices among the different local carriers
            administering Medicare;

        (4) inability to obtain from patients an advance beneficiary notice form
            for tests that cannot be billed without prior receipt of the form;
            and

        (5) the potential need to monitor charges and lower certain fees to
            Medicare to comply with the OIG's proposed rule pertaining to
            exclusion of providers for submitting claims to Medicare containing
            charges that are substantially in excess of the provider's usual
            charges.

        See "Business -- Regulation of Reimbursement for Clinical Laboratory
    Services" and "Business -- Billing".

    (e) Adverse results from pending or future government investigations,
        lawsuits or private actions. These include, in particular significant
        monetary damages, loss or suspension of licenses, and/or suspension or
        exclusion from the Medicare and Medicaid programs and/or other
        significant litigation matters. See "Business -- Government
        Investigations and Related Claims".

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

    (g) Failure to efficiently integrate acquired clinical laboratory
        businesses, including Unilab, or to efficiently integrate clinical
        laboratory businesses from joint ventures and alliances with hospitals,
        and to manage the costs related to any such integration, or to retain
        key technical and management personnel. See "Business -- Recent
        Acquisitions".

                                       21




    (h) Inability to obtain professional liability or other insurance coverage
        or a material increase in premiums for such coverage or reserves for
        self-insurance. See "Business -- Insurance".

    (i)  Denial of CLIA certification or other licenses for any of our clinical
         laboratories under the CLIA standards, revocation or suspension of the
         right to bill the Medicare and Medicaid programs or other adverse
         regulatory actions by federal, state and local agencies. See
         "Business -- Regulation of Clinical Laboratory Operations".

    (j)  Changes in federal, state or local laws or regulations, including
         changes that result in new or increased federal or state regulation of
         commercial clinical laboratories, including regulation by the FDA.

    (k) Inability to achieve expected synergies from our acquisitions of other
        business, including Unilab. See "Business -- Recent Acquisitions".

    (l)  Inability to achieve additional benefits from our Six Sigma and
         standardization initiatives.

    (m) Adverse publicity and news coverage about the clinical laboratory
        industry or us.

    (n) Computer or other system failures that affect our ability to perform
        tests, report test results or properly bill customers, including
        potential failures resulting from the standardization of our IT systems
        and other system conversions, telecommunications failures, malicious
        human acts (such as electronic break-ins or computer viruses) or natural
        disasters. See "Business -- Information Systems" and "Business --
        Billing".

    (o) Development of technologies that substantially alter the practice of
        laboratory medicine, including technology changes that lead to the
        development of more cost-effective tests such as (1) point-of-care tests
        that can be performed by physicians in their offices and (2) home
        testing that can be carried out without requiring the services of
        clinical laboratories. See "Business -- Competition" and "Business --
        Regulation of Clinical Laboratory Operations".

    (p) Issuance of patents or other property rights to our competitors or
        others that could prevent, limit or interfere with our ability to
        develop, perform or sell our tests or operate our business.

    (q) Development of tests by our competitors or others which we may not be
        able to license, or usage of our technology or similar technologies or
        our trade secrets by competitors, any of which could negatively affect
        our competitive position.

    (r) Inability to commercialize newly licensed tests or technologies or to
        obtain appropriate reimbursements for such tests.

    (s) Inability to obtain or maintain adequate patent and other proprietary
        rights protections of our products and services or to successfully
        enforce our proprietary rights.

    (t)  Development of an Internet-based electronic commerce business model
         that does not require an extensive logistics and laboratory network.

    (u) The impact of the privacy regulations, security regulations and
        standards for electronic transactions regulations issued under HIPAA on
        our operations as well as the cost to comply with the regulations,
        including the failure of third party payers to complete testing with us,
        failure to agree on data content for claims, failure to accept default
        diagnosis codes in the absence of physician-supplied codes, or inability
        of payers to accept or remit transactions in HIPAA-required standard
        transaction and code set format. See "Business -- Privacy and Security
        of Health Information; Standard Transactions".

    (v) Inability to promptly or properly bill for our services or to obtain
        appropriate payments for services that we do bill. See "Business --
        Billing".

    (w) Changes in interest rates and changes in our credit ratings from
        Standard & Poor's and Moody's Investor Services causing an unfavorable
        impact on our cost of and access to capital.

    (x) Inability to hire and retain qualified personnel or the loss of the
        services of one or more of our key senior management personnel.

    (y) Terrorist and other criminal activities, which could affect our
        customers, transportation or power systems, or our facilities, and for
        which insurance may not adequately reimburse us for.

                                       22




ITEM 2. PROPERTIES

    Our principal laboratories (listed alphabetically by state) are located in
or near the following metropolitan areas. In certain areas (indicated by the
number (2)), we have two principal laboratories as a result of recent
acquisitions.



LOCATION                                        LEASED OR OWNED
- --------                                        ---------------
                                         
Phoenix, Arizona                            Leased by Joint Venture
Los Angeles, California(2)                   One owned, one leased
Sacramento, California                              Leased
San Diego, California                               Leased
San Jose, California                                Leased
San Juan Capistrano, California                      Owned
Denver, Colorado                                    Leased
New Haven, Connecticut                               Owned
Washington, D.C. (Chantilly, Virginia)              Leased
Miami, Florida(2)                            One owned, one leased
Tampa, Florida                                       Owned
Atlanta, Georgia                                     Owned
Chicago, Illinois(2)                         One owned, one leased
Indianapolis, Indiana                       Leased by Joint Venture
Lexington, Kentucky                                  Owned
New Orleans, Louisiana                               Owned
Baltimore, Maryland                                  Owned
Boston, Massachusetts                               Leased
Detroit, Michigan                                   Leased
St. Louis, Missouri                                  Owned
Las Vegas, Nevada                                    Owned
New York, New York (Teterboro, New Jersey)           Owned
Long Island, New York                               Leased
Dayton, Ohio                                Leased by Joint Venture
Oklahoma City, Oklahoma                     Leased by Joint Venture
Portland, Oregon                                    Leased
Erie, Pennsylvania                          Leased by Joint Venture
Philadelphia, Pennsylvania                          Leased
Pittsburgh, Pennsylvania                            Leased
Nashville, Tennessee                                Leased
Dallas, Texas                                       Leased
Houston, Texas                                      Leased
Seattle, Washington                                 Leased


    Our executive offices are located at an owned facility in Teterboro, New
Jersey and at leased facilities in Lyndhurst, New Jersey. We also lease a site
in Norristown, Pennsylvania, that serves as a billing center; a site in San
Clemente, California, that serves as the main facility for Nichols Institute
Diagnostics; a site in Cincinnati that serves as the main office for MedPlus;
and an additional site in West Hills, California, that will serve as our
regional laboratory in the Los Angeles metropolitan area after we complete the
integration of Unilab. We also own an administrative office in Collegeville,
Pennsylvania, and a site in Norriton, Pennsylvania, that serves as our national
data center. We own our laboratory facility in Mexico City and lease laboratory
facilities in San Juan, Puerto Rico and near London, England. We believe that,
in general, our laboratory facilities are suitable and adequate for our current
and anticipated future levels of operation. We believe that if we were unable to
renew a lease on any of our testing facilities, we could find alternative space
at competitive market rates and relocate our operations to such new location.

                                       23




ITEM 3. LEGAL PROCEEDINGS

    In addition to the investigations described in "Business -- Government
Investigations and Related Claims", we are involved in various legal proceedings
arising in the ordinary course of business. Some of the proceedings against us
involve claims that are substantial in amount. Although we cannot predict the
outcome of such proceedings or any claims made against us, we do not anticipate
that the ultimate outcome of the various proceedings or claims will have a
material adverse effect on our financial position, but may be material to our
results of operations and cash flows in the period in which such proceedings or
claims are resolved.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

                                       24






                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

    Our common stock is listed and traded on the New York Stock Exchange under
the symbol "DGX." The following table sets forth, for the periods indicated, the
high and low sales price per share as reported on the New York Stock Exchange
Consolidated Tape:



                                                       HIGH     LOW
                                                       ----     ---
                                                         
2002
First Quarter.......................................  $84.10   $66.00
Second Quarter......................................   96.14    79.25
Third Quarter.......................................   85.31    51.29
Fourth Quarter......................................   66.99    49.09

2003
First Quarter.......................................  $60.90   $47.36
Second Quarter......................................   66.24    55.14
Third Quarter.......................................   69.25    56.42
Fourth Quarter......................................   74.99    59.47


    As of February 23, 2004, we had approximately 5,900 record holders of our
common stock.

    On October 21, 2003, we declared a quarterly cash dividend of $.15 per
common share, payable on January 23, 2004 to holders of record on January 8,
2004. On February 19, 2004, we declared a quarterly cash dividend of $.15 per
common share, payable on April 21, 2004 to holders of record on April 7, 2004.
Prior to October 2003, we had not previously declared or paid cash dividends on
our common stock. We expect to fund future dividend payments with cash flows
from operations, and do not expect the dividend to have a material impact on our
ability to finance future growth.

    In May 2003, our Board of Directors authorized a share repurchase program,
which permits us to purchase up to $300 million of our common stock. In October
2003, our Board of Directors increased the share repurchase authorization by an
additional $300 million. Through December 31, 2003, we repurchased approximately
4 million shares of our common stock at an average price of $64.54 per share for
a total of $258 million.

ITEM 6. SELECTED FINANCIAL DATA

    See page 34.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    See page 37.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    See Item 15 (a) 1 and 2.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

    None.

                                       25




ITEM 9A. CONTROLS AND PROCEDURES

  
(a)  Our Chief Executive Officer and Chief Financial Officer have
     evaluated the effectiveness of the design and operation of
     our disclosure controls and procedures (as defined under
     Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
     of 1934, as amended) as of the end of the period covered by
     this report. Based upon that evaluation, our Chief Executive
     Officer and Chief Financial Officer have concluded that our
     disclosure controls and procedures are adequate and
     effective.

(b)  During the quarter ended December 31, 2003, there were no
     changes in our internal control over financial reporting
     that have materially affected, or are reasonably likely to
     materially affect, our internal control over financial
     reporting.



                                       26






                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Information concerning the directors of the Company is incorporated by
reference to the information in the Company's Proxy Statement to be filed on or
before April 29, 2004, or the Proxy Statement, appearing under the caption
"Election of Directors."

EXECUTIVE OFFICERS OF THE REGISTRANT

    Officers of the Company are elected annually by the Board of Directors and
hold office at the discretion of the Board of Directors. The following persons
serve as executive officers of the Company:

    Kenneth W. Freeman (53) is Chairman of the Board and Chief Executive Officer
of the Company. Mr. Freeman joined the Company in May 1995 as President and
Chief Executive Officer, was elected a Director in July 1995 and was elected
Chairman of the Board in December 1996. Prior to 1995, he served in a variety of
financial and managerial positions at Corning, which he joined in 1972. He was
elected Controller and a Vice President of Corning in 1985, Senior Vice
President in 1987, General Manager of the Science Products Division in 1989 and
Executive Vice President in 1993. He was appointed President and Chief Executive
Officer of Corning Asahi Video Products Company in 1990.

    Surya N. Mohapatra, Ph.D. (54) is President and Chief Operating Officer and
a Director of the Company. Prior to joining the Company in February 1999 as
Senior Vice President and Chief Operating Officer, he was Senior Vice President
of Picker International, a worldwide leader in advanced medical imaging
technologies, where he served in various executive positions during his 18-year
tenure. Dr. Mohapatra was appointed President and Chief Operating Officer in
June 1999.

    The Company is implementing an orderly succession plan under which Dr.
Mohapatra will succeed Mr. Freeman as Chief Executive Officer by the date of the
2004 annual meeting of stockholders, scheduled to be held on May 4, 2004. At
that time Mr. Freeman will continue as Chairman of the Board.

    Robert A. Hagemann (47) is Senior Vice President and Chief Financial
Officer. He joined Corning Life Sciences, Inc., in 1992, where he held a variety
of senior financial positions before being named Vice President and Corporate
Controller of the Company in 1996. Prior to joining the Company, Mr. Hagemann
was employed by Prime Hospitality, Inc. and Crompton & Knowles, Inc. in senior
financial positions. He was also previously associated with Ernst & Young. Mr.
Hagemann assumed his present responsibilities in August 1998.

    Gerald C. Marrone (61) is Senior Vice President, Administration. Mr. Marrone
joined the Company in November 1997 as Chief Information Officer, after 12 years
with Citibank, N.A. He assumed his current position in October 2002. While at
Citibank, he served as Vice President, Division Executive for Citibank's Global
Production Support Division, and was also the Chief Information Officer of
Citibank's Global Cash Management business. Prior to joining Citibank, he served
for five years as the Chief Information Officer for Memorial Sloan-Kettering
Cancer Center in New York.

    Michael E. Prevoznik (42) is Senior Vice President and General Counsel.
Prior to joining SBCL in 1994 as its Chief Legal Compliance Officer, Mr.
Prevoznik was with Dechert Price & Rhodes. In 1996, he became Vice President and
Chief Legal Compliance Officer for SmithKline Beecham Healthcare Services. In
1998, he was appointed Vice President, Compliance for SmithKline Beecham,
assuming additional responsibilities for coordinating all compliance activities
within SmithKline Beecham worldwide. Mr. Prevoznik joined the Company as Vice
President and General Counsel in August 1999. In 2003, he assumed additional
responsibilities for coporate communication and governmental affairs.

    David M. Zewe (52) is Senior Vice President, Diagnostics Testing Services.
Mr. Zewe oversees diagnostic testing operations company-wide, including
physician, clinical trials, international and drugs of abuse testing, as well
as the diagnostic instruments business. Mr. Zewe joined the Company in 1994 as
General Manager of the Philadelphia regional laboratory, became Regional Vice
President Sales and Marketing for the mid-Atlantic region in August 1996, became
Vice President, Revenue Services in August 1999, leading the billing function
company-wide, and became Senior Vice President, U.S. Operations in January 2001,
responsible for all core business operations and revenue services. Mr. Zewe
assumed his current position in May 2002. Prior to joining the Company, Mr. Zewe
was with the Squibb Diagnostics Division of Bristol Myers Squibb, most recently
serving as Vice President of Sales.

                                       27




ITEM 11. EXECUTIVE COMPENSATION

    The information called for by this Item is incorporated by reference to the
information under the caption "Executive Compensation" appearing in the Proxy
Statement. The information contained in the Proxy Statement under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Graph" is not incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Except for the Equity Compensation Plan information set forth below, the
information called for by this Item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" appearing in the Proxy Statement.

                      EQUITY COMPENSATION PLAN INFORMATION

    The following table provides information as of December 31, 2003 about our
common stock that may be issued upon the exercise of options, warrants and
rights under our existing equity compensation plans:



                                                                                              NUMBER OF SECURITIES
                                                                                             REMAINING AVAILABLE FOR
                                          NUMBER OF SECURITIES                                FUTURE ISSUANCE UNDER
                                              TO BE ISSUED            WEIGHTED-AVERAGE         EQUITY COMPENSATION
                                            UPON EXERCISE OF          EXERCISE PRICE OF         PLANS (EXCLUDING
                                          OUTSTANDING OPTIONS,      OUTSTANDING OPTIONS,     SECURITIES REFLECTED IN
             PLAN CATEGORY               WARRANTS AND RIGHTS (a)   WARRANTS AND RIGHTS (b)       COLUMN (a)) (c)
- ---------------------------------------  -----------------------   -----------------------   -----------------------
                                                                                    
Equity compensation plans approved by
  security holders.....................        10,239,921                  $44.85                   4,790,768
Equity compensation plans not approved
  by security holders..................                 -              not applicable               1,419,381
                                               ----------              --------------               ---------
Total..................................        10,239,921                  $44.85                   6,210,149
                                               ----------                  ------                   ---------
                                               ----------                  ------                   ---------


    The only equity compensation plan that has not been approved by the
Company's stockholders is the Company's Employee Stock Purchase Plan, or ESPP.
The ESPP permits employees to purchase the Company's common stock each calendar
quarter through payroll deductions. The purchase price is 85% of the closing
market price on the last business day of the calendar quarter (or, if lower, the
closing market price on the first business day of the calendar quarter). The
ESPP authorizes the issuance of 4 million shares of the Company's common stock.
The number of securities reflected in the table above for the ESPP includes the
share allocation for the fourth quarter of 2003, which were issued in January
2004. The ESPP was adopted prior to the spinoff of the Company in 1996 and, as a
result of action taken by the Board in 2001, has a term ending on December 31,
2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information called for by this Item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
appearing in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

    The information called for by this Item is incorporated by reference to the
information under the caption "Ratification of Appointment of
PricewaterhouseCoopers LLP" appearing in the Proxy Statement.

                                       28





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this report:

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



                            ITEM                              PAGE
                            ----                              ----
                                                           
Report of Independent Auditors..............................   F-1
Consolidated Balance Sheets.................................   F-2
Consolidated Statements of Operations.......................   F-3
Consolidated Statements of Cash Flows.......................   F-4
Consolidated Statements of Stockholders' Equity.............   F-5
Notes to Consolidated Financial Statements..................   F-6
Supplementary Data: Quarterly Operating Results
  (unaudited)...............................................  F-36


    2.  Financial Statement Schedule:



                            ITEM                              PAGE
                            ----                              ----
                                                           
Schedule II -- Valuation Accounts and Reserves..............  F-37


    3.  Exhibits filed as part of this report:

        See (c) below.

(b)  Report on Form 8-K filed during the fourth quarter of 2003:

     On October 21, 2003, the Company furnished a current report on Form 8-K
     reporting under Item 7 its press release of October 31, 2003 announcing,
     among other things, its results for the quarter and nine months ended
     September 30, 2003 and its press release announcing a quarterly cash
     dividend and the expansion of the Company's share repurchase program.

     On October 31, 2003, the Company filed a current report on Form 8-K
     reporting under Item 5 operating income for the quarters ended March 31,
     2003, June 30, 2003 and September 30, 2003 and the nine months ended
     September 30, 2003 and for the quarters ended March 31, 2002, June 30,
     2002, September 30, 2002 and December 31, 2002 and the year ended
     December 31, 2002 on a basis consistent with the preparation of the
     Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

     On November 20, 2003, the Company filed an amended current report on
     Form 8-K (Date of Report: February 26, 2003) reporting under Item 2 on the
     acquisition of the outstanding capital stock of Unilab Corporation.

(c)  Exhibits filed as part of this report:



    EXHIBIT
    NUMBER                            DESCRIPTION
    ------                            -----------
           
     3.1      Restated Certificate of Incorporation (filed as an Exhibit
              to the Company's current report on Form 8-K (Date of Report:
              May 31, 2001) and incorporated herein by reference)
     3.2      Amended and Restated By-Laws of the Registrant (filed as an
              Exhibit to the Company's 2000 annual report on Form 10-K and
              incorporated herein by reference)
     4.1      Form of Rights Agreement dated December 31, 1996 (the
              "Rights Agreement") between Corning Clinical Laboratories
              Inc. and Harris Trust and Savings Bank as Rights Agent
              (filed as an Exhibit to the Company's Registration Statement
              on Form 10 (File No. 1-12215) and incorporated herein by
              reference)
     4.2      Form of Amendment No. 1 effective as of July 1, 1999 to the
              Rights Agreement (filed as an Exhibit to the Company's
              current report on Form 8-K (Date of Report: August 16, 1999)
              and incorporated herein by reference)
     4.3      Form of Amendment No. 2 to the Rights Agreement (filed as an
              Exhibit to the Company's 1999 annual report on Form 10-K and
              incorporated herein by reference)
     4.4      Form of Amendment No. 3 to the Rights Agreement (filed as an
              Exhibit to the Company's 2000 annual report on Form 10-K and
              incorporated herein by reference)
     4.5      Form of Acceptance by National City Bank as successor Rights
              Agent under the Rights Agreement


                                       29




       
    10.1      Form of 6 3/4% Senior Notes due 2006, including the form of
              guarantee endorsed thereon (filed as an Exhibit to the
              Company's current report on Form 8-K (Date of Report:
              June 27, 2001) and incorporated herein by reference)
    10.2      Form of 7 1/2% Senior Notes due 2011, including the form of
              guarantee endorsed thereon (filed as an Exhibit to the
              Company's current report on Form 8-K (Date of Report:
              June 27, 2001) and incorporated herein by reference)
    10.3      Form of 1.75% Contingent Convertible Debentures due 2021,
              including the form of guarantee endorsed thereon (filed as
              an Exhibit to the Company's current report on Form 8-K (Date
              of Report: November 26, 2001) and incorporated herein by
              reference)
    10.4      Indenture dated as of June 27, 2001, among the Company, the
              Subsidiary Guarantors, and the Trustee (filed as an Exhibit
              to the Company's current report on Form 8-K (Date of Report:
              June 27, 2001) and incorporated herein by reference)
    10.5      First Supplemental Indenture, dated as of June 27, 2001,
              among the Company, the Subsidiary Guarantors, and the
              Trustee to the Indenture referred to in Exhibit 10.4 (filed
              as an Exhibit to the Company's current report on Form 8-K
              (Date of Report: June 27, 2001) and incorporated herein by
              reference)
    10.6      Second Supplemental Indenture, dated as of November 26,
              2001, among the Company, the Subsidiary Guarantors, and the
              Trustee to the Indenture referred to in Exhibit 10.4 (filed
              as an Exhibit to the Company's current report on Form 8-K
              (Date of Report: November 26, 2001) and incorporated herein
              by reference)
    10.7      Third Supplemental Indenture, dated as of April 4, 2002,
              among Quest Diagnostics, the Additional Subsidiary
              Guarantors, and the Trustee to the Indenture referred to in
              Exhibit 10.4 (filed as an Exhibit to the Company's current
              report on Form 8-K (Date of Report: April 1, 2002) and
              incorporated herein by reference)
    10.8      Fourth Supplemental Indenture dated as of March 19, 2003,
              among Unilab Corporation (f/k/a Quest Diagnostics Newco
              Incorporated), Quest Diagnostics Incorporated, The Bank Of
              New York, and the Subsidiary Guarantors (filed as an Exhibit
              to the Company's quarterly report on Form 10-Q for the
              quarter ended March 31, 2003 and incorporated herein by
              reference)
    10.9      Credit Agreement, dated as of June 27, 2001, among the
              Company, the Subsidiary Guarantors and the Banks (filed as
              an Exhibit to the Company's current report on Form 8-K (Date
              of Report: June 27, 2001) and incorporated herein by
              reference)
    10.10     Second Amended and Restated Credit and Security Agreement
              dated as of September 30, 2003 among Quest Diagnostics
              Receivables Inc., as Borrower, Quest Diagnostics
              Incorporated, as Servicer, each of the lenders party thereto
              and Wachovia Bank, National Association, as Administrative
              Agent (filed as an Exhibit to the Company's quarterly report
              on Form 10-Q for the quarter ended September 30, 2003 and
              incorporated herein by reference)
    10.11     Amended and Restated Receivables Sale Agreement dated as of
              September 30, 2003 among Quest Diagnostics Incorporated and
              each of its direct or indirect wholly owned subsidiaries who
              is or hereafter becomes a seller hereunder, as the Sellers,
              and Quest Diagnostics Receivables Inc., as the Buyer (filed
              as an Exhibit to the Company's quarterly report on
              Form 10-Q for the quarter ended September 30, 2003 and
              incorporated herein by reference)
    10.12     Term Loan Credit Agreement dated as of June 21, 2002 among
              Quest Diagnostics Incorporated, certain subsidiary
              guarantors of the Company, the lenders party thereto, and
              Bank of America, N.A., as Administrative Agent (filed as an
              Exhibit to the Company's Registration Statement on Form S-4
              (No. 333-88330) and incorporated herein by reference)
    10.13     First Amendment to Credit Agreement dated as of
              September 20, 2002 among Quest Diagnostics Incorporated,
              certain subsidiary guarantors of the Company, the lenders
              party thereto, and Bank of America, N.A., as Administrative
              Agent (filed as an Exhibit to the Company's quarterly report
              on Form 10-Q for the quarter ended September 30, 2002 and
              incorporated herein by reference)
    10.14     Second Amendment to Credit Agreement dated as of
              December 19, 2002 among Quest Diagnostics Incorporated,
              certain subsidiary guarantors of the Company, the lenders
              party thereto, and Bank of America, N.A., as Administrative
              Agent (filed as an Exhibit to post effective Amendment No. 1
              to the Company's Registration Statement on Form S-4
              (No. 333-88330) and incorporated herein by reference)

    

                                       30




       
    10.15     Term Loan Credit Agreement dated as of December 19, 2003
              among Quest Diagnostics Incorporated, certain subsidiary
              guarantors of the Company, the lenders party thereto, and
              Sumitomo Mitsui Banking Corporation
    10.16     Stock and Asset Purchase Agreement dated as of February 9,
              1999 among SmithKline Beecham plc, SmithKline Beecham
              Corporation and the Company (the "Stock and Asset Purchase
              Agreement") (filed as Appendix A of the Company's Definitive
              Proxy Statement dated May 11, 1999 and incorporated herein
              by reference)
    10.17     Amendment No. 1 dated August 6, 1999 to the Stock and Asset
              Purchase Agreement (filed as an Exhibit to the Company's
              current report on Form 8-K (Date of Report: August 16, 1999)
              and incorporated herein by reference)
    10.18     Non-Competition Agreement dated as of August 16, 1999
              between SmithKline Beecham plc and the Company (filed as an
              Exhibit to the Company's current report on Form 8-K (Date of
              Report: August 16, 1999) and incorporated herein by
              reference)
    10.19     Stockholders Agreement dated as of August 16, 1999 between
              SmithKline Beecham plc and the Company (filed as an Exhibit
              to the Company's current report on Form 8-K (Date of Report:
              August 16, 1999) and incorporated herein by reference)
    10.20     Amended and Restated Global Clinical Trials Agreement, dated
              as of December 19, 2002 between SmithKline Beecham plc dba
              GlaxoSmithKline and the Company (filed as an Exhibit to post
              effective amendment No. 1 to the Company's Registration
              Statement on Form S-4 (No. 333-88330) and incorporated
              herein by reference)
    10.21     Agreement and Plan of Merger, dated as of April 2, 2002, as
              amended, among the Company, Quest Diagnostics Newco
              Incorporated and Unilab Corporation (filed as an annex to
              the Company's final prospectus, dated August 6, 2002, and
              incorporated herein by reference)
    10.22     Amendment to the Agreement and Plan of Merger, dated as of
              May 13, 2002, among the Company, Quest Diagnostics Newco
              Incorporated and Unilab Corporation (filed as an annex to
              the Company's final prospectus, dated August 6, 2002, and
              incorporated herein by reference)
    10.23     Amendment No. 2 to the Agreement and Plan of Merger, dated
              as of June 20, 2002, among the Company, Quest Diagnostics
              Newco Incorporated and Unilab Corporation (filed as an annex
              to the Company's final prospectus, dated August 6, 2002, and
              incorporated herein by reference)
    10.24     Amendment No. 3 to the Agreement and Plan of Merger, dated
              as of September 25, 2002, among the Company, Quest
              Diagnostics Newco Incorporated and Unilab Corporation
              (incorporated herein by reference to Exhibit (a)(11) of the
              Company's Schedule TO Amendment No. 12 filed with the
              Commission on September 26, 2002, file No. 001-12215)
    10.25     Amendment No. 4 to the Agreement and Plan of Merger, dated
              as of January 4, 2003, among the Company, Quest Diagnostics
              Newco Incorporated and Unilab Corporation (incorporated
              herein by reference to Exhibit (a)(20) of Quest Diagnostics'
              Schedule TO Amendment No. 20 filed with the Commission on
              January 6, 2003, file No. 001-12215)
    10.26     Form of Employees Stock Purchase Plan, as amended (filed as an
              Exhibit to the Company's annual report on Form 10-K for the year
              ended December 31, 2002 and incorporated herein by reference)
    10.27     Form of 1996 Employee Equity Participation Program, as
              amended (filed as an Exhibit to the Company's quarterly
              report on Form 10-Q for the quarter ended September 30, 2002
              and incorporated herein by reference)
    10.28     Form of 1999 Employee Equity Participation Program, as amended
              as of July 31, 2003 (filed as an Exhibit to the Company's
              quarterly report on Form 10-Q for the quarter ended June 30, 2003
              and incorporated herein by reference)
    10.29     Procedures for the Exercise of Designated Options by Covered
              Employees (filed as an Exhibit to the Company's quarterly report
              on Form 10-Q for the quarter ended June 30, 2003 and incorporated
              herein by reference)
    10.30     Form of Stock Option Plan for Non-Employee Directors (filed
              as an Exhibit to post effective amendment No. 1 to the
              Company's Registration Statement on Form S-4
              (No. 333-88330) and incorporated herein by reference)
    10.31     Form of Amended and Restated Deferred Compensation Plan For
              Directors (filed as an Exhibit to the Company's quarterly report
              on Form 10-Q for the quarter ended June 30, 2003 and incorporated
              herein by reference)

    

                                       31




       
    10.32     Employment Agreement between the Company and Kenneth W.
              Freeman dated as of January 1, 2003 (filed as an Exhibit to
              the Company's annual report on Form 10-K for the year ended
              December 31, 2002 and incorporated herein by reference)
    10.33     Employment Agreement between the Company and Surya N.
              Mohapatra dated as of November 9, 2003
    10.34     Form of Supplemental Deferred Compensation Plan (filed as an
              Exhibit to the Company's annual report on Form 10-K for the
              year ended December 31, 1998 and incorporated herein by
              reference)
    10.35     Amendment No. 1 to the Supplemental Deferred Compensation
              Plan (filed as an Exhibit to post effective amendment No. 1
              to the Company's Registration Statement on Form S-4
              (No. 333-88330) and incorporated herein by reference)
    10.36     Amendment No. 2 to the Supplemental Deferred Compensation
              Plan (filed as an Exhibit to post effective amendment No. 1
              to the Company's Registration Statement on Form S-4
              (No. 333-88330) and incorporated herein by reference)
    10.37     Form of Executive Retirement Supplemental Plan (filed as an
              Exhibit to the Company's Registration Statement on Form 10
              (File No. 1-12215) and incorporated herein by reference)
    10.38     Form of Senior Management Incentive Plan (filed as Appendix A
              to the Company's proxy statement dated March 28, 2003 and
              incorporated herein by reference)
    14        Code of Business Ethics
    21        Subsidiaries of Quest Diagnostics Incorporated
    23.1      Consent of PricewaterhouseCoopers LLP
    31.1      Certification of Chief Executive Officer Pursuant to Section
              302 of the Sarbanes-Oxley Act of 2002
    31.2      Certification of Chief Financial Officer Pursuant to Section
              302 of the Sarbanes-Oxley Act of 2002
    32.1      Certification of Chief Executive Officer Pursuant to 18
              U.S.C. 'SS' 1350, as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002
    32.2      Certification of Chief Financial Officer Pursuant to 18
              U.S.C. 'SS' 1350, as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002

    

                                       32






                                   SIGNATURES

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

    Quest Diagnostics Incorporated

                                                                                        
    By /s/ Kenneth W. Freeman                         Chairman of the Board and Chief         February 26, 2004
       ----------------------------                     Executive Officer
            Kenneth W. Freeman

    By /s/ Robert A. Hagemann                         Senior Vice President and Chief         February 26, 2004
       -----------------------------                    Financial Officer
           Robert A. Hagemann

    By /s/ Thomas F. Bongiorno                        Vice President, Controller and          February 26, 2004
       -----------------------------                    Chief Accounting Officer
           Thomas F. Bongiorno
 


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



                                                                   CAPACITY                      DATE
                                                                   --------                      ----
                                                                                     
       /s/ Kenneth W. Freeman                         Chairman of the Board and Chief      February 26, 2004
       -----------------------------                    Executive Officer
           Kenneth W. Freeman

       /s/ Surya N. Mohapatra                         Director, President and Chief        February 26, 2004
       ----------------------------                     Operating Officer
           Surya N. Mohapatra

       /s/ Kenneth D. Brody                           Director                             February 26, 2004
       ----------------------------
           Kenneth D. Brody


       /s/ William F. Buehler                         Director                             February 26, 2004
       ----------------------------
           William F. Buehler


       /s/ Mary A. Cirillo                            Director                             February 26, 2004
       ----------------------------
           Mary A. Cirillo

       /s/ James F. Flaherty III                      Director                             February 26, 2004
       ----------------------------
           James F. Flaherty III


       /s/ William R. Grant                           Director                             February 26, 2004
       ----------------------------
           William R. Grant


       /s/ Rosanne Haggerty                           Director                             February 26, 2004
       ----------------------------
           Rosanne Haggerty


       /s/ Dan C. Stanzione                           Director                             February 26, 2004
       ----------------------------
           Dan C. Stanzione


       /s/ Gail R. Wilensky                           Director                             February 26, 2004
       ----------------------------
           Gail R. Wilensky


       /s/ John B. Ziegler                            Director                             February 26, 2004
       ----------------------------
           John B. Ziegler


                                       33






               SELECTED HISTORICAL FINANCIAL DATA OF OUR COMPANY

    The following table summarizes selected historical financial data of our
Company and our subsidiaries at the dates and for each of the periods presented.
We derived the selected historical financial data for the years 1999 through
2003 from the audited consolidated financial statements of our Company. As
discussed in Note 2 to the Consolidated Financial Statements, all per share data
has been restated to reflect our two-for-one stock split effected on May 31,
2001. In April 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections", or SFAS 145. Pursuant to SFAS 145, extraordinary losses
associated with the extinguishment of debt in 1999, 2000 and 2001, previously
presented net of applicable taxes, were reclassified to other non-operating
expenses. The selected historical financial data is only a summary and should
be read together with the audited consolidated financial statements and related
notes of our Company and management's discussion and analysis of financial
condition and results of operations included elsewhere in this Annual Report
on Form 10-K.



                                                             YEAR ENDED DECEMBER 31,
                                 -------------------------------------------------------------------------------
                                  2003(a)         2002(b)           2001             2000              1999(c)
                                 ----------      ----------      ----------       ----------         -----------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                      
Operations Data:
Net revenues...................  $4,737,958      $4,108,051      $3,627,771       $3,421,162         $ 2,205,243
Amortization of goodwill(d)....           -               -          38,392           37,862              23,530
Provisions for restructuring
 and other special charges.....           -               -               -            2,100 (e)          73,385 (f)
Operating income...............     796,454         592,142         411,550          317,527 (e)          78,980 (f)
Loss on debt extinguishment....           -               -          42,012 (g)        4,826 (h)           3,566 (i)
Net income (loss)..............     436,717         322,154         162,303 (g)      102,052 (e),(h)      (3,413)(f),(i)

Basic net income (loss) per
 common share:
Net income (loss)..............  $     4.22      $     3.34      $     1.74       $      1.14        $      (0.05)

Diluted net income (loss) per
 common share:(j)
Net income (loss)..............  $     4.12      $     3.23      $     1.66       $      1.08        $      (0.05)

Dividends per common share.....  $     0.15      $        -      $        -       $        -         $         -

Balance Sheet Data (at end of
 year):
Accounts receivable, net.......  $  609,187      $  522,131      $  508,340       $  485,573         $   539,256
Total assets...................   4,301,418       3,324,197       2,930,555        2,864,536           2,878,481
Long-term debt.................   1,028,707         796,507         820,337          760,705           1,171,442
Preferred stock................           -               -               - (k)        1,000               1,000
Common stockholders' equity....   2,394,694       1,768,863       1,335,987        1,030,795             862,062

Other Data:
Net cash provided by operating
 activities....................  $  662,799      $  596,371      $  465,803       $  369,455         $   249,535
Net cash used in investing
 activities....................    (417,050)       (477,212)       (296,616)         (48,015)         (1,107,990)
Net cash (used in) provided by
 financing activities..........    (187,568)       (144,714)       (218,332)        (177,247)            682,831
Provision for doubtful
 accounts......................     228,222         217,360         218,271          234,694             142,333
Rent expense...................     120,748          96,547          82,769           76,515              59,073
Capital expenditures...........     174,641         155,196         148,986          116,450              76,029


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

 (a) On February 28, 2003, we completed the acquisition of Unilab Corporation,
     or Unilab. Consolidated operating results for 2003 include the results of
     operations of Unilab subsequent to the closing of the acquisition. See
     Note 3 to the Consolidated Financial Statements.

 (b) On April 1, 2002, we completed the acquisition of American Medical
     Laboratories, Incorporated, or AML. Consolidated operating results for 2002
     include the results of operations of AML subsequent to the closing of the
     acquisition. See Note 3 to the Consolidated Financial Statements.

                                       34




 (c) On August 16, 1999, we completed the acquisition of SmithKline Beecham
     Clinical Laboratories, Inc., or SBCL. Consolidated operating results for
     1999 include the results of operations of SBCL subsequent to the closing of
     the acquisition.

 (d) In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
     Intangibles", or SFAS 142, which the Company adopted on January 1, 2002.
     The following table presents net income and basic and diluted earnings per
     common share data adjusted to exclude the amortization of goodwill,
     assuming that SFAS 142 had been in effect for the periods presented:



                                                                          YEAR ENDED DECEMBER 31,
                                                                    -----------------------------------
                                                                      2001          2000         1999
                                                                    --------      --------      -------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE
                                                                                   DATA)
                                                                                       
      Net income:
      Reported net income (loss)..................................  $162,303      $102,052      $(3,413)
      Add back: Amortization of goodwill, net of taxes............    35,964        36,023       22,013
                                                                    --------      --------      -------
      Adjusted net income.........................................  $198,267      $138,075      $18,600
                                                                    --------      --------      -------
                                                                    --------      --------      -------

      Basic earnings per common share:
      Reported net income (loss)..................................  $   1.74      $   1.14      $ (0.05)
      Amortization of goodwill, net of taxes......................      0.39          0.40         0.31
                                                                    --------      --------      -------
      Adjusted net income.........................................  $   2.13      $   1.54      $  0.26
                                                                    --------      --------      -------
                                                                    --------      --------      -------

      Diluted earnings per common share:
      Reported net income (loss)..................................  $   1.66      $   1.08      $ (0.05)
      Amortization of goodwill, net of taxes......................      0.37          0.38         0.31
                                                                    --------      --------      -------
      Adjusted net income.........................................  $   2.03      $   1.46      $  0.26
                                                                    --------      --------      -------
                                                                    --------      --------      -------


 (e) During the second quarter of 2000, we recorded a net special charge of $2.1
     million. This net charge resulted from a $13.4 million charge related to
     the costs to cancel certain contracts that we believed were not
     economically viable as a result of the SBCL acquisition, and which were
     principally associated with the cancellation of a co-marketing agreement
     for clinical trials testing services, which charges were in large part
     offset by a reduction in reserves attributable to a favorable resolution of
     outstanding claims for reimbursements associated with billings of certain
     tests.

 (f) During 1999, we recorded provisions for restructuring and other special
     charges of $73 million in conjunction with the acquisition and planned
     integration of SBCL. Of the $73 million charge, $19.8 million represented
     stock-based employee compensation related to special one-time grants to
     certain employees of the combined company and accelerated vesting,
     $12.7 million represented professional and consulting fees related
     to planned integration activities and $3.5 million represented special
     recognition awards granted to certain employees involved in the transaction
     and integration planning processes of the SBCL acquisition. The remaining
     $36 million represented a charge to earnings in the fourth quarter of 1999
     representing the costs associated with planned integration activities
     affecting Quest Diagnostics' operations and employees. See Note 4 to the
     Consolidated Financial Statements for further details.

 (g) In conjunction with our debt refinancing in 2001, we recorded a loss on
     debt extinguishment of $42 million. The loss represented the write-off of
     deferred financing costs of $23 million, associated with the debt which was
     refinanced, and $13 million of payments related primarily to the tender
     premium incurred in connection with our cash tender offer of our 10 3/4%
     senior subordinated notes due 2006. The remaining $6 million of losses
     represented amounts incurred in conjunction with the cancellation of
     certain interest rate swap agreements which were terminated in connection
     with the debt that was refinanced. See Note 7 to the Consolidated Financial
     Statements for further details.

 (h) During the fourth quarter of 2000, we recorded a $4.8 million loss on the
     extinguishment of debt representing the write-off of deferred financing
     costs resulting from the prepayment of $155 million of term loans under our
     then existing senior secured credit facility.

 (i) In conjunction with the acquisition of SBCL, we repaid the entire amount
     outstanding under our then existing credit agreement. The loss on the
     extinguishment of debt recorded in the third quarter of 1999

                                       35




     represented $3.6 million of deferred financing costs, which were
     written-off in connection with the extinguishment of the then existing
     credit agreement.

 (j) Potentially dilutive common shares primarily include stock options and
     restricted common shares granted under our Employee Equity Participation
     Program. During the period in which net income available for common
     stockholders is a loss, diluted weighted average common shares outstanding
     equals basic weighted average common shares outstanding, since under this
     circumstance, the incremental shares would have an anti-dilutive effect.

 (k) On December 31, 2001, the Company repurchased all of its then outstanding
     preferred stock for its par value of $1 million plus accrued dividends.

                                       36






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

OVERVIEW

    The underlying fundamentals of the diagnostic testing industry have improved
since the early to mid-1990s, which was a period of declining reimbursement and
reduced test utilization. During the early 1990s, the industry was negatively
impacted by significant government regulation and investigations into various
billing practices. In addition, the rapid growth of managed care, as a result of
the need to reduce overall healthcare costs, and excess laboratory testing
capacity, led to revenue and profit declines across the diagnostic testing
industry, which in turn led to industry consolidation, particularly among
commercial laboratories. As a result of these dynamics, fewer but larger
commercial laboratories have emerged, which have greater economies of scale,
rigorous programs designed to assure compliance with government billing
regulations and other laws, and a more disciplined approach to pricing services.
These changes have resulted in improved profitability and a reduced risk of
non-compliance with complex government regulations. At the same time, a slowdown
in the growth of managed care and decreasing influence by managed care
organizations on the ordering of clinical laboratory testing by physicians has
contributed to renewed growth in testing and further improvements in
profitability since 1999. Partially offsetting these favorable trends have been
changes in the United States economy during the last several years, which has
resulted in an increase in the number of unemployed and uninsured. In addition,
in an attempt to slow the rapidly rising costs of healthcare, employers and
healthcare insurers have made design changes to healthcare plans, which shift a
larger portion of healthcare costs to consumers. We believe that these factors
have reduced the utilization of healthcare services in general. Orders for
laboratory testing are generated from physician offices, hospitals and
employers. As such, factors such as the number of unemployed and uninsured and
design changes in healthcare plans, which impact the level of employment or the
number of physicians office and hospital visits, will impact the utilization of
laboratory testing.

    We believe the diagnostic testing industry has continued to grow during the
last several years despite the slowdown in the United States economy and the
changes in healthcare plan design, and that growth will accelerate as the
economy improves. In addition, over the longer term, growth is expected to
accelerate as a result of the following factors:

    o  general expansion and aging of the United States population;

    o  continuing research and development in the area of genomics and
       proteomics, which is expected to yield new, more sophisticated and
       specialized diagnostics tests;

    o  increasing recognition by consumers and payers of the value of early
       detection and prevention which can be provided through laboratory testing
       as a means to improve health and reduce the overall cost of healthcare;
       and

    o  increasing affordability of tests due to advances in technology and cost
       efficiencies.

    Quest Diagnostics, as the largest clinical laboratory testing company with a
leading position in most of its geographic markets and service offerings, is
well positioned to benefit from the growth expected in the industry.

    Payments for clinical laboratory testing services are made by the
government, health insurers, physicians, hospitals, employers and patients.
Physicians, hospitals and employers are typically billed on a fee-for-service
basis based on fee schedules, which are typically negotiated. Fees billed to
patients and health insurers are based on the laboratory's patient fee schedule,
subject to any limitations on fees negotiated with the health insurers or with
physicians on behalf of their patients. Medicare and Medicaid reimbursements are
based on fee schedules set by governmental authorities.

    We incur significant additional costs as a result of our participation in
Medicare and Medicaid programs, as billing and reimbursement for clinical
laboratory testing is subject to considerable and complex federal and state
regulations. These additional costs include those related to: (1) complexity
added to our billing processes; (2) training and education of our employees and
customers; (3) compliance and legal costs; and (4) costs related to, among other
factors, medical necessity denials and advance beneficiary notices. Compliance
with applicable laws and regulations, as well as internal compliance policies
and procedures, adds further complexity and costs to the billing process. We
have implemented "best practices" that have significantly improved our billing
and collection processes. These efforts, together with our Six Sigma and
standardization initiatives, have significantly reduced bad debt expense as a
percentage of net revenues over the last several years. While the

                                       37




total cost to comply with Medicare administrative requirements is
disproportionate to our cost to bill other payers, average Medicare
reimbursement rates approximate the Company's overall average reimbursement rate
from all payers, making this business generally less profitable. Government
payers, such as Medicare and Medicaid, as well as insurers and larger employers
have taken steps and may continue to take steps to control the cost, utilization
and delivery of healthcare services, including clinical laboratory services.
Principally as a result of reimbursement reductions and measures adopted by the
Centers for Medicare & Medicaid Services, or CMS (formerly the Health Care
Financing Administration) which establishes procedures and continuously
evaluates and implements changes in the reimbursement process to control
utilization, the percentage of our aggregate net revenues derived from Medicare
and Medicaid programs declined from approximately 20% in 1995 to approximately
17% in 2003. Despite the added cost and complexity of participating in the
Medicare and Medicaid programs, we continue to participate in such programs
because we believe that our other business may significantly depend on continued
participation in the Medicare and Medicaid programs, because many customers want
a single laboratory to perform all of their clinical laboratory testing
services, regardless of who pays for such services.

    Health insurers, which typically contract with a limited number of clinical
laboratories for their members, represent approximately one-half of our total
testing volumes and one-half of our net revenues. Larger health insurers
typically prefer to use large commercial clinical laboratories because they can
provide services on a national or regional basis and can manage networks of
local or regional laboratories to provide even broader access to their members
and physicians. In certain markets, such as California, health insurers delegate
their covered members to independent physician associations, or IPA, which in
turn contract with laboratories for clinical laboratory services.

    Over the last decade, health insurers have been consolidating, resulting in
fewer but larger insurers with significant bargaining power to negotiate fee
arrangements with healthcare providers, including clinical laboratories. These
health insurers demand that clinical laboratory service providers accept
discounted fee structures or assume all or a portion of the financial risk
associated with providing testing services to their members through capitated
payment contracts. Under these capitated payment contracts, the Company and
health insurers agree to a predetermined monthly contractual rate for each
member of the health insurer's plan regardless of the number or cost of services
provided by the Company. Capitated agreements have historically been priced
aggressively, particularly for exclusive or semi-exclusive arrangements. In
2003, we derived approximately 14% of our testing volume and 8% of our net
revenues from capitated payment contracts. In recent years, there has been a
shift in the way major insurers contract with clinical laboratories. Health
insurers have begun to offer more freedom of choice to their affiliated
physicians, including greater freedom to determine which laboratory to use and
which tests to order. Accordingly, most of our agreements with major health
insurers are non-exclusive arrangements. As a result, under these non-exclusive
arrangements, physicians have more freedom of choice in selecting laboratories,
and laboratories are likely to compete more on the basis of service and quality
rather than price alone. Also, health insurers have been giving patients greater
freedom of choice and patients have increasingly been selecting plans (such as
preferred provider organizations and consumer driven plans) that offer a greater
choice of providers. Pricing for these preferred provider organizations is
typically negotiated on a fee-for-service basis, which generally results in
higher revenue per requisition than under a capitated fee arrangement. Despite
these trends, health insurers continue to aggressively seek cost reductions in
order to keep their premiums to their customers competitive.

    We expect that the overall reimbursement dynamics for all payers on a
combined basis are neutral for the diagnostic testing industry. Today, many
federal and state governments face serious budget deficits and healthcare
spending is a prime target for reductions. For example, the Prescription Drug,
Improvement, and Modernization Act of 2003 eliminated for five years (beginning
January 1, 2004) the provision for annual increases to the Medicare national fee
schedule based on the consumer price index. Efforts to impose reduced
reimbursements and more stringent cost controls by government and other payers
for existing tests may continue. However, we believe that as new tests are
developed which either improve on the effectiveness of existing tests or provide
new diagnostic capabilities, government and other payers will add these tests as
covered services, because of the importance of laboratory testing in assessing
and managing the health of patients. We continue to emphasize the importance and
the high value of laboratory testing with insurers and government payers at the
federal and state level.

    The diagnostic testing industry is subject to seasonal fluctuations in
operating results and cash flows. Typically, testing volume declines during the
summer months, year-end holiday periods and other major holidays, reducing net
revenues and operating cash flows below annual averages. Testing volume is also
subject to declines in winter months due to inclement weather, which varies in
severity from year to year.

                                       38




    The diagnostic testing industry is labor intensive. Employee compensation
and benefits constitute approximately one-half of our total costs and expenses.
Cost of services consists principally of costs for obtaining, transporting and
testing specimens. Selling, general and administrative expenses consist
principally of the costs associated with our sales force, billing operations
(including bad debt expense), and general management and administrative support.

    Information systems are used extensively in virtually all aspects of our
business, including laboratory testing, billing, customer service, logistics,
and management of medical data. Our success depends, in part, on the continued
and uninterrupted performance of our information technology systems. In 2002, we
began implementation of a standard laboratory information system and a standard
billing system, which we expect will take several more years to complete.
Through proper planning and execution, we expect to reduce the risks associated
with systems conversions of this type, and minimize any disruptions in our
operations.

CRITICAL ACCOUNTING POLICIES

    The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses in our
financial statements. Actual results could differ from those estimates.

    While many operational aspects of our business are subject to complex
federal, state and local regulations, the accounting for our business is
generally straightforward with net revenues primarily recognized upon completion
of the testing process. Our revenues are primarily comprised of a high volume of
relatively low dollar transactions, and about one-half of our total costs and
expenses consist of employee compensation and benefits. Due to the nature of our
business, several of our accounting policies involve significant estimates and
judgments:

    o  revenues and accounts receivable;

    o  reserves for general and professional liability claims;

    o  billing-related settlement reserves; and

    o  accounting for and recoverability of goodwill.

    Revenues and accounts receivable

    The process for estimating the ultimate collection of receivables involves
significant assumptions and judgments. Billings for services under third-party
payer programs, including Medicare and Medicaid, are recorded as revenues net of
allowances for differences between amounts billed and the estimated receipts
under such programs. Adjustments to the estimated receipts, based on final
settlement with the third-party payers, are recorded upon settlement as an
adjustment to net revenues.

    We have implemented a monthly standardized approach to estimate and review
the collectibility of our receivables based on the period they have been
outstanding. Historical collection and payer reimbursement experience is an
integral part of the estimation process related to reserves for doubtful
accounts. In addition, we assess the current state of our billing functions in
order to identify any known collection or reimbursement issues in order to
assess the impact, if any, on our reserve estimates, which involves judgment. We
believe that the collectibility of our receivables is directly linked to the
quality of our billing processes, most notably those related to obtaining the
correct information in order to bill effectively for the services we provide. As
such, we have implemented "best practices" to reduce the number of requisitions
that we receive from healthcare providers with missing or incorrect billing
information. Revisions in reserve for doubtful accounts estimates are recorded
as an adjustment to bad debt expense within selling, general and administrative
expenses. We believe that our collection and reserves processes, along with our
close monitoring of our billing processes, helps to reduce the risk associated
with material revisions to reserve estimates resulting from adverse changes in
collection and reimbursement experience and billing operations.

    Reserves for general and professional liability claims

    As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on our client base and reputation.
We maintain

                                       39




various liability insurance programs for claims that could result from providing
or failing to provide clinical laboratory testing services, including inaccurate
testing results and other exposures. Our insurance coverage limits our maximum
exposure on individual claims; however, we are essentially self-insured for a
significant portion of these claims. While the basis for claims reserves
incorporates actuarially determined losses based upon our historical and
projected loss experience, the process of analyzing, assessing and establishing
reserve estimates relative to these types of claims involves a high degree of
judgment. Changes in the facts and circumstances associated with a claim could
have a material impact on our results of operations, principally costs of
services, and cash flows in the period that reserve estimates are revised. We
believe that present insurance coverage and reserves are sufficient to cover
currently estimated exposures, but we cannot assure investors that we will not
incur liabilities in excess of recorded reserves. Similarly, although we
believe that we will be able to obtain adequate insurance coverage in the
future at acceptable costs, we cannot assure investors that we will be able
to do so.

    Billing-related settlement reserves

    Our business is subject to extensive and frequently changing federal, state
and local laws and regulations. We have entered into several settlement
agreements with various government and private payers during recent years
relating to industry-wide billing and marketing practices that had been
substantially discontinued by early 1993. In addition, we are aware of several
pending lawsuits filed under the qui tam provisions of the civil False Claims
Act and have received notices of private claims relating to billing issues
similar to those that were the subject of prior settlements with various
government payers. We have a comprehensive compliance program that is intended
to ensure the strict implementation and observance of all applicable laws,
regulations and Company policies. The Quality, Safety and Compliance Committee
of the Board of Directors requires periodic reporting of compliance operations
from management. As an integral part of our compliance program, we investigate
all reported or suspected failures to comply with federal healthcare
reimbursement requirements. Any non-compliance that results in Medicare or
Medicaid overpayments is reported to the government and reimbursed by us. As a
result of these efforts, we have periodically identified and reported
overpayments. While we have reimbursed these overpayments and have taken
corrective action where appropriate, we cannot assure investors that in each
instance the government will necessarily accept these actions as sufficient.

    While we believe that we are in material compliance with all applicable
laws, many of the regulations applicable to us, including those relating to
billing and reimbursement of tests and those relating to relationships with
physicians and hospitals, are vague or indefinite and have not been interpreted
by the courts. They may be interpreted or applied by a prosecutorial, regulatory
or judicial authority in a manner that could require us to make changes in our
operations, including our billing practices. If we fail to comply with
applicable laws and regulations, we could suffer civil and criminal penalties,
including the loss of licenses or our ability to participate in Medicare,
Medicaid and other federal and state healthcare programs.

    Although management believes that established reserves for billing-related
claims are sufficient, it is possible that additional information (such as the
indication by the government of criminal activity, additional tests being
questioned or other changes in the government's or private claimants' theories
of wrongdoing) may become available which may cause the final resolution of
these matters to exceed established reserves by an amount which could be
material to our results of operations and cash flows in the period in which such
claims are settled. We do not believe that these issues will have a material
adverse effect on our overall financial condition.

    Accounting for and recoverability of goodwill

    In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets", or SFAS 142. The impact of adopting SFAS 142 is
summarized in Note 2 to the Consolidated Financial Statements.

    Effective January 1, 2002, we evaluate the recoverability and measure the
potential impairment of our goodwill under SFAS 142. The annual impairment test
is a two-step process that begins with the estimation of the fair value of the
reporting unit. The first step screens for potential impairment and the second
step measures the amount of the impairment, if any. Our estimate of fair value
considers publicly available information regarding the market capitalization of
our Company, as well as (i) publicly available information regarding comparable
publicly-traded companies in the clinical laboratory testing industry, (ii) the
financial projections and future prospects of our business, including its growth
opportunities and likely operational improvements, and (iii) comparable sales
prices, if available. As part of the first step to assess potential impairment,
we compare

                                       40




our estimate of fair value for the Company to the book value of our consolidated
net assets. If the book value of our consolidated net assets is greater than our
estimate of fair value, we would then proceed to the second step to measure the
impairment, if any. The second step compares the implied fair value of goodwill
with its carrying value. The implied fair value is determined by allocating the
fair value of the reporting unit to all of the assets and liabilities of that
unit as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit. The excess of the fair value of the reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value of
goodwill. If the carrying amount of the reporting unit's goodwill is greater
than its implied fair value, an impairment loss will be recognized in the amount
of the excess. We believe our estimation methods are reasonable and reflective
of common valuation practices.

    On a quarterly basis, we perform a review of our business to determine if
events or changes in circumstances have occurred which could have a material
adverse effect on the fair value of the Company and its goodwill. If such events
or changes in circumstances were deemed to have occurred, we would perform an
impairment test of goodwill as of the end of the quarter, consistent with the
annual impairment test, and record any noted impairment loss.

ACQUISITION OF UNILAB CORPORATION

    On February 28, 2003, we completed the acquisition of Unilab Corporation, or
Unilab, the leading commercial clinical laboratory in California. In connection
with the acquisition, we paid $297 million in cash and issued 7.1 million shares
of Quest Diagnostics common stock to acquire all of the outstanding capital
stock of Unilab. In addition, we reserved approximately 0.3 million shares of
Quest Diagnostics common stock for outstanding stock options of Unilab which
were converted upon the completion of the acquisition into options to acquire
shares of Quest Diagnostics common stock. In connection with the acquisition of
Unilab, as part of a settlement agreement with the United States Federal Trade
Commission, we entered into an agreement to sell to Laboratory Corporation of
America Holdings, Inc., or LabCorp, certain assets in northern California for
$4.5 million, including the assignment of agreements with four IPA's and leases
for 46 patient service centers (five of which also serve as rapid response
laboratories), or the Divestiture. We completed the transfer of assets and
assignment of the IPA agreements to LabCorp and recorded a $1.5 million gain in
the third quarter of 2003 in connection with the Divestiture, which is included
in "other operating (income) expense, net" in the consolidated statements of
operations. See Note 3 to the Consolidated Financial Statements for a full
discussion of the Unilab acquisition and the Divestiture.

INTEGRATION OF ACQUIRED BUSINESSES

    In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", or SFAS 146. SFAS 146, which we adopted
effective January 1, 2003, requires that a liability for a cost associated with
an exit activity, including those related to employee termination benefits and
contractual obligations, be recognized when the liability is incurred, and not
necessarily the date of an entity's commitment to an exit plan, as under
previous accounting guidance. The provisions of SFAS 146 apply to integration
costs associated with actions that impact the employees and operations of Quest
Diagnostics. Costs associated with actions that impact the employees and
operations of an acquired company, such as Unilab, are accounted for as a cost
of the acquisition and included in goodwill in accordance with Emerging Issues
Task Force No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination".

    Unilab Corporation

    As part of the Unilab acquisition, we acquired all of Unilab's operations,
including its primary testing facilities in Los Angeles, San Jose and
Sacramento, California, and approximately 365 patient service centers and 35
rapid response laboratories and approximately 4,100 employees. During the fourth
quarter of 2003, we finalized our plan related to the integration of Unilab into
our laboratory network. As part of the plan, following the sale of certain
assets to LabCorp as part of the Divestiture, we closed our previously owned
clinical laboratory in the San Francisco Bay area and completed the integration
of remaining customers in the northern California area to Unilab's laboratories
in San Jose and Sacramento. We continue to have two laboratories in the Los
Angeles metropolitan area (our facilities in Van Nuys and Tarzana). We plan to
open a new regional laboratory in the Los Angeles metropolitan area and then
integrate our business in the Los Angeles metropolitan area into the new
facility.

                                       41




    We expect to incur up to $20 million of costs through 2005 to integrate
Unilab and our existing California operations. During 2003, we recorded $9
million of such costs associated with executing the plan. The majority of these
integration costs related to employee severance and contractual obligations
associated with leased facilities and equipment. Employee groups affected as a
result of this plan include those involved in the collection and testing of
specimens, as well as administrative and other support functions. Of the $9
million in costs, $7.9 million was recorded in the fourth quarter and related to
actions that impact the employees and operations of Unilab, was accounted for as
a cost of the Unilab acquisition and included in goodwill. Of the $7.9 million,
$6.8 million related to employee severance benefits for approximately 150
employees, with the remainder primarily related to contractual obligations. In
addition, $1.1 million of integration costs, related to actions that impact
Quest Diagnostics' employees and operations and comprised principally of
employee severance benefits for approximately 30 employees, were accounted for
as a charge to earnings in the third quarter of 2003 and included in "other
operating (income) expense, net" within the consolidated statements of
operations. As of December 31, 2003, accruals related to the Unilab integration
plan totaled approximately $7 million. While the majority of the accrued costs
at December 31, 2003 are expected to be paid in 2004, there are certain
severance costs that have payment terms extending into 2005. The remaining
estimated costs associated with executing the Unilab integration plan relate to
actions which are expected to take place through 2005. Such costs will be
accounted for as a charge to earnings in the periods that the related actions
are taken.

    Upon completion of the Unilab integration, we expect to realize
approximately $25 million to $30 million of annual synergies and we expect to
achieve this annual rate of synergies by the end of 2005.

    American Medical Laboratories, Incorporated and Clinical Diagnostics
Services, Incorporated

    On April 1, 2002, we completed our acquisition of all of the outstanding
voting stock of American Medical Laboratories, Incorporated, or AML. In
addition, during the fourth quarter of 2001, we acquired all of the voting stock
of Clinical Diagnostic Services, Inc.

    See Notes 3 and 4 to the Consolidated Financial Statements for a full
discussion of these transactions.

SIX SIGMA AND STANDARDIZATION INITIATIVES

    We intend to become recognized as the quality leader in the healthcare
services industry. We continue to implement our Six Sigma and standardization
initiatives throughout all aspects of our organization. Six Sigma is a
management approach that requires a thorough understanding of customer needs and
requirements, root cause analysis, process improvements and rigorous tracking
and measuring of services. We have integrated our Six Sigma initiative with our
initiative to standardize operations and processes across all of our Company by
adopting identified Company best practices. We plan to continue these
initiatives during the next several years and expect that their successful
implementation will result in measurable improvements in customer satisfaction
and operating results.

RESULTS OF OPERATIONS

    YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002

    Net income for the year ended December 31, 2003 increased to $437 million
from $322 million for the prior year period. This increase in earnings was
primarily attributable to revenue growth and improved efficiencies generated
from our Six Sigma and standardization initiatives.

    Net Revenues

    Net revenues for the year ended December 31, 2003 grew by 15.3% over the
prior year level and include the results of Unilab, which was acquired on
February 28, 2003, for ten months. Net revenues for 2003 also included twelve
months of results for AML, which was acquired on April 1, 2002. Pro forma
revenue growth, assuming that the Unilab and AML acquisitions and the related
Divestiture had been completed on January 1, 2002, was 4.3% for the year ended
December 31, 2003.

    For the year ended December 31, 2003, clinical testing volume, measured by
the number of requisitions, increased 11.3% compared to 2002. On a pro forma
basis, assuming that the Unilab and AML acquisitions and the Divestiture had
been completed on January 1, 2002, testing volume declined 1.2%. The combined
effect of the severe winter storms and the New Jersey physicians' strike during
the first quarter of 2003 and Hurricane

                                       42




Isabel and the blackout in the third quarter of 2003 reduced testing volume by
approximately 0.5% for the year ended December 31, 2003. In addition, our
drugs-of-abuse testing business, which is most directly impacted by economic
conditions and accounts for approximately 3% of our net revenues and 6% of our
testing volume, declined during 2003, reducing Company-wide testing volume
growth by approximately 0.5%. Both reported and pro forma testing volume have
been impacted by general economic conditions, which have increased the number of
uninsured and unemployed and, we believe, have reduced utilization of healthcare
services in 2003.

    For the year ended December 31, 2003, average revenue per requisition
improved 3.6%, or 5.1% on a pro forma basis, assuming that the Unilab and AML
acquisitions and the Divestiture had been completed on January 1, 2002. These
improvements in average revenue per requisition were primarily attributable to a
continuing shift in test mix to higher value testing, including gene-based and
esoteric testing. Gene-based testing net revenues exceeded $500 million for
2003, and grew over 20% compared to the prior year. In addition, a shift in
payer mix to higher priced fee-for-service reimbursement contributed a portion
of the increase in average revenue per requisition. The inclusion of Unilab's
results subsequent to February 28, 2003 served to reduce average revenue per
requisition, reflecting Unilab's lower revenue per requisition.

    Our businesses, other than clinical laboratory testing, which represent
approximately 4% of our consolidated net revenues, grew approximately 16% during
the year and contributed about 0.5% to the reported growth in net revenues.

    Operating Costs and Expenses

    Total operating costs and expenses for 2003 increased $426 million from 2002
primarily due to increases in our clinical testing volume (largely as a result
of the Unilab acquisition), employee compensation and benefits, testing supply
costs and depreciation expense. While our cost structure has been favorably
impacted by the improved efficiencies generated from our Six Sigma and
standardization initiatives, we continue to make investments to enhance our
infrastructure to pursue our overall business strategy. These investments
include:

    o  Skills training for all employees, which together with our competitive
       pay and benefits, helps to increase employee satisfaction and
       performance, which we believe will result in better service to our
       customers;

    o  Our information technology strategy, which is designed to improve our
       efficiency and provide better service to our customers; and

    o  Our strategic growth opportunities.

    Cost of services, which includes the costs of obtaining, transporting and
testing specimens, was 58.4% of net revenues for 2003, compared to 59.2% in the
prior year. This improvement was primarily the result of efficiency gains
resulting from our Six Sigma and standardization initiatives and the increase in
average revenue per requisition. This improvement was partially offset by
initial installation costs of deploying our Internet-based orders and results
systems in physicians' offices and our patient service centers. The increase in
the number of orders and test results reported via our Internet-based systems is
improving the initial collection of billing information which is reducing the
cost of billing and bad debt expense, both of which are components of selling,
general and administrative expenses. At December 31, 2003, approximately 25% of
our orders and approximately 35% of our test results were being transmitted via
the Internet. Additionally, we are seeing an increase in the number of
physicians who no longer draw blood in their office, which is resulting in an
increase in the number of blood draws in our patient service centers or by our
phlebotomists placed in physicians' offices. This shift has increased our
operating costs associated with our blood draws, but is reducing costs in
accessioning and other parts of our operations due to improved billing
information and a reduction in the number of inadequate patient samples obtained
by our trained phlebotomists compared to samples collected by physician employed
phlebotomists.

    Selling, general and administrative expenses, which include the costs of the
sales force, billing operations, bad debt expense and general management and
administrative support, decreased during 2003, as a percentage of net revenues,
to 24.6% from 26.2% in the prior year. This improvement was primarily due to
efficiencies from our Six Sigma and standardization initiatives and the
improvement in average revenue per requisition. During 2003, bad debt expense
improved to 4.8% of net revenues, compared to 5.3% in 2002. The reduction in bad
debt expense as a percentage of net revenues occurred despite the addition of
Unilab, which has higher levels of bad debt than the rest of Quest Diagnostics.
This improvement primarily relates to the collection of diagnosis, patient and
insurance information necessary to more effectively bill for services performed.
We believe that our Six Sigma and standardization initiatives and the increased
use of electronic ordering by our customers will provide additional
opportunities to further improve our overall collection experience and cost
structure.

                                       43




    Other operating (income) expense, net represents miscellaneous income and
expense items related to operating activities, and includes gains and losses
associated with the disposal of operating assets.

    Operating Income

    Operating income for the year ended December 31, 2003 improved to $796
million, or 16.8% of net revenues, from $592 million, or 14.4% of net revenues,
in 2002. The increase in operating income was primarily due to revenue growth
and improved efficiencies generated from our Six Sigma and standardization
initiatives.

    Other Income (Expense)

    Net interest expense for the year ended December 31, 2003 increased from
2002 by $6 million and was primarily attributable to the amounts borrowed to
finance the acquisition of Unilab and to repay substantially all of Unilab's
outstanding debt, partially offset by decreased amounts borrowed under our
secured receivables credit facility.

    Other income (expense), net represents miscellaneous income and expense
items related to non-operating activities such as gains and losses associated
with investments and other non-operating assets.

    YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

    Net income for the year ended December 31, 2002 increased to $322 million
from $162 million for the year ended December 31, 2001. Assuming that the
provisions of SFAS 142 related to accounting for goodwill amortization had been
in effect in 2001, net income for the year ended December 31, 2001 would have
been $198 million. The increase in earnings was primarily attributable to
revenue growth, improved efficiencies generated from our Six Sigma and
standardization initiatives, and a reduction in net interest expense, partially
offset by increases in employee compensation and supply costs, depreciation
expense and investments in our information technology strategy and strategic
growth opportunities. In addition, results for the year ended December 31, 2001
included a loss on debt extinguishment of $42 million, which was incurred in
conjunction with our debt refinancing in the second quarter of 2001.

    Net Revenues

    Net revenues for the year ended December 31, 2002 grew by 13.2% compared
with the prior year. The acquisition of AML, which was completed on April 1,
2002, contributed approximately one-half of the increase in net revenues. For
the year ended December 31, 2002, clinical testing volume, measured by the
number of requisitions, increased 9.7% compared with the prior year.
Assuming AML had been part of Quest Diagnostics in 2001, clinical testing volume
would have increased above the prior year level by 3.4% on a pro forma basis.
Other smaller acquisitions completed in 2001 contributed approximately 1.5% to
testing volume growth in 2002. Partially offsetting these increases was a
decline in testing volumes associated with our drugs of abuse testing business,
which reduced total Company testing volume for the year ended December 31, 2002
by about one-half of a percent. Drugs of abuse testing, which accounted for
approximately 7% of our testing volume and 4% of our net revenues, was impacted
by a general slowing of the economy and a corresponding slowdown in hiring.
Average revenue per requisition increased 3.2% for the year ended December 31,
2002, compared with the prior year. The improvement in average revenue
per requisition was primarily attributable to a continuing shift in test mix to
higher value testing, including gene-based testing, which contributed over
one-half of the improvement, and a shift in payer mix to higher priced
fee-for-service reimbursement. We continued to see strong growth in our
gene-based and esoteric testing with gene-based testing net revenues, which
approached $400 million for the year, growing at more than 20% compared with
the prior year. Our businesses, other than clinical laboratory testing, which
accounted for approximately 4% of our total net revenues in 2002, grew about
15% over the prior year and accounted for 0.6% of the 13.2% increase in net
revenues, or approximately $20 million. Most of this increase was from our
MedPlus subsidiary, which we acquired in November 2001, which develops clinical
connectivity products designed to enhance patient care.

    Operating Costs and Expenses

    Total operating costs for the year ended December 31, 2002 increased $300
million from the prior year primarily due to increases in our clinical testing
volume, largely as a result of the AML acquisition, employee compensation and
supply costs and depreciation expense; partially offset by reductions in
amortization of

                                       44




goodwill and bad debt expense. While our cost structure has been favorably
impacted by the synergies realized as a result of the integration of SBCL and
the improved efficiencies generated from our Six Sigma and standardization
initiatives, we continue to make investments to enhance our infrastructure to
pursue our overall business strategy. These investments include those related
to:

    o  Skills training for all employees, which together with our competitive
       pay and benefits, helps to increase employee satisfaction and
       performance, which we believe will result in better service to our
       customers;

    o  Our information technology strategy, which is designed to improve our
       efficiency and provide better service to our customers; and

    o  Our strategic growth opportunities.

    Cost of services, which includes the costs of obtaining, transporting and
testing specimens, was 59.2% of net revenues for the year ended December 31,
2002, decreasing slightly from 59.3% in the prior year. The positive impact of
our Six Sigma and standardization initiatives and the increase in average
revenue per requisition, which reduced cost of services as a percentage of net
revenues, was partially offset by the addition of AML's higher cost of services
as of April 1, 2002. Cost of services has also increased due to a greater
percentage of patients having their blood drawn in our patient service centers
or by our phlebotomists placed in physicians' offices. During 2002, in an effort
to reduce their costs, many physicians took action to simplify activities in
their offices by ceasing blood draws by physician staff. Additionally, reflected
in the cost of services are the one-time installation costs of deploying our
Internet-based orders and results systems in physicians' offices. As of December
31, 2002, approximately 10% of all orders and 15% of all test results were being
transmitted via the Internet. Both the reduction of blood draws in the
physicians' offices and the increased use of the Internet for ordering and
resulting are improving the initial collection of billing information and
generating savings in the cost of billing and bad debt expense, both of which
are components of selling, general and administrative expense. Increased blood
draws by Company-trained employee phlebotomists also improve the overall
preparation of the blood sample, which can improve efficiency of the testing
process.

    Selling, general and administrative expenses, which include the costs of the
sales force, billing operations, bad debt expense and general management and
administrative support, decreased during the year ended December 31, 2002 as a
percentage of net revenues to 26.2% from 28.1% in the prior year. This decrease
was primarily due to efficiencies from our Six Sigma and standardization
initiatives, in particular bad debt expense, the improvement in average revenue
per requisition and the impact of AML's cost structure as of April 1, 2002.
During 2002, bad debt expense improved to 5.3% of net revenues, compared to 6.0%
of net revenues in 2001. The improvements in bad debt expense were principally
attributable to the continued progress that we have made in our overall
collection experience through process improvements, driven by our Six Sigma and
standardization initiatives. These improvements primarily relate to the
collection of diagnosis, patient and insurance information necessary to
effectively bill for services performed. We believe that our Six Sigma and
standardization initiatives will provide additional opportunities to further
improve our overall collection experience.

    Amortization of goodwill for the year ended December 31, 2002 decreased from
the prior year by $38 million as the result of adopting SFAS 142, effective
January 1, 2002. See Note 2 to the Consolidated Financial Statements for further
details regarding the impact of SFAS 142.

    Other operating (income) expense, net represents miscellaneous income and
expense items related to operating activities, such as gains and losses
associated with the disposal of operating assets.

    Operating Income

    Operating income for the year ended December 31, 2002 improved to $592
million, or 14.4% of net revenues, from $412 million, or 11.3% of net revenues,
in 2001. The increase in operating income was primarily due to revenue growth,
improved efficiencies generated from our Six Sigma and standardization
initiatives and a reduction in amortization of goodwill, partially offset by
increases in employee compensation and supply costs, depreciation expense and
investments in our information technology strategy and strategic growth
opportunities.

    Other Income (Expense)

    Net interest expense for the year ended December 31, 2002 decreased from the
prior year by $17 million. The reduction was primarily due to the favorable
impact of our debt refinancings in 2001 and a favorable interest rate
environment.

                                       45




    In 2001, we refinanced a majority of our long-term debt on a senior
unsecured basis. Specifically, we completed a $550 million senior notes
offering, or the Senior Notes, and entered into a new $500 million senior
unsecured credit facility, or the Credit Agreement, which included a five-year
$325 million revolving credit agreement and a $175 million term loan. We used
the net proceeds from the senior notes offering and the term loan, together with
cash on hand, to repay all of the $584 million which was outstanding under our
then existing senior secured credit agreement, including the costs to settle
existing interest rate swap agreements, and to consummate a cash tender offer of
our 10 3/4% senior subordinated notes due 2006, or the Subordinated Notes. In
conjunction with our debt refinancing, we recorded a loss on debt extinguishment
of $42 million, $36 million of which represented the write-off of $23 million of
deferred financing costs, associated with the debt which was refinanced, and $13
million of payments related primarily to the tender premium incurred in
connection with our cash tender offer for our Subordinated Notes. The remaining
$6 million of losses represented amounts incurred in conjunction with the
cancellation of certain interest rate swap agreements, which were terminated in
connection with the debt that was refinanced. Prior to our debt refinancing, our
secured credit agreement required us to maintain interest rate swap agreements
to mitigate the risk of changes in interest rates associated with a portion of
our variable interest rate indebtedness.

    Other income (expense), net, represents miscellaneous income and expense
items related to non-operating activities, such as gains and losses associated
with investments and other non-operating assets. For the year ended December 31,
2002, other income (expense), net includes a $4.9 million pretax gain on the
sale of certain assets, partially offset by losses on miscellaneous
non-operating assets. For the year ended December 31, 2001, other income
(expense), net includes the net impact of writing-off $9.6 million of certain
impaired assets, partially offset by a $6.3 million gain on the sale of an
investment.

    Income Taxes

    During 2001, our effective tax rate was significantly impacted by goodwill
amortization, the majority of which was not deductible for tax purposes, and had
the effect of increasing the overall tax rate. The reduction in the effective
tax rate for the year ended December 31, 2002 was primarily due to the
elimination of amortization of goodwill (as a result of adopting SFAS 142,
effective January 1, 2002) the majority of which was not deductible for tax
purposes.

IMPACT OF CONTINGENT CONVERTIBLE DEBENTURES ON DILUTED EARNINGS PER COMMON SHARE

    On November 26, 2001, we completed our $250 million offering of 1 3/4%
contingent convertible debentures due 2021, or the Debentures. Each one thousand
dollar principal amount of Debentures is convertible into 11.429 shares of our
common stock, which represents an initial conversion price of $87.50 per share.
Holders may surrender the Debentures for conversion into shares of our common
stock under any of the following circumstances: (i) if the sales price of our
common stock is above 120% of the conversion price (or $105 per share) for
specified periods; (ii) if we call the Debentures; or (iii) if specified
corporate transactions have occurred. See Note 11 to the Consolidated Financial
Statements for a further discussion of the Debentures.

    The if-converted method is used in determining the dilutive effect of the
Debentures in periods when the holders of such securities are permitted to
exercise their conversion rights. As of and for each of the years ended December
31, 2003 and 2002, the holders of our Debentures did not have the ability to
exercise their conversion rights. Had the requirements to allow the holders to
exercise their conversion rights been met and the Debentures remained
outstanding for the entire period, diluted earnings per common share would have
been reduced by approximately 2% during each of the years ended December 31,
2003 and 2002.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We address our exposure to market risks, principally the market risk of
changes in interest rates, through a controlled program of risk management that
may include the use of derivative financial instruments. We do not hold or issue
derivative financial instruments for trading purposes. We do not believe that
our foreign exchange exposure is material to our financial position or results
of operations. See Note 2 to the Consolidated Financial Statements for
additional discussion of our financial instruments and hedging activities.

    At December 31, 2003 and 2002, the fair value of our debt was estimated at
$1.2 billion and $899 million, respectively, using quoted market prices and
yields for the same or similar types of borrowings, taking into account the
underlying terms of the debt instruments. At December 31, 2003 and 2002, the
estimated fair value exceeded the carrying value of the debt by approximately
$86 million and $77 million, respectively. An

                                       46




assumed 10% increase in interest rates (representing approximately 50 and 60
basis points at December 31, 2003 and 2002, respectively) would potentially
reduce the estimated fair value of our debt by approximately $17 million and $21
million, respectively, at December 31, 2003 and 2002.

    The Debentures have a contingent interest component that will require us to
pay contingent interest based on certain thresholds, as outlined in the
indenture governing the Debentures. The contingent interest component, which is
more fully described in Note 11 to the Consolidated Financial Statements, is
considered to be a derivative instrument subject to SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended. As such, the
derivative was recorded at its fair value in the consolidated balance sheets and
was not material at December 31, 2003 and 2002.

    Borrowings under our unsecured revolving credit facility under our Credit
Agreement, our term loan facilities and our secured receivables credit facility
are subject to variable interest rates, unless fixed through interest rate swaps
or other agreements. Interest rates on our unsecured revolving credit facility
and term loans are subject to a pricing schedule that can fluctuate based on
changes in our credit rating. As such, our borrowing cost under these credit
arrangements will be subject to both fluctuations in interest rates and changes
in our credit rating. As of December 31, 2003, our borrowing rate for
LIBOR-based loans was principally LIBOR plus 1.1875%. At December 31, 2003,
there was $305 million outstanding under our term loan due June 2007 and there
were no borrowings outstanding under our unsecured revolving credit facility or
secured receivables credit facility.

    Based on our net exposure to interest rate changes, an assumed 10% change in
interest rates on our variable rate indebtedness (representing approximately 12
basis points) would impact annual net interest expense by approximately $0.4
million, assuming no changes to the debt outstanding at December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

    Cash and Cash Equivalents

    Cash and cash equivalents at December 31, 2003 totaled $155 million,
compared to $97 million at December 31, 2002. Cash flows from operating
activities in 2003 provided cash of $663 million, which together with cash
on-hand were used to fund investing and financing activities, which required
cash of $417 million and $188 million, respectively. Cash and cash equivalents
at December 31, 2002 totaled $97 million, a decrease of $26 million from
December 31, 2001. Cash flows from operating activities in 2002 provided cash of
$596 million, which together with cash on-hand were used to fund investing and
financing activities, which required cash of $477 million and $145 million,
respectively.

    Cash Flows from Operating Activities

    Net cash provided by operating activities for 2003 was $663 million compared
to $596 million in the prior year period. This increase was primarily due to
improved operating performance, partially offset by an increase in accounts
receivable associated with growth in net revenues. Days sales outstanding, a
measure of billing and collection efficiency, improved to 48 days at December
31, 2003 from 49 days at December 31, 2002. Net cash provided by operating
activities for 2002 benefited from our ability to accelerate the tax deduction
for certain operating expenses resulting from Internal Revenue Service rule
changes.

    Net cash from operating activities for 2002 was $131 million higher than the
2001 level. This increase was primarily due to improved operating performance,
our ability to accelerate the tax deductions resulting from Internal Revenue
Service rule changes, efficiencies in our billing and collection processes and a
reduction in SBCL integration costs paid. The increase was partially offset by
settlement payments, primarily related to contractual disputes previously
reserved for, and a decrease in the tax benefits realized associated with the
exercise of employee stock options. The year-over-year comparisons were also
impacted by the payment of indemnifiable tax matters to GlaxoSmithKline in 2002
and cash received from Corning Incorporated in 2001 related to an indemnified
billing-related claim. Days sales outstanding decreased to 49 days at December
31, 2002 from 54 days at December 31, 2001.

    Cash Flows from Investing Activities

    Net cash used in investing activities in 2003 was $417 million, consisting
primarily of acquisition and related transaction costs of $238 million to
acquire the outstanding capital stock of Unilab and capital expenditures of $175
million. The acquisition and related transaction costs included the cash portion
of the

                                       47




Unilab purchase price of $297 million and approximately $12 million of
transaction costs paid in 2003, partially offset by $72 million of cash acquired
from Unilab.

    Net cash used in investing activities in 2002 was $477 million, consisting
primarily of acquisition and related costs of $334 million, primarily to acquire
the outstanding voting stock of AML, and capital expenditures of $155 million.

    Cash Flows from Financing Activities

    Net cash used in financing activities in 2003 was $188 million, consisting
primarily of debt repayments totaling $392 million and purchases of treasury
stock totaling $258 million, partially offset by $450 million of borrowings
under our term loan due June 2007. Borrowings under our term loan due
June 2007 were used to finance the cash portion of the purchase price and
related transaction costs associated with the acquisition of Unilab, and to
repay $220 million of debt, representing substantially all of Unilab's then
existing outstanding debt, and related accrued interest. Of the $220 million,
$124 million represented payments related to our cash tender offer, which was
completed on March 7, 2003, for all of the outstanding $101 million principal
amount of Unilab's 12 3/4% Senior Subordinated Notes due 2009 and $23 million
of related tender premium and associated tender offer costs. The remaining
debt repayments in 2003 consisted primarily of $145 million of repayments
under our term loan due June 2007 and $24 million of capital lease repayments.
The $258 million in treasury stock purchases represents 4.0 million shares of
our common stock repurchased at an average price of $64.54 per share.

    Net cash used in financing activities in 2002 was $145 million, consisting
primarily of the net cash activity associated with the financing of the AML
acquisition. We financed AML's all-cash purchase price of approximately $335
million and related transaction costs, together with the repayment of
approximately $150 million of acquired AML debt and accrued interest with cash
on-hand, $300 million of borrowings under our secured receivables credit
facility and $175 million of borrowings under our unsecured revolving credit
facility. During the last three quarters of 2002, we repaid all of the $475
million in borrowings related to the acquisition of AML.

    Dividend Policy

    Through October 20, 2003, we had never declared or paid cash dividends on
our common stock. On October 21, 2003, our Board of Directors declared the
payment of a quarterly cash dividend of $0.15 per common share. The initial
quarterly dividend was paid on January 23, 2004 to shareholders of record on
January 8, 2004 and totaled $15.4 million. We expect to fund future dividend
payments with cash flows from operations, and do not expect the dividend to have
a material impact on our ability to finance future growth.

    Share Repurchase Plan

    In May 2003, our Board of Directors authorized a share repurchase program,
which permits us to purchase up to $300 million of our common stock. In October
2003, our Board of Directors increased our share repurchase authorization by an
additional $300 million. Through December 31, 2003, we have repurchased 4.0
million shares of our common stock at an average price of $64.54 per share for a
total of $258 million under the program. We expect to fund the share repurchase
program with cash flows from operations and do not expect the share repurchase
program to have a material impact on our ability to finance future growth.

    Contingent Convertible Debentures

    On November 30, 2004, 2005, 2008, 2012 and 2016 each holder of the
Debentures may require us to repurchase the holder's Debentures for the
principal amount of the Debentures plus any accrued and unpaid interest. We may
repurchase the $250 million Debentures for cash, common stock, or a combination
of both. We expect to settle any repurchases from any put on the Debentures with
a cash payment, funding such payment with a combination of cash on-hand and
borrowings under our credit facilities.

                                       48




    Contractual Obligations and Commitments

    The following table summarizes certain of our contractual obligations as of
December 31, 2003. See Notes 11 and 15 to the Consolidated Financial Statements
for further details.



                                                                    PAYMENTS DUE BY PERIOD
                                                                    ----------------------
                                                                        (IN THOUSANDS)
                                                            LESS THAN                                    AFTER
           CONTRACTUAL OBLIGATIONS               TOTAL       1 YEAR       1-3 YEARS       4-5 YEARS     5 YEARS
           -----------------------               -----       ------      -----------     -----------    -------
                                                                                         
Long-term debt...............................  $1,101,071   $ 72,817      $424,404        $ 81,919      $521,931
Capital lease obligations....................       1,586      1,133           421              32             -
Operating leases.............................     529,781    122,596       170,236         100,799       136,150
Purchase obligations.........................      75,046     39,269        35,420             202           155
                                               ----------   --------      --------        --------      --------
    Total contractual obligations............  $1,707,484   $235,815      $630,481        $182,952      $658,236
                                               ----------   --------      --------        --------      --------
                                               ----------   --------      --------        --------      --------


    See Note 11 to the Consolidated Financial Statements for a full description
of the terms of our indebtedness and related debt service requirements. A full
discussion and analysis regarding our minimum rental commitments under
noncancelable operating leases, noncancelable commitments to purchase products
or services, and reserves with respect to insurance and billing-related claims
is contained in Note 15 to the Consolidated Financial Statements.

    In December 2003, we entered into two lines of credit with two financial
institutions totaling $68 million for the issuance of letters of credit, which
mature in December 2004. Standby letters of credit are obtained, principally in
support of our risk management program, to ensure our performance or payment to
third parties and amounted to $57 million at December 31, 2003, of which $44
million was issued against the $68 million letter of credit lines with the
remaining $13 million issued against our $325 million unsecured revolving credit
facility. The letters of credit, which are renewed annually, primarily represent
collateral for automobile liability and workers' compensation loss payments.

    Our credit agreements relating to our unsecured revolving credit facility
and our term loan facilities contain various covenants and conditions, including
the maintenance of certain financial ratios, that could impact our ability to,
among other things, incur additional indebtedness, repurchase shares of our
outstanding common stock, make additional investments and consummate
acquisitions. We do not expect these covenants to adversely impact our ability
to execute our growth strategy or conduct normal business operations.

    Unconsolidated Joint Ventures

    We have investments in unconsolidated joint ventures in Phoenix, Arizona;
Indianapolis, Indiana; and Dayton, Ohio, which are accounted for under the
equity method of accounting. We believe that our transactions with our joint
ventures are conducted at arm's length, reflecting current market conditions and
pricing. Total net revenues of our unconsolidated joint ventures, on a combined
basis, are less than 6% of our consolidated net revenues. Total assets
associated with our unconsolidated joint ventures are less than 3% of our
consolidated total assets. We have no material unconditional obligations or
guarantees to, or in support of, our unconsolidated joint ventures and their
operations.

    Requirements and Capital Resources

    We estimate that we will invest approximately $180 million to $190 million
during 2004 for capital expenditures to support and expand our existing
operations, principally related to investments in information technology,
equipment, and facility upgrades. During January 2004, $13 million in letters of
credit issued against our $325 million unsecured revolving credit facility were
cancelled and $17 million of letters of credit were issued under the letter
of credit lines. As of February 26, 2004, all of the $325 million unsecured
revolving credit facility and all of the $250 million secured receivables
credit facility remained available to us for future borrowing. Our secured
receivables credit facility is set to expire on April 21, 2004. We are
currently in discussions with our lenders regarding a replacement for the
facility and expect to have a replacement in place during the second quarter of
2004. If in the unexpected instance the facility is not renewed, we expect that
other sources of liquidity could be readily obtained.

    We believe that cash from operations and our borrowing capacity under our
credit facilities and any replacement facilities will provide sufficient
financial flexibility to meet seasonal working capital requirements and to fund
capital expenditures, debt service requirements, cash dividends on common
shares, share repurchases

                                       49




and additional growth opportunities for the foreseeable future, exclusive of any
potential temporary impact of the Health Insurance Portability and
Accountability Act of 1996, as discussed below. Our investment grade credit
ratings have had a favorable impact on our cost of and access to capital, and we
believe that our improved financial performance should provide us with access to
additional financing, if necessary, to fund growth opportunities that cannot be
funded from existing sources.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

    The Secretary of the Department of Human Health and Services, or HHS, has
issued final regulations under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, designed to improve the efficiency and
effectiveness of the healthcare system by facilitating the electronic exchange
of information in certain financial and administrative transactions while
protecting the privacy and security of the information exchanged. Three
principal regulations have been issued: privacy regulations, security
regulations, and standards for electronic transactions.

    We implemented the HIPAA privacy regulations by April 2003, as required, and
are conducting an analysis to determine the proper security measures to
reasonably and appropriately comply with the standards and implementation
specifications by the compliance deadline of April 20, 2005.

    The HIPAA regulations on electronic transactions, which we refer to as the
transaction standards, establish uniform standards for electronic transactions
and code sets, including the electronic transactions and code sets used for
claims, remittance advices, enrollment and eligibility.

    On September 23, 2003, CMS announced that it would implement a
contingency plan for the Medicare program to accept electronic transactions that
are not fully compliant with the transaction standards after the October 16,
2003 compliance deadline. The CMS contingency plan, as announced, allows
Medicare carriers to continue to accept and process Medicare claims in the
pre-October 16 electronic formats to give healthcare providers additional time
to complete the testing process, provided that they continue to make a good
faith effort to comply with the new standards. Almost all other payers have
followed the lead of CMS, accepting legacy formats until both parties to the
transactions are ready to implement the new electronic transaction standards.

    As part of its plan, CMS is expected to regularly reassess the readiness of
its healthcare providers to determine how long the contingency plan will remain
in effect. Many of our payers were not ready to implement the transaction
standards by the October 2003 compliance deadline or were not ready to test or
trouble-shoot claims submissions. We are working in good faith with payers that
have not converted to the new standards to reach agreement on each payer's data
requirements and to test claims submissions.

    The HIPAA transaction standards are complex, and subject to differences in
interpretation by payers. For instance, some payers may interpret the standards
to require us to provide certain types of information, including demographic
information not usually provided to us by physicians. As a result of
inconsistent interpretation of transaction standards by payers or our inability
to obtain certain billing information not usually provided to us by physicians,
we could face increased costs and complexity, a temporary disruption in receipts
and ongoing reductions in reimbursements and net revenues. We are working
closely with our payers to establish acceptable protocols for claims submissions
and with our trade association and an industry coalition to present issues and
problems as they arise to the appropriate regulators and standards setting
organizations. Compliance with the HIPAA requirements requires significant
capital and personnel resources from all healthcare organizations. While we
believe that our total costs to comply with HIPAA will not be material to our
results of operations or cash flows, additional customer contact to obtain
data for billing as a result of different interpretations of the current
regulations could impose significant additional costs on us.

OUTLOOK

    As discussed in the Overview, we believe that the underlying fundamentals of
the diagnostic testing industry will continue to improve and that the growth in
the market for laboratory testing will accelerate over the long term. We believe
that in the short term, the market will continue to expand, despite the negative
impact which the current levels of unemployed and uninsured, and healthcare plan
design changes are having on our business. As the leading national provider of
diagnostic testing, information and related services with the most extensive
network of laboratories and patient service centers throughout the United
States, we expect to further enhance patient access and customer service. We
provide a broad range of benefits for customers

                                       50




including: continued improvements in quality; convenience and accessibility; a
broad test menu; and a broad range of information technology products to help
providers and insurers better manage their patients' health.

    We continue to invest in areas that are differentiating us from our
competitors, including: Six Sigma quality, which is benefiting margins by
improving efficiencies and is beginning to attract new business by improving
service quality; state-of-the-art electronic client connectivity options that
enhance customer loyalty; and new tests and testing techniques including
gene-based testing. We also pursue selective acquisitions when they make
strategic and economic sense. While there are fewer large acquisition
opportunities available as a result of industry consolidation, there remain
numerous regional and local acquisition opportunities. Additionally, we see an
opportunity to use our strong customer service capabilities to expand our
current position in many markets around the country.

    Our credit profile continues to improve. Our strong cash generation and
balance sheet position us well to take advantage of growth opportunities.

INFLATION

    We believe that inflation generally does not have a material adverse effect
on our results of operations or financial condition because the majority of our
contracts are short term.

IMPACT OF NEW ACCOUNTING STANDARDS

    In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised in December 2003. The impact of this
accounting standard is discussed in Note 2 to the Consolidated Financial
Statements.

                                       51






        STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS

    The management of Quest Diagnostics Incorporated is responsible for the
preparation, presentation and integrity of the consolidated financial statements
and other information included in this annual report. The financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and include certain amounts based on
management's best estimates and judgments.

    Quest Diagnostics maintains a comprehensive system of internal controls
designed to provide reasonable assurance as to the reliability of the financial
statements as well as to safeguard assets from unauthorized use or disposition.
The system is reinforced by written policies, selection and training of highly
competent financial personnel, appropriate division of responsibilities and a
program of internal audits.

    The Audit and Finance Committee of the Board of Directors is responsible for
reviewing and monitoring Quest Diagnostics' financial reporting and accounting
practices and the annual appointment of the independent auditors. The Audit and
Finance Committee meets periodically with management, the internal auditors and
the independent auditors to review and assess the activities of each. Both the
independent auditors and the internal auditors meet with the Audit and Finance
Committee, without management present, to review the results of their audits.

    The consolidated financial statements have been audited by our independent
auditors, PricewaterhouseCoopers LLP. Their responsibility is to express an
opinion with respect to the consolidated financial statements on the basis of an
audit conducted in accordance with auditing standards generally accepted in the
United States of America.

                                                                                        
    By /s/ Kenneth W. Freeman                         Chairman of the Board and               February 26, 2004
       ----------------------------                     Chief Executive Officer
           Kenneth W. Freeman

    By /s/ Surya N. Mohapatra                         President and                           February 26, 2004
       ----------------------------                     Chief Operating Officer
           Surya N. Mohapatra

    By /s/ Robert A. Hagemann                         Senior Vice President and               February 26, 2004
       ----------------------------                     Chief Financial Officer
           Robert A. Hagemann



                                       52






REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
of Quest Diagnostics Incorporated

    In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the financial position of Quest Diagnostics Incorporated and
its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.

    As discussed in Note 2 to the financial statements, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which changed the
method of accounting for goodwill and other intangible assets effective January
1, 2002.

/s/ PricewaterhouseCoopers LLP
_______________________________
  PricewaterhouseCoopers LLP
  Stamford, Connecticut
  January 23, 2004

                                      F-1






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                 2003         2002
                                                              ----------   ----------
                                                                     
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................  $  154,958   $   96,777
Accounts receivable, net of allowance of $211,739 and
  $193,456 at December 31, 2003 and 2002, respectively......     609,187      522,131
Inventories.................................................      72,484       60,899
Deferred income taxes.......................................     108,975      102,700
Prepaid expenses and other current assets...................      50,182       41,936
                                                              ----------   ----------
    Total current assets....................................     995,786      824,443
PROPERTY, PLANT AND EQUIPMENT, NET..........................     607,305      570,149
GOODWILL, NET...............................................   2,518,875    1,788,850
INTANGIBLE ASSETS, NET......................................      16,978       22,083
DEFERRED INCOME TAXES.......................................      49,635       29,756
OTHER ASSETS................................................     112,839       88,916
                                                              ----------   ----------
TOTAL ASSETS................................................  $4,301,418   $3,324,197
                                                              ----------   ----------
                                                              ----------   ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.......................  $  649,850   $  609,945
Current portion of long-term debt...........................      73,950       26,032
                                                              ----------   ----------
    Total current liabilities...............................     723,800      635,977
LONG-TERM DEBT..............................................   1,028,707      796,507
OTHER LIABILITIES...........................................     154,217      122,850
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share; 300,000 shares
  authorized; 106,804 and 97,963 shares issued at December
  31, 2003 and 2002, respectively...........................       1,068          980
Additional paid-in capital..................................   2,267,014    1,817,511
Retained earnings (accumulated deficit).....................     380,559      (40,772)
Unearned compensation.......................................      (2,346)      (3,332)
Accumulated other comprehensive income (loss)...............       5,947       (5,524)
Treasury stock, at cost; 3,990 shares at December 31,
  2003......................................................    (257,548)           -
                                                              ----------   ----------
    Total common stockholders' equity.......................   2,394,694    1,768,863
                                                              ----------   ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................  $4,301,418   $3,324,197
                                                              ----------   ----------
                                                              ----------   ----------


The accompanying notes are an integral part of these statements.

                                      F-2




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                                 2003         2002         2001
                                                              ----------   ----------   ----------
                                                                               
NET REVENUES................................................  $4,737,958   $4,108,051   $3,627,771

OPERATING COSTS AND EXPENSES:
Cost of services............................................   2,768,623    2,432,388    2,151,594
Selling, general and administrative.........................   1,165,700    1,074,841    1,018,680
Amortization of goodwill....................................           -            -       38,392
Amortization of intangible assets...........................       8,201        8,373        7,715
Other operating (income) expense, net.......................      (1,020)         307         (160)
                                                              ----------   ----------   ----------

    Total operating costs and expenses......................   3,941,504    3,515,909    3,216,221
                                                              ----------   ----------   ----------

OPERATING INCOME............................................     796,454      592,142      411,550

OTHER INCOME (EXPENSE):
Interest expense, net.......................................     (59,789)     (53,673)     (70,523)
Minority share of income....................................     (17,630)     (14,874)      (9,953)
Equity earnings in unconsolidated joint ventures............      17,439       16,714       10,763
Loss on debt extinguishment.................................           -            -      (42,012)
Other income (expense), net.................................       1,324        2,068       (3,236)
                                                              ----------   ----------   ----------
    Total non-operating expenses, net.......................     (58,656)     (49,765)    (114,961)
                                                              ----------   ----------   ----------

INCOME BEFORE TAXES.........................................     737,798      542,377      296,589
INCOME TAX EXPENSE..........................................     301,081      220,223      134,286
                                                              ----------   ----------   ----------
NET INCOME..................................................  $  436,717   $  322,154   $  162,303
                                                              ----------   ----------   ----------
                                                              ----------   ----------   ----------
BASIC EARNINGS PER COMMON SHARE:
Net income..................................................  $     4.22   $     3.34   $     1.74
Weighted average common shares outstanding -- basic.........     103,416       96,467       93,053

DILUTED EARNINGS PER COMMON SHARE:
Net income..................................................  $     4.12   $     3.23   $     1.66
Weighted average common shares outstanding -- diluted.......     105,932       99,790       97,610


The accompanying notes are an integral part of these statements.

                                      F-3






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)



                                                                2003        2002         2001
                                                              ---------   ---------   -----------
                                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $ 436,717   $ 322,154   $   162,303
Adjustments to reconcile net income to net cash provided by
  operating activities:
Depreciation and amortization...............................    153,903     131,391       147,727
Provision for doubtful accounts.............................    228,222     217,360       218,271
Loss on debt extinguishment.................................          -           -        42,012
Deferred income tax provision (benefit).....................     33,853      90,401          (560)
Minority share of income....................................     17,630      14,874         9,953
Stock compensation expense..................................      5,297       9,028        20,672
Tax benefits associated with stock-based compensation
  plans.....................................................     30,496      44,507        71,917
Other, net..................................................     (1,583)       (813)        1,034
Changes in operating assets and liabilities:
    Accounts receivable.....................................   (254,865)   (168,185)     (230,131)
    Accounts payable and accrued expenses...................     (6,795)    (12,658)       12,788
    Integration, settlement and other special charges.......    (18,942)    (29,668)      (48,664)
    Income taxes payable....................................     26,493      (3,912)       23,131
    Other assets and liabilities, net.......................     12,373     (18,108)       35,350
                                                              ---------   ---------   -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................    662,799     596,371       465,803
                                                              ---------   ---------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired.................   (237,610)   (333,512)     (152,864)
Capital expenditures........................................   (174,641)   (155,196)     (148,986)
Increase in investments and other assets....................    (13,842)     (9,728)      (20,428)
Proceeds from disposition of assets.........................      9,043      10,564        22,673
Collection of note receivable...............................          -      10,660         2,989
                                                              ---------   ---------   -----------
NET CASH USED IN INVESTING ACTIVITIES.......................   (417,050)   (477,212)     (296,616)
                                                              ---------   ---------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings....................................    450,000     475,237       969,939
Repayments of debt..........................................   (391,718)   (634,278)   (1,175,489)
Purchases of treasury stock.................................   (257,548)          -             -
Exercise of stock options...................................     29,887      27,034        25,631
Distributions to minority partners..........................    (14,253)    (12,192)       (8,718)
Financing costs paid........................................     (4,227)       (129)      (28,459)
Redemption of preferred stock...............................          -           -        (1,000)
Preferred dividends paid....................................          -           -          (236)
Other.......................................................        291        (386)            -
                                                              ---------   ---------   -----------

NET CASH USED IN FINANCING ACTIVITIES.......................   (187,568)   (144,714)     (218,332)
                                                              ---------   ---------   -----------

NET CHANGE IN CASH AND CASH EQUIVALENTS.....................     58,181     (25,555)      (49,145)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................     96,777     122,332       171,477
                                                              ---------   ---------   -----------

CASH AND CASH EQUIVALENTS, END OF YEAR......................  $ 154,958   $  96,777   $   122,332
                                                              ---------   ---------   -----------
                                                              ---------   ---------   -----------


The accompanying notes are an integral part of these statements.

                                      F-4





                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)


                                                              RETAINED                 ACCUMULATED
                                                ADDITIONAL    EARNINGS      UNEARNED     OTHER                     COMPRE-
                                       COMMON    PAID-IN     (ACCUMULATED   COMPEN-    COMPREHENSIVE   TREASURY    HENSIVE
                                       STOCK     CAPITAL      DEFICIT)       SATION    INCOME (LOSS)     STOCK      INCOME
                                                                                              

BALANCE, DECEMBER 31, 2000..........  $ 465    $1,591,976    $(525,111)    $(31,077)     $(5,458)     $       -
Net income..........................                           162,303                                            $162,303
Other comprehensive income..........                                                       1,988                     1,988
                                                                                                                  --------
Comprehensive income................                                                                              $164,291
                                                                                                                  --------
                                                                                                                  --------
Two-for-one stock split
 (47,149 common shares).............    472          (472)
Preferred dividends declared........                              (118)
Issuance of common stock under
 benefit plans (233 common shares)..      2        25,040                   (3,540)
Exercise of stock options
 (2,101 common shares)..............     21        25,610
Tax benefits associated with
 stock-based compensation plans.....               71,917
Adjustment to Corning receivable....                  605
Amortization of unearned
 compensation.......................                                        21,364
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001..........    960     1,714,676     (362,926)    (13,253)       (3,470)             -
Net income..........................                           322,154                                            $322,154
Other comprehensive loss............                                                      (2,054)                   (2,054)
                                                                                                                  --------
Comprehensive income................                                                                              $320,100
                                                                                                                  --------
                                                                                                                  --------
Issuance of common stock under
 benefit plans (418 common shares)..      4        31,310
Exercise of stock options
 (1,521 common shares)..............     16        27,018
Tax benefits associated with
 stock-ased compensation plans.....                44,507
Amortization of unearned
 compensation.......................                                         9,921
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002..........    980     1,817,511      (40,772)     (3,332)       (5,524)             -
Net income..........................                           436,717                                            $436,717
Other comprehensive income..........                                                      11,471                    11,471
                                                                                                                  --------
Comprehensive income................                                                                              $448,188
                                                                                                                  --------
                                                                                                                  --------
Dividend declared...................                           (15,386)
Shares issued to acquire Unilab
 (7,055 common shares)..............     71       372,393
Fair value of Unilab converted
 options............................                8,452
Issuance of common stock under
 benefit plans (400 common shares)..      4        18,081                   (4,313)
Exercise of stock options
 (1,567 common shares)..............     15        29,872
Shares to cover employee payroll tax
 withholdings on stock issued under
 benefit plans (181 common shares)..     (2)       (9,791)
Tax benefits associated with
 stock-based compensation plans.....               30,496
Amortization of unearned
 compensation.......................                                         5,299
Purchases of treasury stock
 (3,990 common shares)..............                                                                   (257,548)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003.......... $1,068    $2,267,014    $ 380,559     $(2,346)      $ 5,947      $(257,548)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------


The accompanying notes are an integral part of these statements.

                                      F-5






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

1.  DESCRIPTION OF BUSINESS

    Quest Diagnostics Incorporated and its subsidiaries ("Quest Diagnostics" or
the "Company") is the largest clinical laboratory testing business in the United
States. Prior to January 1, 1997, Quest Diagnostics was a wholly owned
subsidiary of Corning Incorporated ("Corning"). On December 31, 1996, Corning
distributed all of the outstanding shares of common stock of the Company to the
stockholders of Corning as part of the "Spin-Off Distribution".

    As the nation's leading provider of diagnostic testing and related services
for the healthcare industry, Quest Diagnostics offers a broad range of clinical
laboratory testing services to physicians, hospitals, managed care
organizations, employers, governmental institutions and other commercial
clinical laboratories. Quest Diagnostics is the leading provider of esoteric
testing, including gene-based testing, and testing for drugs of abuse. The
Company is also a leading provider of anatomic pathology services and testing to
support clinical trials of new pharmaceuticals worldwide. Through the Company's
national network of laboratories and patient service centers, and its esoteric
testing laboratory and development facilities, Quest Diagnostics offers
comprehensive and innovative diagnostic testing, information and related
services used by physicians and other healthcare customers to diagnose, treat
and monitor diseases and other medical conditions.

    During 2003, Quest Diagnostics processed over 130 million requisitions
through its extensive network of laboratories and patient service centers in
virtually every major metropolitan area throughout the United States.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation

    The consolidated financial statements include the accounts of all entities
controlled by the Company. The equity method of accounting is used for
investments in affiliates which are not Company controlled, in which the
Company's ownership interest is between 20 and 49 percent and in which the
Company has significant influence. The Company's share of equity earnings from
investments in affiliates, accounted for under the equity method, totaled $17.4
million, $16.7 million and $10.8 million, respectively, for 2003, 2002 and 2001.
All significant intercompany accounts and transactions are eliminated in
consolidation.

    Use of Estimates

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



Reclassifications

    Certain amounts reported in the Company's consolidated statements of
operations for the years ended December 31, 2002 and 2001 have been reclassified
to conform to the December 31, 2003 presentation, which reports operating income
on the face of the consolidated statements of operations. In April 2002, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). Pursuant to SFAS 145, the extraordinary loss associated with the
extinguishment of debt in 2001, previously presented net of applicable taxes,
was reclassified to other non-operating expenses. Certain amounts reported in
the Company's consolidated statements of cash flows for the years ended
December 31, 2002 and 2001 have been reclassified to conform to the December 31,
2003 presentation.

    Revenue Recognition

    The Company primarily recognizes revenue for services rendered upon
completion of the testing process. Billings for services under third-party payer
programs, including Medicare and Medicaid, are recorded as revenues net of
allowances for differences between amounts billed and the estimated receipts
under such

                                      F-6




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

programs. Adjustments to the estimated receipts, based on final settlement
with the third-party payers, are recorded upon settlement. In 2003, 2002 and
2001, approximately 17%, 15% and 14%, respectively, of net revenues were
generated by Medicare and Medicaid programs. Under capitated agreements with
health insurers, the Company recognizes revenue based on a predetermined
monthly contractual rate for each member of the insurers' health plan
regardless of the number or cost of services provided by the Company.

    Taxes on Income

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

    Earnings Per Share

    On May 8, 2001, the stockholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of common shares
authorized from 100 million shares to 300 million shares. On May 31, 2001, the
Company effected a two-for-one stock split through the issuance of a stock
dividend of one new share of common stock for each share of common stock held by
stockholders of record on May 16, 2001. References to the number of common
shares and per common share amounts in the accompanying consolidated statements
of operations, including earnings per common share calculations and related
disclosures, have been restated to give retroactive effect to the stock split
for all periods presented.

    Basic earnings per common share is calculated by dividing net income, less
preferred stock dividends ($30 per quarter in 2001), by the weighted average
common shares outstanding. Diluted earnings per common share is calculated by
dividing net income, less preferred stock dividends, by the weighted average
common shares outstanding after giving effect to all potentially dilutive common
shares outstanding during the period. The if-converted method is used in
determining the dilutive effect of the Company's 1 3/4% contingent convertible
debentures in periods when the holders of such securities are permitted to
exercise their conversion rights (see Note 11). Potentially dilutive common
shares include outstanding stock options and restricted common shares granted
under the Company's Employee Equity Participation Program. During the fourth
quarter of 2001, the Company redeemed all of its then issued and outstanding
shares of preferred stock.

    The computation of basic and diluted earnings per common share was as
follows (in thousands, except per share data):



                                                       2003       2002       2001
                                                       ----       ----       ----
                                                                  
Net income.........................................  $436,717   $322,154   $162,303
Less: Preferred stock dividends....................         -          -        118
                                                     --------   --------   --------
Net income available to common stockholders........  $436,717   $322,154   $162,185
                                                     --------   --------   --------
                                                     --------   --------   --------

Weighted average common shares
  outstanding -- basic.............................   103,416     96,467     93,053

Effect of dilutive securities:
Stock options......................................     2,343      2,879      3,854
Restricted common stock............................       173        444        703
                                                     --------   --------   --------
Weighted average common shares
  outstanding -- diluted...........................   105,932     99,790     97,610
                                                     --------   --------   --------
                                                     --------   --------   --------

Basic earnings per common share:
Net income.........................................  $   4.22   $   3.34   $   1.74
                                                     --------   --------   --------
                                                     --------   --------   --------

Diluted earnings per common share:
Net income.........................................  $   4.12   $   3.23   $   1.66
                                                     --------   --------   --------
                                                     --------   --------   --------


                                      F-7




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The following securities were not included in the diluted earnings per share
calculation due to their antidilutive effect (in thousands):



                                                        2003       2002       2001
                                                        ----       ----       ----
                                                                   
Stock options......................................     2,009      2,352      1,820
Restricted common stock............................        -          -         20


    Stock-Based Compensation

    SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure -- an amendment of FASB Statement No. 123" ("SFAS 148")
encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, and amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

    The Company has chosen to adopt the disclosure only provisions of SFAS 148
and continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under this approach, the cost of restricted stock awards is
expensed over their vesting period, while the imputed cost of stock option
grants and discounts offered under the Company's Employee Stock Purchase Plan
("ESPP") is disclosed, based on the vesting provisions of the individual grants,
but not charged to expense. Stock-based compensation expense recorded in
accordance with APB 25, relating to restricted stock awards, was $5 million, $9
million and $21 million in 2003, 2002 and 2001, respectively.

    The Company has several stock ownership and compensation plans, which are
described more fully in Note 13. The following table presents net income and
basic and diluted earnings per common share, had the Company elected to
recognize compensation cost based on the fair value at the grant dates for stock
option awards and discounts granted for stock purchases under the Company's
ESPP, consistent with the method prescribed by SFAS 123, as amended by
SFAS 148:



                                                       2003       2002       2001
                                                       ----       ----       ----
                                                                  
Net income, as reported............................  $436,717   $322,154   $162,303
Add: Stock-based compensation under APB 25.........     5,297      9,028     20,672
Deduct: Total stock-based compensation expense
  determined under fair value method for all
  awards, net of related tax effects...............   (52,351)   (47,393)   (45,079)
                                                     --------   --------   --------
Pro forma net income...............................  $389,663   $283,789   $137,896
                                                     --------   --------   --------
                                                     --------   --------   --------
Earnings per common share:
Basic -- as reported...............................  $   4.22   $   3.34   $   1.74
                                                     --------   --------   --------
                                                     --------   --------   --------
Basic -- pro forma.................................  $   3.77   $   2.94   $   1.48
                                                     --------   --------   --------
                                                     --------   --------   --------

Diluted -- as reported.............................  $   4.12   $   3.23   $   1.66
                                                     --------   --------   --------
                                                     --------   --------   --------
Diluted -- pro forma...............................  $   3.72   $   2.87   $   1.41
                                                     --------   --------   --------
                                                     --------   --------   --------


                                      F-8




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:



                                                       2003       2002       2001
                                                       ----       ----       ----
                                                                  
Dividend yield.....................................    0.0%       0.0%       0.0%
Risk-free interest rate............................    2.8%       4.2%       5.1%
Expected volatility................................   48.1%      45.2%      47.7%
Expected holding period, in years..................       5          5          5


    The majority of options granted in 2003 were issued prior to the declaration
of the Company's quarterly cash dividend in the fourth quarter of 2003 and as
such carry a dividend yield of 0%, thereby reducing the weighted average
dividend yield for 2003 to 0.0%.

    Foreign Currency

    Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates. Income and expense items are translated at
average exchange rates prevailing during the year. The translation adjustments
are recorded as a component of accumulated other comprehensive income (loss)
within stockholders' equity. Gains and losses from foreign currency transactions
are included within "other operating (income) expense, net" in the consolidated
statements of operations. Transaction gains and losses have not been material.

    Cash and Cash Equivalents

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

    Concentration of Credit Risk

    Financial instruments that potentially subject the Company to concentrations
of credit risk are principally cash, cash equivalents, short-term investments
and accounts receivable. The Company's policy is to place its cash, cash
equivalents and short-term investments in highly rated financial instruments and
institutions. Concentration of credit risk with respect to accounts receivable
is mitigated by the diversity of the Company's clients and their dispersion
across many different geographic regions, and is limited to certain customers
who are large buyers of the Company's services. To reduce risk, the Company
routinely assesses the financial strength of these customers and, consequently,
believes that its accounts receivable credit risk exposure, with respect to
these customers, is limited. While the Company has receivables due from federal
and state governmental agencies, the Company does not believe that such
receivables represent a credit risk since the related healthcare programs are
funded by federal and state governments, and payment is primarily dependent on
submitting appropriate documentation.

    Inventories

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

    Property, Plant and Equipment

    Property, plant and equipment is recorded at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed as
incurred. Costs incurred for computer software developed or obtained for
internal use are capitalized for application development activities and expensed
as incurred for preliminary project activities and post-implementation
activities. Capitalized costs include external direct costs of materials and
services consumed in developing or obtaining internal-use software, payroll and
payroll-related costs for employees who are directly associated with and who
devote time to the internal-use software project and interest costs incurred,
when material, while developing internal-use software. Capitalization of such
costs ceases when the project is substantially complete and ready for its
intended purpose. Certain costs, such as

                                      F-9




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

maintenance and training, are expensed as incurred. The Company capitalizes
interest on borrowings during the active construction period of major capital
projects. Capitalized interest is added to the cost of the underlying assets and
is amortized over the useful lives of the assets. Depreciation and amortization
are provided on the straight-line method over expected useful asset lives as
follows: buildings and improvements, ranging from ten to thirty years;
laboratory equipment and furniture and fixtures, ranging from three to seven
years; leasehold improvements, the lesser of the useful life of the improvement
or the remaining life of the building or lease, as applicable; and computer
software developed or obtained for internal use, ranging from three to five
years.

    Goodwill

    Goodwill represents the cost of acquired businesses in excess of the fair
value of assets acquired, including separately recognized intangible assets,
less the fair value of liabilities assumed in a business combination. In June
2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), which broadens the criteria for recording intangible assets
separate from goodwill and requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles are not amortized into results of
operations, but instead are reviewed for impairment. Prior to July 1, 2001,
goodwill was amortized on the straight-line method over periods not exceeding
forty years. Pursuant to SFAS 142, goodwill recorded in connection with
acquisitions consummated prior to July 1, 2001 continued to be amortized through
December 31, 2001 and has not been amortized thereafter. In addition, goodwill
recognized in connection with acquisitions consummated after June 30, 2001 has
not been amortized.

    The following table presents net income and basic and diluted earnings per
common share, adjusted to reflect results as if the nonamortization provisions
of SFAS 142 had been in effect for the periods presented:



                                                       2003       2002       2001
                                                       ----       ----       ----
                                                                  
Net income, as reported............................  $436,717   $322,154   $162,303
Add back: Amortization of goodwill, net of taxes...         -          -     35,964
                                                     --------   --------   --------
Adjusted net income................................  $436,717   $322,154   $198,267
                                                     --------   --------   --------
                                                     --------   --------   --------
Basic earnings per common share:
Net income, as reported............................  $   4.22   $   3.34   $   1.74
Amortization of goodwill, net of taxes.............         -          -       0.39
                                                     --------   --------   --------
Adjusted net income................................  $   4.22   $   3.34   $   2.13
                                                     --------   --------   --------
                                                     --------   --------   --------
Diluted earnings per common share:
Net income, as reported............................  $   4.12   $   3.23   $   1.66
Amortization of goodwill, net of taxes.............         -          -       0.37
                                                     --------   --------   --------
Adjusted net income................................  $   4.12   $   3.23   $   2.03
                                                     --------   --------   --------
                                                     --------   --------   --------


    Intangible Assets

    Intangible assets are recognized as an asset apart from goodwill if the
asset arises from contractual or other legal rights, or if it is separable.
Intangible assets, principally representing the cost of customer lists and
non-competition agreements acquired, are capitalized and amortized on the
straight-line method over their expected useful life, which generally ranges
from five to fifteen years. The Company does not have any intangible assets that
have an indefinite useful life.

    Recoverability and Impairment of Goodwill

    The new criteria for recording intangible assets separate from goodwill did
not require the Company to reclassify any of its intangible assets. Under the
nonamortization provisions of SFAS 142, goodwill and certain intangibles are not
amortized into results of operations, but instead are reviewed for impairment
and an impairment charge is recorded in the periods in which the recorded
carrying value of goodwill and certain

                                      F-10




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

intangibles is more than its estimated fair value. The provisions of SFAS 142
require that a transitional impairment test be performed as of the beginning
of the year the statement is adopted. The provisions of SFAS 142 also require
that a goodwill impairment test be performed annually or in the case of other
events that indicate a potential impairment. The Company's transitional
impairment test indicated that there was no impairment of goodwill upon
adoption of SFAS 142 effective January 1, 2002. The annual impairment test of
goodwill was performed at the end of the Company's fiscal year on December
31st and indicated that there was no impairment of goodwill as of December 31,
2003.

    Effective January 1, 2002, the Company evaluates the recoverability and
measures the potential impairment of its goodwill under SFAS 142. The annual
impairment test is a two-step process that begins with the estimation of the
fair value of the reporting unit. The first step screens for potential
impairment and the second step measures the amount of the impairment, if any.
Management's estimate of fair value considers publicly available information
regarding the market capitalization of the Company as well as (i) publicly
available information regarding comparable publicly-traded companies in the
clinical laboratory testing industry, (ii) the financial projections and future
prospects of the Company's business, including its growth opportunities and
likely operational improvements, and (iii) comparable sales prices, if
available. As part of the first step to assess potential impairment, management
compares the estimate of fair value for the Company to the book value of the
Company's consolidated net assets. If the book value of the consolidated net
assets is greater than the estimate of fair value, the Company would then
proceed to the second step to measure the impairment, if any. The second step
compares the implied fair value of goodwill with its carrying value. The implied
fair value is determined by allocating the fair value of the reporting unit to
all of the assets and liabilities of that unit as if the reporting unit had been
acquired in a business combination and the fair value of the reporting unit was
the purchase price paid to acquire the reporting unit. The excess of the fair
value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. If the carrying amount of the
reporting unit's goodwill is greater than its implied fair value, an impairment
loss will be recognized in the amount of the excess. Management believes its
estimation methods are reasonable and reflective of common valuation practices.

    On a quarterly basis, management performs a review of the Company's business
to determine if events or changes in circumstances have occurred which could
have a material adverse effect on the fair value of the Company and its
goodwill. If such events or changes in circumstances were deemed to have
occurred, the Company would perform an impairment test of goodwill as of the end
of the quarter, consistent with the annual impairment test, and record any noted
impairment loss.

    Prior to 2002, the Company evaluated the recoverability and measured the
possible impairment of goodwill under APB Opinion No. 17, "Intangible Assets"
based on a fair value methodology. The fair value method was applied to each of
the regional laboratories. Management's estimate of fair value was primarily
based on multiples of forecasted revenue or multiples of forecasted earnings
before interest, taxes, depreciation and amortization. The multiples were
primarily determined based upon publicly available information regarding
comparable publicly-traded companies in the industry, but also considered
(i) the financial projections of each regional laboratory, (ii) the future
prospects of each regional laboratory, including its growth opportunities,
managed care concentration and likely operational improvements, and
(iii) comparable sales prices, if available. During 2001, no impairments of
goodwill were recorded.

    Recoverability and Impairment of Intangible Assets and Other Long-Lived
Assets

    Effective January 1, 2002, the Company evaluates the possible impairment of
its long-lived assets, including intangible assets which are amortized pursuant
to the provisions of SFAS 142, under SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). The Company reviews the
recoverability of its long-lived assets when events or changes in circumstances
occur that indicate that the carrying value of the asset may not be recoverable.
Evaluation of possible impairment is based on the Company's ability to recover
the asset from the expected future pretax cash flows (undiscounted and without
interest charges) of the related operations. If the expected undiscounted pretax
cash flows are less than the carrying amount of such asset, an impairment loss
is recognized for the difference between the estimated fair value and carrying
amount of the asset. The Company's adoption of SFAS 144 did not result in any
impairment loss being recorded.

                                      F-11




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    Investments

    The Company accounts for investments in equity securities, which are
included in "other assets" in conformity with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires the use of
fair value accounting for trading or available-for-sale securities. Both
realized and unrealized gains and losses for trading securities are recorded
currently in earnings as a component of non-operating expenses within "other
income (expense), net" in the consolidated statements of operations. Unrealized
gains and losses for available-for-sale securities are recorded as a component
of accumulated other comprehensive income (loss) within stockholders' equity.
Gains and losses on securities sold are based on the average cost method.

    Investments at December 31, 2003 and 2002 consisted of the following:



                                                               2003      2002
                                                               ----      ----
                                                                  
Available-for-sale equity securities........................  $26,195   $ 5,692
Trading equity securities...................................   19,168    14,808
Other investments...........................................   12,598     9,744
                                                              -------   -------
Total.......................................................  $57,961   $30,244
                                                              -------   -------
                                                              -------   -------


    Investments in available-for-sale equity securities consist primarily of
equity securities in public corporations. Investments in trading equity
securities represent participant directed investments of deferred employee
compensation and related Company matching contributions held in a trust pursuant
to the Company's supplemental deferred compensation plan (see Note 13). Other
investments do not have readily determinable fair values and consist primarily
of investments in preferred and common shares of privately held companies.

    As of December 31, 2003 and 2002, the Company had gross unrealized gains
(losses) from available-for-sale equity securities of $15.5 million and $(6.6)
million, respectively. "Other income (expense), net" for the year ended December
31, 2001 included a gain of $6.3 million associated with the sale of certain
available-for-sale equity securities. For the years ended December 31, 2003,
2002 and 2001, gains (losses) from trading equity securities totaled $1.9
million, $(1.0) million and $(0.1) million, respectively, and are included in
"other income (expense), net" within the consolidated statements of operations.

    Financial Instruments

    The Company's policy for managing exposure to market risks may include the
use of financial instruments, including derivatives. The Company has established
a control environment that includes policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. These policies prohibit holding or issuing derivative financial
instruments for trading purposes.

    SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), as amended, requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Effective January 1,
2001, the Company adopted SFAS 133, as amended. The cumulative effect of the
change in accounting for derivative financial instruments upon adoption on
January 1, 2001 of SFAS 133, as amended, reduced comprehensive income by
approximately $1 million.

    Fair Value of Financial Instruments

    The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable and accrued expenses approximate fair value based on the short
maturity of these instruments. At December 31, 2003 and 2002, the fair value of
the Company's debt was estimated at $1.2 billion and $899 million, respectively,
using quoted market prices and yields for the same or similar types of
borrowings, taking into account the underlying terms of the debt instruments. At
December 31, 2003 and 2002, the estimated fair value exceeded the carrying value
of the debt by $86 million and $77 million, respectively.

                                      F-12




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The Company's 1 3/4% contingent convertible notes due 2021 have a contingent
interest component that will require the Company to pay contingent interest
based on certain thresholds, as outlined in the indenture governing such notes.
The contingent interest component, which is more fully described in Note 11, is
considered to be a derivative instrument subject to SFAS 133, as amended. As
such, the derivative was recorded at its fair value in the consolidated balance
sheets and was not material at both December 31, 2003 and 2002.

    Comprehensive Income

    Comprehensive income encompasses all changes in stockholders' equity (except
those arising from transactions with stockholders) and includes net income, net
unrealized capital gains or losses on available-for-sale securities and foreign
currency translation adjustments.

    Segment Reporting

    The Company currently operates in one reportable business segment.
Substantially all of the Company's services are provided within the United
States, and substantially all of the Company's assets are located within the
United States. No one customer accounted for ten percent or more of net
revenues in 2003, 2002, or 2001.

    New Accounting Standards

    In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised in December 2003 ("FIN 46"). FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. Historically, entities generally were not consolidated unless
the entity was controlled through voting interests. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 will apply to variable interest entities as
of March 31, 2004 for the Company. Also, certain disclosure requirements apply
to all financial statements issued after December 31, 2003, regardless of when
the variable interest entity was established. The adoption of this standard is
not expected to have a material impact on the Company's consolidated financial
statements.

3.  BUSINESS ACQUISITIONS

    Acquisition of Unilab Corporation

    On February 28, 2003, the Company completed the acquisition of Unilab
Corporation ("Unilab"), the leading commercial clinical laboratory in
California. In connection with the acquisition, the Company paid $297 million in
cash and issued 7.1 million shares of Quest Diagnostics common stock to acquire
all of the outstanding capital stock of Unilab. In addition, the Company
reserved approximately 0.3 million shares of Quest Diagnostics common stock for
outstanding stock options of Unilab which were converted upon the completion of
the acquisition into options to acquire shares of Quest Diagnostics common stock
(the "converted options").

    The aggregate purchase price of $698 million included the cash portion of
the purchase price of $297 million and transaction costs of approximately $20
million, with the remaining portion of the purchase price paid through the
issuance of 7.1 million shares of Quest Diagnostics common stock (valued at $372
million or $52.80 per share, based on the average closing stock price of Quest
Diagnostics common stock for the five trading days ended March 4, 2003) and the
issuance of approximately 0.3 million converted options (valued at approximately
$9 million, based on the Black Scholes option-pricing model). Of the total
transaction costs incurred, approximately $8 million was paid during fiscal
2002.

    In conjunction with the acquisition of Unilab, the Company repaid $220
million of debt, representing substantially all of Unilab's then existing
outstanding debt, and related accrued interest. Of the $220 million, $124
million represents payments related to the Company's cash tender offer, which
was completed on March 7, 2003, for all of the outstanding $101 million
principal amount and related accrued interest of Unilab's 12 3/4%

                                      F-13




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Senior Subordinated Notes due 2009 and $23 million of related tender premium and
associated tender offer costs.

    The Company financed the cash portion of the purchase price and related
transaction costs, and the repayment of substantially all of Unilab's
outstanding debt and related accrued interest, with the proceeds from a new $450
million amortizing term loan due 2007 (see Note 11) and cash on-hand.

    As part of the Unilab acquisition, Quest Diagnostics acquired all of
Unilab's operations, including its primary testing facilities in Los Angeles,
San Jose and Sacramento, California, and approximately 365 patient service
centers and 35 rapid response laboratories and approximately 4,100 employees.
The Company expects to realize significant benefits from the acquisition of
Unilab. As the leading commercial clinical laboratory in California, the
acquisition of Unilab positions the Company to capitalize on its leading
position within the laboratory testing industry, further enhancing its national
network and access to its comprehensive range of services. Customers and
patients are expected to benefit from the acquisition by having greater access
to diagnostic testing services through the Company's expanded network of patient
service centers. In addition, customers will be provided with state-of-the-art
electronic connectivity services, innovative technologies and an expanded
esoteric testing menu from the Company's Nichols Institute based in San Juan
Capistrano, California.

    In connection with the acquisition of Unilab, as part of a settlement
agreement with the United States Federal Trade Commission, the Company entered
into an agreement to sell to Laboratory Corporation of America Holdings, Inc.,
("LabCorp"), certain assets in northern California for $4.5 million, including
the assignment of agreements with four independent physician associations
("IPA") and leases for 46 patient service centers (five of which also serve as
rapid response laboratories) (the "Divestiture"). Approximately $27 million in
annual net revenues were generated by capitated fees under the IPA contracts and
associated fee-for-service testing for physicians whose patients use these
patient service centers, as well as from specimens received directly from the
IPA physicians. The Company completed the transfer of assets and assignment of
the IPA agreements to LabCorp and recorded a $1.5 million gain in the third
quarter of 2003 in connection with the Divestiture, which is included in "other
operating (income) expense, net" within the consolidated statements of
operations.

    The acquisition of Unilab was accounted for under the purchase method of
accounting. As such, the cost to acquire Unilab has been allocated to the assets
and liabilities acquired based on estimated fair values as of the closing date.
The consolidated financial statements include the results of operations of
Unilab subsequent to the closing of the acquisition.

    The following table summarizes the Company's purchase price allocation
related to the acquisition of Unilab based on the estimated fair value of the
assets acquired and liabilities assumed on the acquisition date.



                                                                 FAIR VALUES
                                                                    AS OF
                                                              FEBRUARY 28, 2003
                                                              -----------------
                                                           
Current assets..............................................      $193,798
Property, plant and equipment...............................        10,855
Goodwill....................................................       735,853
Other assets................................................        47,777
                                                                  --------
    Total assets acquired...................................       988,283
                                                                  --------

Current liabilities.........................................        62,002
Long-term liabilities.......................................         7,369
Long-term debt..............................................       221,291
                                                                  --------
    Total liabilities assumed...............................       290,662
                                                                  --------

    Net assets acquired.....................................      $697,621
                                                                  --------
                                                                  --------


    Based on management's review of the net assets acquired and consultations
with third-party valuation specialists, no intangible assets meeting the
criteria under SFAS No. 141, "Business Combinations", were

                                      F-14




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

identified. Of the $736 million allocated to goodwill, approximately $85 million
is expected to be deductible for tax purposes.

    Acquisition of American Medical Laboratories, Incorporated

    On April 1, 2002, the Company completed its acquisition of all of the
outstanding voting stock of American Medical Laboratories, Incorporated, ("AML")
and an affiliated company of AML, LabPortal, Inc. ("LabPortal"), a provider of
electronic connectivity products, in an all-cash transaction with a combined
value of approximately $500 million, which included the assumption of
approximately $160 million in debt.

    Through the acquisition of AML, Quest Diagnostics acquired all of AML's
operations, including two full-service laboratories, 51 patient service centers,
and hospital sales, service and logistics capabilities. The all-cash purchase
price of approximately $335 million and related transaction costs, together with
the repayment of approximately $150 million of principal and related accrued
interest, representing substantially all of AML's debt, was financed by Quest
Diagnostics with cash on-hand, $300 million of borrowings under its secured
receivables credit facility and $175 million of borrowings under its unsecured
revolving credit facility. During 2002, Quest Diagnostics repaid all of the $475
million in borrowings related to the acquisition of AML.

    The acquisition of AML was accounted for under the purchase method of
accounting. As such, the cost to acquire AML has been allocated to the assets
and liabilities acquired based on estimated fair values as of the closing date.
The consolidated financial statements include the results of operations of AML
subsequent to the closing of the acquisition.

    The following table summarizes the Company's purchase price allocation
related to the acquisition of AML based on the estimated fair value of the
assets acquired and liabilities assumed on the acquisition date.



                                                               FAIR VALUES
                                                                  AS OF
                                                              APRIL 1, 2002
                                                              -------------
                                                           
Current assets..............................................    $ 83,403
Property, plant and equipment...............................      31,475
Goodwill....................................................     426,314
Other assets................................................       8,211
                                                                --------
    Total assets acquired...................................     549,403
                                                                --------

Current portion of long-term debt...........................      11,834
Other current liabilities...................................      51,403
Long-term debt..............................................     139,465
Other liabilities...........................................       4,925
                                                                --------
    Total liabilities assumed...............................     207,627
                                                                --------

    Net assets acquired.....................................    $341,776
                                                                --------
                                                                --------


    Based on management's review of the net assets acquired and consultations
with valuation specialists, no intangible assets meeting the criteria under SFAS
No. 141, "Business Combinations", were identified. Of the $426 million allocated
to goodwill, approximately $17 million is expected to be deductible for tax
purposes.

    Acquisition of LabPortal

    The all-cash purchase price for LabPortal of approximately $4 million and
related transaction costs, together with the repayment of all of LabPortal's
outstanding debt of approximately $7 million and related accrued interest, was
financed by Quest Diagnostics with cash on-hand. The acquisition of LabPortal
was accounted for under the purchase method of accounting. As such, the cost to
acquire LabPortal has been allocated to the assets and liabilities acquired
based on estimated fair values as of the closing date, including approximately
$8 million of goodwill. The consolidated financial statements include the
results of operations of LabPortal subsequent to the closing of the acquisition.

                                      F-15




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    Pro Forma Combined Financial Information

    The following unaudited pro forma combined financial information for the
years ended December 31, 2003 and 2002 assumes that the Unilab and AML
acquisitions and the Divestiture were completed on January 1, 2002. The
unaudited pro forma combined financial information for the year ended December
31, 2001 assumes that the AML acquisition was completed on January 1, 2001 (in
thousands, except per share data):



                                                           2003         2002         2001
                                                           ----         ----         ----
                                                                         
Net revenues..........................................  $4,803,875   $4,607,242   $3,925,418
Net income............................................     444,944      365,448      171,346

Basic earnings per common share:
Net income............................................  $     4.26   $     3.53   $     1.84
Weighted average common shares outstanding -- basic...     104,552      103,522       93,053

Diluted earnings per common share:
Net income............................................  $     4.16   $     3.42   $     1.76
Weighted average common shares
  outstanding -- diluted..............................     107,079      106,926       97,610


    The pro forma combined financial information presented above reflects
certain reclassifications to the historical financial statements of Unilab and
AML to conform the acquired companies' accounting policies and classification of
certain costs and expenses to that of Quest Diagnostics. These adjustments had
no impact on pro forma net income. Pro forma results for the year ended December
31, 2003 exclude $14.5 million of direct transaction costs, which were incurred
and expensed by Unilab in conjunction with its acquisition by Quest Diagnostics.
Pro forma results for the year ended December 31, 2002 exclude $14.5 million and
$6.3 million, respectively, of direct transaction costs, which were incurred and
expensed by AML and Unilab, respectively, in conjunction with their acquisitions
by Quest Diagnostics.

    2001 Acquisitions

    During 2001, the Company acquired the assets of Clinical Laboratories of
Colorado, LLC and the assets of Las Marias Reference Lab Corp. and Laboratorio
Clinico Las Marias, Inc., a clinical laboratory based in San Juan, Puerto Rico.
During 2001, the Company also acquired the outstanding voting shares that it did
not already own of MedPlus, Inc., a leading developer and integrator of clinical
connectivity and data management solutions for healthcare organizations and
clinicians, and all of the voting stock of Clinical Diagnostic Services, Inc.
("CDS"), which operated a diagnostic testing laboratory and more than 50 patient
service centers in New York and New Jersey. Additionally, during 2001, the
Company acquired the minority ownership interest of a consolidated joint venture
from its joint venture partner. The combined purchase price for these
acquisitions was $155 million, which was paid primarily in cash.

    The Company accounted for the above acquisitions under the purchase method
of accounting. In connection with the above transactions, the Company recorded
$153 million of goodwill during 2001, representing acquisition costs in excess
of the fair value of net assets acquired, and approximately $8 million
associated with non-compete agreements. The amounts paid under the non-compete
agreements are being amortized on the straight-line basis over their five-year
terms. During 2002, the Company recorded approximately $4 million of adjustments
to finalize the purchase price allocations associated with the businesses
acquired in 2001, primarily related to accruals for integration costs for
actions impacting the employees and operations of the acquired businesses,
partially offset by adjustments to finalize the deferred tax position of the
acquired entities.

    The historical financial statements of Quest Diagnostics include the results
of operations of each acquired company subsequent to the closing of the
respective acquisition.

4.  INTEGRATION OF ACQUIRED BUSINESSES

    In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146, which the Company
adopted effective January 1, 2003, requires that a liability for a cost
associated with an exit activity, including those related to employee
termination benefits and contractual obligations, be recognized when the
liability is incurred, and not necessarily the date of an entity's

                                      F-16




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

commitment to an exit plan, as under previous accounting guidance. The
provisions of SFAS 146 apply to integration costs associated with actions that
impact the employees and operations of Quest Diagnostics. Costs associated with
actions that impact the employees and operations of an acquired company, such as
Unilab, are accounted for as a cost of the acquisition and included in goodwill
in accordance with Emerging Issues Task Force No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination".

Integration of Unilab Corporation

    During the fourth quarter of 2003, the Company finalized its plan related to
the integration of Unilab into Quest Diagnostics' laboratory network. As part of
the plan, following the sale of certain assets to LabCorp as part of the
Divestiture, the Company closed its previously owned clinical laboratory in the
San Francisco Bay area and completed the integration of remaining customers in
the northern California area to Unilab's laboratories in San Jose and
Sacramento. The Company currently operates two laboratories in the Los Angeles
metropolitan area. As part of the integration plan, the Company plans to open a
new regional laboratory in the Los Angeles metropolitan area into which it will
integrate all of its business in the area.

    During 2003, the Company recorded $9 million of costs associated with
executing the Unilab integration plan. The majority of these integration costs
related to employee severance and contractual obligations associated with leased
facilities and equipment. Employee groups affected as a result of this plan
include those involved in the collection and testing of specimens, as well as
administrative and other support functions. Of the $9 million in costs, $7.9
million was recorded in the fourth quarter of 2003 and related to actions that
impact the employees and operations of Unilab, was accounted for as a cost of
the Unilab acquisition and included in goodwill. Of the $7.9 million, $6.8
million related to employee severance benefits for approximately 150 employees,
with the remainder primarily related to contractual obligations. In addition,
$1.1 million of integration costs, related to actions that impact Quest
Diagnostics' employees and operations and comprised principally of employee
severance benefits for approximately 30 employees, were accounted for as a
charge to earnings in the third quarter of 2003 and included in "other operating
(income) expense, net" within the consolidated statements of operations. As of
December 31, 2003, accruals related to the Unilab integration plan totaled
$6.6 million. While the majority of the accrued costs at December 31, 2003
are expected to be paid in 2004, there are certain severance costs that
have payment terms extending into 2005.

    Integration of American Medical Laboratories, Incorporated

    During the third quarter of 2002, the Company finalized its plan related to
the integration of AML into Quest Diagnostics' laboratory network. The plan
focused principally on improving customer service by enabling the Company to
perform esoteric testing on the east and west coasts of the United States, and
redirecting certain physician testing volumes within its national network to
provide more local testing. As part of the plan, the Company's Chantilly,
Virginia laboratory, acquired as part of the AML acquisition, has become the
primary esoteric testing laboratory and hospital service center for the eastern
United States, complementing the Company's Nichols Institute esoteric testing
facility in San Juan Capistrano, California. Esoteric testing volumes have been
redirected within the Company's national network to provide customers with
improved turnaround time and customer service. The Company has completed the
transition of certain routine clinical laboratory testing previously performed
in the Chantilly, Virginia laboratory to other testing facilities within the
Company's regional laboratory network. A reduction in staffing occurred as the
Company executed the integration plan and consolidated duplicate or overlapping
functions and facilities. Employee groups affected as a result of this plan
included those involved in the collection and testing of specimens, as well as
administrative and other support functions.

    In connection with the AML integration plan, the Company recorded $11
million of costs associated with executing the plan. The majority of these
integration costs related to employee severance and contractual obligations
associated with leased facilities and equipment. Of the total costs indicated
above, $9.5 million, related to actions that impact the employees and operations
of AML, was accounted for as a cost of the AML acquisition and included in
goodwill. Of the $9.5 million, $5.9 million related to employee severance
benefits for approximately 200 employees, with the remainder primarily related
to contractual obligations associated with leased facilities and equipment. In
addition, $1.5 million of integration costs, related to actions that impact

                                      F-17




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Quest Diagnostics' employees and operations and comprised principally of
employee severance benefits for approximately 100 employees, were accounted for
as a charge to earnings in the third quarter of 2002 and included in "other
operating (income) expense, net" within the consolidated statements of
operations. As of December 31, 2003 and 2002, accruals related to the AML
integration plan totaled $4.1 million and $8.3 million, respectively. The
actions associated with the AML integration plan, including those related to
severed employees, were completed in 2003. The remaining accruals at
December 31, 2003, substantially all of which represented severance and facility
exit costs, are expected to be paid in 2004.

    Integration of Clinical Diagnostic Services, Inc.

    During the fourth quarter of 2002, the Company finalized its plan related to
the integration of CDS into Quest Diagnostics' laboratory network in the New
York metropolitan area. Of the $13.3 million of costs recorded in the fourth
quarter of 2002 in connection with the execution of the CDS integration plan,
all of which were associated with actions impacting the employees and operations
of CDS, $3 million related to employee severance benefits for approximately 150
employees with the remainder primarily associated with remaining contractual
obligations under facility and equipment leases. The costs outlined above were
recorded as a cost of the acquisition and included in goodwill. As of
December 31, 2003 and 2002, accruals related to the CDS integration plan totaled
$5.3 million and $10.3 million, respectively. The actions associated with the
CDS integration plan, including those related to severed employees, were
completed in 2003. The remaining accruals at December 31, 2003, substantially
all of which represented remaining contractual obligations under facility
leases, have terms extending beyond 2004.

    Integration of SmithKline Beecham Clinical Laboratory Testing Business

    On August 16, 1999, the Company completed the acquisition of SmithKline
Beecham Clinical Laboratories, Inc. ("SBCL"), which operated the clinical
laboratory business of SmithKline Beecham plc ("SmithKline Beecham"). During the
fourth quarter of 1999, Quest Diagnostics finalized its plan to integrate SBCL
into Quest Diagnostics' laboratory network and recorded the estimated costs
associated with executing the integration plan. The majority of these
integration costs related to employee severance, contractual obligations
associated with leased facilities and equipment, and the write-off of fixed
assets which management believed would have no future economic benefit upon
combining the operations. The plan focused principally on laboratory
consolidations in geographic markets served by more than one of the Company's
laboratories, and the redirection of testing volume within the Company's
national network to provide more local testing and improve customer service. The
actions associated with the SBCL integration plan, including those related to
severed employees, were completed as of June 30, 2001. During 2001, the Company
utilized $27 million of the remaining accruals established in connection with
the SBCL integration, principally related to the payment of severance benefits
to terminated employees. The remaining accruals associated with the SBCL
integration plan, principally comprised of remaining contractual obligations
under facility leases, were not material at December 31, 2002.

5.  TAXES ON INCOME

    In conjunction with the Spin-Off Distribution, the Company entered into a
tax sharing agreement with its former parent and a former subsidiary, that
provide the parties with certain rights of indemnification against each other.
As part of the SBCL acquisition agreements, the Company entered into a tax
indemnification arrangement with SmithKline Beecham that provides the parties
with certain rights of indemnification against each other.

    The Company's pretax income (loss) consisted of $736 million, $547 million
and $290 million from U.S. operations and approximately $1.4 million, $(4.5)
million and $6.6 million from foreign operations for the years ended
December 31, 2003, 2002 and 2001, respectively.

                                      F-18




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The components of income tax expense for 2003, 2002 and 2001 were as
follows:



                                                               2003       2002       2001
                                                               ----       ----       ----
                                                                          
Current:
    Federal................................................  $214,729   $105,799   $107,629
    State and local........................................    51,771     23,396     25,727
    Foreign................................................       728        627      1,490

Deferred:
    Federal................................................    29,271     73,002       (452)
    State and local........................................     4,582     17,399       (108)
                                                             --------   --------   --------
        Total..............................................  $301,081   $220,223   $134,286
                                                             --------   --------   --------
                                                             --------   --------   --------


    A reconciliation of the federal statutory rate to the Company's effective
tax rate for 2003, 2002 and 2001 was as follows:



                                                               2003       2002       2001
                                                               ----       ----       ----
                                                                          
Tax provision at statutory rate............................    35.0%      35.0%      35.0%
State and local income taxes, net of federal benefit.......     5.0        5.0        5.0
Non-deductible goodwill amortization.......................       -          -        4.4
Impact of foreign operations...............................     0.2        0.2        0.5
Non-deductible meals and entertainment expense.............     0.3        0.3        0.4
Other, net.................................................     0.3        0.1          -
                                                               ----       ----       ----
    Effective tax rate.....................................    40.8%      40.6%      45.3%
                                                               ----       ----       ----
                                                               ----       ----       ----


    The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2003 and 2002 were as
follows:



                                                               2003       2002
                                                               ----       ----
                                                                  
Current deferred tax asset:
    Accounts receivable reserve............................  $ 33,797   $ 30,449
    Liabilities not currently deductible...................    65,352     67,173
    Accrued settlement reserves............................     4,972      3,456
    Accrued restructuring and integration costs............     4,854      1,622
                                                             --------   --------
        Total..............................................  $108,975   $102,700
                                                             --------   --------
                                                             --------   --------
Non-current deferred tax asset:
    Liabilities not currently deductible...................  $ 44,978   $ 40,422
    Net operating loss carryforwards.......................    17,914      1,652
    Accrued restructuring and integration costs............     1,613      3,334
    Depreciation and amortization..........................   (14,870)   (15,652)
                                                             --------   --------
        Total..............................................  $ 49,635   $ 29,756
                                                             --------   --------
                                                             --------   --------


    As of December 31, 2003, the Company had estimated net operating loss
carryforwards for federal and state income tax purposes of $45 million and
$430 million, respectively, which expire at various dates through 2023. As of
December 31, 2003 and 2002, deferred tax assets associated with net operating
loss carryforwards for federal and state income tax purposes of $51 million and
$29 million, respectively, have each been reduced by a valuation reserve of $33
million and $27 million respectively.

    Income taxes payable at December 31, 2003 and 2002 were $29 million and $20
million, respectively, and consisted primarily of federal income taxes payable
of $22 million and $23 million, respectively.

                                      F-19




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

6.  SUPPLEMENTAL CASH FLOW AND OTHER DATA



                                                                   2003        2002       2001
                                                                   ----        ----       ----
                                                                               
   Depreciation expense........................................  $ 145,701   $123,018   $101,620

   Interest expense............................................    (60,630)   (56,347)   (76,765)
   Interest income.............................................        841      2,674      6,242
                                                                 ---------   --------   --------
   Interest, net...............................................    (59,789)   (53,673)   (70,523)

   Interest paid...............................................     59,394     56,102     58,537

   Income taxes paid...........................................    211,966     83,710     26,384

   Businesses acquired:
   Fair value of assets acquired...............................  $ 989,778   $561,267   $182,136
   Fair value of liabilities assumed...........................    291,422    215,810     29,272

   Non-cash financing activities:
   Fair value of common stock issued to acquire Unilab.........  $ 372,464          -          -
   Fair value of converted options issued in conjunction with
     the Unilab acquisition....................................      8,452          -          -


7.  LOSS ON DEBT EXTINGUISHMENT

    On June 27, 2001, the Company refinanced a majority of its long-term debt on
a senior unsecured basis to reduce overall interest costs and obtain less
restrictive covenants. Specifically, the Company completed a $550 million senior
notes offering (the "Senior Notes") and entered into a new $500 million senior
unsecured credit facility (the "Credit Agreement") which included a five-year
$325 million revolving credit agreement and a $175 million term loan. The
Company used the net proceeds from the senior notes offering and the term loan,
together with cash on hand, to repay all of the $584 million which was
outstanding under its then existing senior secured credit agreement, including
the costs to settle existing interest rate swap agreements, and to consummate a
cash tender offer and consent solicitation for its 10 3/4% senior subordinated
notes due 2006 (the "Subordinated Notes"). During the remainder of 2001, the
Company repaid the $175 million term loan under the Credit Agreement.

    In conjunction with its debt refinancing, the Company recorded a loss on
debt extinguishment of $42 million, $36 million of which represented the
write-off of $23 million of deferred financing costs, associated with the
Company's debt which was refinanced, and $13 million of payments related
primarily to the tender premium incurred in connection with the Company's cash
tender offer of the Subordinated Notes. The remaining $6 million of losses
represented amounts incurred in conjunction with the cancellation of certain
interest rate swap agreements, which were terminated in connection with the debt
that was refinanced. Prior to the Company's debt refinancing in June 2001, the
Company's senior secured credit agreement required the Company to maintain
interest rate swap agreements to mitigate the risk of changes in interest rates
associated with a portion of its variable interest rate indebtedness. These
interest rate swap agreements were considered a hedge against changes in the
amount of future cash flows associated with the interest payments of the
Company's variable rate debt obligations. Accordingly, the interest rate swap
agreements were recorded at their estimated fair value in the Company's
consolidated balance sheet and the related losses on these contracts were
deferred in stockholders' equity as a component of comprehensive income. In
conjunction with the debt refinancing, the interest rate swap agreements were
terminated and the losses reflected in stockholders' equity as a component of
comprehensive income were reclassified to earnings and reflected as a charge
within the loss on debt extinguishment in the consolidated statements of
operations for the year ended December 31, 2001.

                                      F-20




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

8.  PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment at December 31, 2003 and 2002 consisted of the
following:



                                                                 2003         2002
                                                                 ----         ----
                                                                     
Land........................................................  $   34,909   $   33,148
Buildings and improvements..................................     273,548      277,565
Laboratory equipment, furniture and fixtures................     670,671      569,982
Leasehold improvements......................................     148,508      119,397
Computer software developed or obtained for internal use....     124,469      101,594
Construction-in-progress....................................      40,083       40,599
                                                              ----------   ----------
                                                               1,292,188    1,142,285
Less: accumulated depreciation and amortization.............    (684,883)    (572,136)
                                                              ----------   ----------
    Total...................................................  $  607,305   $  570,149
                                                              ----------   ----------
                                                              ----------   ----------


9.  GOODWILL AND INTANGIBLE ASSETS

    Goodwill at December 31, 2003 and 2002 consisted of the following:



                                                                 2003         2002
                                                                 ----         ----
                                                                     
Goodwill....................................................  $2,706,928   $1,976,903
Less: accumulated amortization..............................    (188,053)    (188,053)
                                                              ----------   ----------
    Goodwill, net...........................................  $2,518,875   $1,788,850
                                                              ----------   ----------
                                                              ----------   ----------


    The changes in the gross carrying amount of goodwill for the years ended
December 31, 2003 and 2002 are as follows:



                                                                 2003         2002
                                                                 ----         ----
                                                                     
Balance as of January 1.....................................  $1,976,903   $1,539,176
Goodwill acquired during the year...........................     730,025      437,727
                                                              ----------   ----------
Balance as of December 31...................................  $2,706,928   $1,976,903
                                                              ----------   ----------
                                                              ----------   ----------


    Intangible assets at December 31, 2003 and 2002 consisted of the following:



                                   WEIGHTED
                                   AVERAGE
                                 AMORTIZATION
                                    PERIOD             DECEMBER 31, 2003                  DECEMBER 31, 2002
                                 ------------   --------------------------------   --------------------------------
                                                          ACCUMULATED                        ACCUMULATED
                                                 COST     AMORTIZATION     NET      COST     AMORTIZATION     NET
                                                -------   ------------   -------   -------   ------------   -------
                                                                                       
Non-compete agreements.........     5 years     $44,942     $(37,947)    $ 6,995   $44,482     $(32,268)    $12,214
Customer lists.................    15 years      42,225      (35,568)      6,657    41,301      (33,751)      7,550
Other..........................    10 years       5,895       (2,569)      3,326     4,580       (2,261)      2,319
                                                -------     --------     -------   -------     --------     -------
    Total......................    10 years     $93,062     $(76,084)    $16,978   $90,363     $(68,280)    $22,083
                                                -------     --------     -------   -------     --------     -------
                                                -------     --------     -------   -------     --------     -------


    Amortization expense related to intangible assets was $8,201, $8,373 and
$7,715 for the years ended December 31, 2003, 2002 and 2001, respectively.

                                      F-21




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The estimated amortization expense related to other intangible assets for
each of the five succeeding fiscal years and thereafter as of December 31, 2003
is as follows:



FISCAL YEAR ENDING
   DECEMBER 31,
  ------------
                                                           
     2004....................................................    6,558
     2005....................................................    3,048
     2006....................................................    1,819
     2007....................................................    1,035
     2008....................................................      861
     Thereafter..............................................    3,657
                                                               -------
         Total...............................................  $16,978
                                                               -------
                                                               -------


10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

    Accounts payable and accrued expenses at December 31, 2003 and 2002
consisted of the following:



                                                                2003       2002
                                                                ----       ----
                                                                   
Accrued wages and benefits..................................  $255,340   $250,226
Accrued expenses............................................   221,783    208,037
Trade accounts payable......................................   118,731    111,982
Income taxes payable........................................    29,073     20,268
Accrued restructuring and integration costs.................    12,493     10,791
Accrued settlement reserves.................................    12,430      8,641
                                                              --------   --------
    Total...................................................  $649,850   $609,945
                                                              --------   --------
                                                              --------   --------


11. DEBT

    Long-term debt at December 31, 2003 and 2002 consisted of the following:



                                                                 2003        2002
                                                                 ----        ----
                                                                     
Term loan due June 2007.....................................  $  304,921   $      -
6 3/4% Senior Notes due July 2006...........................     274,219    273,907
7 1/2% Senior Notes due July 2011...........................     274,171    274,060
1 3/4% Contingent Convertible Debentures due November
  2021......................................................     247,760    247,635
Other.......................................................       1,586     26,937
                                                              ----------   --------
    Total...................................................   1,102,657    822,539
Less: current portion.......................................      73,950     26,032
                                                              ----------   --------
    Total long-term debt....................................  $1,028,707   $796,507
                                                              ----------   --------
                                                              ----------   --------


    Secured Receivables Credit Facility

    On July 21, 2000, the Company completed a receivables-backed financing
transaction (the "secured receivables credit facility"), the proceeds of which
were used to pay down loans outstanding under the Company's then existing senior
secured credit facility that was used to finance the acquisition of SBCL. The
secured receivables credit facility is currently being provided by Blue Ridge
Asset Funding Corporation, a commercial paper funding vehicle administered by
Wachovia Bank, N.A., La Fayette Asset Securitization LLC, a commercial funding
vehicle administered by Credit Lyonnais and Jupiter Securitization Corporation,
a commercial funding vehicle administered by Bank One, N.A.

    Interest on the $250 million secured receivables credit facility is based on
rates that are intended to approximate commercial paper rates for highly rated
issuers. Borrowings outstanding under the secured receivables credit facility,
if any, are classified as a current liability on our consolidated balance sheet
since the

                                      F-22




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

lenders fund the borrowings through the issuance of commercial paper which
matures at various dates within one year from the date of issuance and the term
of the one-year back-up facilities described below. There were no borrowings
outstanding as of December 31, 2003 and 2002.

    The secured receivables credit facility has the benefit of one-year back-up
facilities provided by three banks on a committed basis. On June 27, 2003, the
Company extended the expiration date of the back-up facilities of its secured
receivables credit facility from July 21, 2003 to April 21, 2004. The Company is
currently in discussions with its lenders regarding a replacement for the
facility and expects to have a replacement in place during the second quarter of
2004.

    Credit Agreement

    The Credit Agreement currently includes a $325 million unsecured revolving
credit facility which expires in June 2006. Interest on the unsecured revolving
credit facility is based on certain published rates plus an applicable margin
that will vary over an approximate range of 50 basis points based on changes in
the Company's credit ratings. At the option of the Company, it may elect to
enter into LIBOR-based interest rate contracts for periods up to 180 days.
Interest on any outstanding amounts not covered under the LIBOR-based interest
rate contracts is based on an alternate base rate, which is calculated by
reference to the prime rate or federal funds rate (as defined in the Credit
Agreement). Additionally, the Company has the ability to borrow up to $200
million under the $325 million unsecured revolving credit facility at rates
determined by a competitive bidding process among the lenders. As of
December 31, 2003, the Company's borrowing rate for LIBOR-based loans was LIBOR
plus 1.1875%. As of December 31, 2003 and 2002, there were no borrowings
outstanding under the unsecured revolving credit facility.

    Borrowings under the Credit Agreement are guaranteed by our wholly owned
subsidiaries that operate clinical laboratories in the United States (the
"Subsidiary Guarantors"). The Credit Agreement contains various covenants,
including the maintenance of certain financial ratios, which could impact the
Company's ability to, among other things, incur additional indebtedness,
repurchase shares of its outstanding common stock, make additional investments
and consummate acquisitions.

    Term Loan due June 2007

    As discussed in Note 3, the Company financed the cash portion of the
purchase price and related transaction costs associated with the Unilab
acquisition, and the repayment of substantially all of Unilab's outstanding debt
and related accrued interest, with the proceeds from a $450 million amortizing
term loan facility (the "term loan due June 2007") and cash on-hand. The term
loan due June 2007 carries interest at LIBOR plus an applicable margin that
can fluctuate over a range of up to 80 basis points, based on changes in the
Company's credit rating. At the option of the Company, it may elect to enter
into LIBOR-based interest rate contracts for periods up to 180 days. Interest
on any outstanding amounts not covered under the LIBOR-based interest rate
contracts is based on an alternate base rate, which is calculated by reference
to the prime rate or federal funds rate. As of December 31, 2003, the Company's
borrowing rate for LIBOR-based loans was LIBOR plus 1.1875%. As of December 31,
2003, the term loan due June 2007 required remaining principal repayments of
the initial amount borrowed equal to 16.18%, 16.18%, 17.19% and 18.2% in 2004
through 2007, respectively. The term loan due June 2007 is guaranteed by the
Subsidiary Guarantors and contains various covenants similar to those under
the Credit Agreement. Through December 31, 2003, the Company has repaid $145
million of principal under the term loan due June 2007. On January 12, 2004,
the Company repaid an additional $75 million of principal under the term loan
due June 2007 with the proceeds from a lower cost term loan due Decemeber
2008. The repayment in 2004 reduces the remaining principal payments of the
initial amount borrowed equal to 9.7%, 13.0%, 13.8% and 14.6% in 2004 through
2007, respectively.

    Term Loan due December 2008

    On December 19, 2003, the Company entered into a new $75 million amortizing
term loan facility (the "term loan due December 2008"), which was funded on
January 12, 2004 and the proceeds of which were used to repay $75 million under
the term loan due June 2007. The term loan due December 2008 carries a lower
interest rate than the

                                      F-23




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

term loan due June 2007 and is based on LIBOR plus an applicable margin that
can fluctuate over a range of up to 119 basis points, based on changes in the
Company's public debt rating. At the option of the Company, it may elect to
enter into LIBOR-based interest rate contracts for periods up to 180 days.
Interest on any outstanding amounts not covered under the LIBOR-based interest
rate contracts is based on an alternate base rate, which is calculated by
reference to the prime rate or federal funds rate. As of December 31, 2003, the
Company's borrowing rate for LIBOR-based loans was LIBOR plus 0.55%. The term
loan due December 2008 requires principal repayments of the initial amount
borrowed equal to 20% on each of the third and fourth anniversary dates of the
funding and the remainder of the outstanding balance on December 31, 2008. The
term loan due December 2008 is guaranteed by the Subsidiary Guarantors and
contains various covenants similar to those under the Credit Agreement.

    Senior Notes

    In conjunction with its 2001 debt refinancing (see Note 7), the Company
completed a $550 million senior notes offering in June 2001. The Senior Notes
were issued in two tranches: (a) $275 million aggregate principal amount of
6 3/4% senior notes due 2006 ("Senior Notes due 2006"), issued at a discount of
approximately $1.6 million and (b) $275 million aggregate principal amount of
7 1/2% senior notes due 2011 ("Senior Notes due 2011"), issued at a discount of
approximately $1.1 million. After considering the discounts, the effective
interest rate on the Senior Notes due 2006 and Senior Notes due 2011 is 6.9% and
7.6%, respectively. The Senior Notes require semiannual interest payments which
commenced January 12, 2002. The Senior Notes are unsecured obligations of the
Company and rank equally with the Company's other unsecured senior obligations.
The Senior Notes are guaranteed by the Subsidiary Guarantors and do not have
a sinking fund requirement.

    1 3/4% Contingent Convertible Debentures

    On November 26, 2001, the Company completed its $250 million offering of
1 3/4% contingent convertible debentures due 2021 (the "Debentures"). The net
proceeds of the offering, together with cash on hand, were used to repay all of
the $256 million principal that was then outstanding under the Company's secured
receivables credit facility. The Debentures, which pay a fixed rate of interest
semi-annually commencing on May 31, 2002, have a contingent interest component,
which is considered to be a derivative instrument subject to SFAS 133, as
amended, that will require the Company to pay contingent interest based on
certain thresholds, as outlined in the indenture governing the Debentures. For
income tax purposes, the Debentures are considered to be a contingent payment
security. As such, interest expense for tax purposes is based on an assumed
interest rate related to a comparable fixed interest rate debt security issued
by the Company without a conversion feature. The assumed interest rate for tax
purposes was 7% for both 2003 and 2002.

    The Debentures are guaranteed by the Subsidiary Guarantors and do not have a
sinking fund requirement.

    Each one thousand dollar principal amount of Debentures is convertible
initially into 11.429 shares of the Company's common stock, which represents an
initial conversion price of $87.50 per share. Holders may surrender the
Debentures for conversion into shares of the Company's common stock under any of
the following circumstances: (1) if the sales price of the Company's common
stock is above 120% of the conversion price (or $105 per share) for specified
periods; (2) if the Company calls the Debentures or (3) if specified corporate
transactions have occurred.

    The Company may call the Debentures at any time on or after November 30,
2004 for the principal amount of the Debentures plus any accrued and unpaid
interest. On November 30, 2004, 2005, 2008, 2012 and 2016 each holder of the
Debentures may require the Company to repurchase the holder's Debentures for the
principal amount of the Debentures plus any accrued and unpaid interest. The
Company may repurchase the Debentures for cash, common stock, or a combination
of both. The Company intends to settle any repurchases with a cash payment,
funding such payment with a combination of cash on-hand and borrowings under its
unsecured revolving credit facility. The Debentures are classified as long-term
debt on the consolidated balance sheet at December 31, 2003 due to the Company's
existing ability and intent to refinance the Debentures on a long-term basis in
the event the Debentures are put to the Company in November 2004.

                                      F-24




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    Letter of Credit Lines

    In December 2003, the Company entered into two lines of credit with two
financial institutions totaling $68 million for the issuance of letters of
credit (the "letter of credit lines"). The letter of credit lines mature in
December 2004 and are guaranteed by the Subsidiary Guarantors. As of December
31, 2003, there $44 million of outstanding letters of credit under the letter
of credit lines.

    As of December 31, 2003, long-term debt, including capital leases, maturing
in each of the years subsequent to December 31, 2004, is as follows:



YEAR ENDING DECEMBER 31,
- ------------------------
                                                           
2005........................................................  $   73,035
2006........................................................     351,790
2007........................................................      81,951
2008........................................................           -
2009 and thereafter.........................................     521,931
                                                              ----------
    Total long-term debt....................................  $1,028,707
                                                              ----------
                                                              ----------


    The table above assumes that the Debentures are repaid at their stated
maturity in 2021.

12. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY

    Series Preferred Stock

    Quest Diagnostics is authorized to issue up to 10 million shares of Series
Preferred Stock, par value $1.00 per share. The Company's Board of Directors has
the authority to issue such shares without stockholder approval and to determine
the designations, preferences, rights and restrictions of such shares. Of the
authorized shares, 1,300,000 shares have been designated Series A Preferred
Stock and 1,000 shares have been designated Voting Cumulative Preferred Stock.
No shares have been issued, other than the Voting Cumulative Preferred Stock.

    Voting Cumulative Preferred Stock

    During the fourth quarter of 2001, the Company redeemed all of the then
issued and outstanding shares of preferred stock for $1 million plus accrued
dividends. The Voting Cumulative Preferred Stock is generally entitled to one
vote per share, voting together as one class with the Company's common stock.
Whenever dividends on the Voting Cumulative Preferred Stock are in arrears, no
dividends or redemptions or purchases of shares may be made with respect to any
stock ranking junior as to dividends or liquidation to the Voting Cumulative
Preferred Stock until all such amounts have been paid. The Voting Cumulative
Preferred Stock is not convertible into shares of any other class or series of
stock of the Company. The Voting Cumulative Preferred Stock ranks senior to the
Quest Diagnostics common stock and the Series A Preferred Stock.

    Preferred Share Purchase Rights

    Each share of Quest Diagnostics common stock trades with a preferred share
purchase right, which entitles stockholders to purchase one-hundredth of a share
of Series A Preferred Stock upon the occurrence of certain events. In
conjunction with the SBCL acquisition, the Board of Directors of the Company
approved an amendment to the preferred share purchase rights. The amended rights
entitle stockholders to purchase shares of Series A Preferred Stock at a
predefined price in the event a person or group (other than SmithKline Beecham)
acquires 20% or more of the Company's outstanding common stock. The preferred
share purchase rights expire December 31, 2006.

                                      F-25




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    Accumulated Other Comprehensive Income (Loss)

    The components of accumulated other comprehensive income (loss) for 2003,
2002 and 2001 were as follows:



                                                               FOREIGN                   ACCUMULATED
                                                              CURRENCY       MARKET         OTHER
                                                             TRANSLATION     VALUE      COMPREHENSIVE
                                                             ADJUSTMENT    ADJUSTMENT   INCOME (LOSS)
                                                             ----------    ----------   -------------
                                                                               
Balance, December 31, 2000.................................    $(3,208)     $(2,250)       $(5,458)
Translation adjustment.....................................     (1,178)           -         (1,178)
Market value adjustment, net of tax expense of $2,093......          -        3,166          3,166
                                                               -------      -------        -------
Balance, December 31, 2001.................................     (4,386)         916         (3,470)
Translation adjustment.....................................      1,906            -          1,906
Market value adjustment, net of tax benefit of $2,627......          -       (3,960)        (3,960)
                                                               -------      -------        -------
Balance, December 31, 2002.................................     (2,480)      (3,044)        (5,524)
Translation adjustment.....................................      2,169            -          2,169
Market value adjustment, net of tax expense of $6,201......          -        9,302          9,302
                                                               -------      -------        -------
Balance, December 31, 2003.................................    $  (311)     $ 6,258        $ 5,947
                                                               -------      -------        -------
                                                               -------      -------        -------


    The market value adjustments for 2003, 2002 and 2001 represented unrealized
holding gains (losses), net of taxes.

    For the year ended December 31, 2001, other comprehensive income included
the cumulative effect of the change in accounting for derivative financial
instruments upon adoption of SFAS 133, as amended, which reduced comprehensive
income by approximately $1 million. In addition, in conjunction with the
Company's debt refinancing, the interest rate swap agreements were terminated
and the losses reflected in stockholders' equity as a component of comprehensive
income were reclassified to earnings and reflected within the loss on debt
extinguishment in the consolidated statements of operations for the year ended
December 31, 2001 (see Note 7).

    Dividend Policy

    Through October 20, 2003, the Company never declared or paid cash dividends
on its common stock. On October 21, 2003, the Company's Board of Directors
declared a quarterly cash dividend of $0.15 per common share. The initial $15.4
million quarterly dividend was paid on January 23, 2004 to shareholders of
record on January 8, 2004.

    Share Repurchase Plan

    In May 2003, the Company's Board of Directors authorized a share repurchase
program, which permits the Company to purchase up to $300 million of its common
stock. In October 2003, the Board of Directors increased the share repurchase
authorization by an additional $300 million. Through December 31, 2003, the
Company has repurchased 4.0 million shares of its common stock at an average
price of $64.54 per share for a total of $258 million under the program.

13. STOCK OWNERSHIP AND COMPENSATION PLANS

    Employee and Non-employee Directors Stock Ownership Programs

    In 1999, the Company established the 1999 Employee Equity Participation
Program (the "1999 EEPP") to replace the Company's prior plan established in
1996 (the "1996 EEPP"). The 1999 EEPP provides for three types of awards: (a)
stock options, (b) stock appreciation rights and (c) incentive stock awards. The
1999 EEPP provides for the grant to eligible employees of either non-qualified
or incentive stock options, or both, to purchase shares of Quest Diagnostics
common stock at no less than the fair market value on the date of grant. The
stock options are subject to forfeiture if employment terminates prior to the
end of the prescribed vesting

                                      F-26




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

period, as determined by the Board of Directors. The stock options expire on the
date designated by the Board of Directors but in no event more than eleven years
from date of grant. Grants of stock appreciation rights allow eligible employees
to receive a payment based on the appreciation of Quest Diagnostics common
stock in cash, shares of Quest Diagnostics common stock or a combination
thereof. The stock appreciation rights are granted at an exercise price at no
less than the fair market value of Quest Diagnostics common stock on the date
of grant. Stock appreciation rights expire on the date designated by the Board
of Directors but in no event more than eleven years from date of grant. No stock
appreciation rights have been granted under the 1999 EEPP. Under the incentive
stock provisions of the plan, the 1999 EEPP allows eligible employees to receive
awards of shares, or the right to receive shares, of Quest Diagnostics common
stock, the equivalent value in cash or a combination thereof. These shares are
generally earned on achievement of financial performance goals and are subject
to forfeiture if employment terminates prior to the end of the prescribed
vesting period, which ranges primarily from three to four years. The market
value of the shares awarded is recorded as unearned compensation. The amount of
unearned compensation is subject to adjustment based upon changes in earnings
estimates, if any, during the initial year of grant and is amortized to
compensation expense over the prescribed vesting period. Key executive,
managerial and technical employees are eligible to participate in the 1999 EEPP.
The provisions of the 1996 EEPP were similar to those outlined above for the
1999 EEPP.

    The 1999 EEPP increased the maximum number of shares of Quest Diagnostics
common stock that may be optioned or granted to 18 million shares. In addition,
any remaining shares under the 1996 EEPP are available for issuance under the
1999 EEPP.

    In 1998, the Company established the Quest Diagnostics Incorporated Stock
Option Plan for Non-employee Directors (the "Director Option Plan"). The
Director Option Plan provides for the grant to non-employee directors of
non-qualified stock options to purchase shares of Quest Diagnostics common
stock at no less than fair market value on the date of grant. The maximum number
of shares that may be issued under the Director Option Plan is 1 million shares.
The stock options expire ten years from date of grant and generally vest over
three years. During 2003, 2002 and 2001, grants under the Director Option Plan
totaled 94, 94 and 81 thousand shares, respectively.

    Transactions under the stock option plans were as follows (options in
thousands, except per share amounts):



                                                               2003      2002      2001
                                                               ----      ----      ----
                                                                         
Options outstanding, beginning of year......................    8,922     8,695     9,246
Options granted.............................................    3,176     2,052     2,413
Options exercised...........................................   (1,616)   (1,543)   (2,576)
Options terminated..........................................     (242)     (282)     (388)
                                                              -------   -------   -------
Options outstanding, end of year............................   10,240     8,922     8,695
                                                              -------   -------   -------
                                                              -------   -------   -------

Exercisable.................................................    5,706     3,943     3,168
Weighted average exercise price:
    Options granted.........................................  $ 53.33   $ 74.92   $ 55.08
    Options exercised.......................................    20.29     18.70     11.37
    Options terminated......................................    58.31     26.05     25.31
    Options outstanding, end of year........................    44.85     38.83     26.33
    Exercisable, end of year................................    34.01     22.09     13.97

Weighted average fair value of options at grant date........  $ 23.21   $ 33.74   $ 25.79


                                      F-27




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    The following relates to options outstanding at December 31, 2003:



                           OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE
- -------------------------------------------------------------------------   --------------------------------
                                            WEIGHTED
                                            AVERAGE
                                           REMAINING          WEIGHTED                           WEIGHTED
      RANGE OF             SHARES       CONTRACTUAL LIFE      AVERAGE           SHARES           AVERAGE
   EXERCISE PRICE      (IN THOUSANDS)      (IN YEARS)      EXERCISE PRICE   (IN THOUSANDS)    EXERCISE PRICE
   --------------      --------------      ----------      --------------   --------------    --------------
                                                                               
$ 5.26 - $11.28......        564              3.8              $ 7.91              564            $ 7.91
$12.92 - $19.16......      2,431              5.8               14.02            2,431             14.02
$28.53 - $35.64......        360              6.4               30.44              360             30.44
$44.00 - $60.00......      4,142              8.3               51.44            1,349             53.13
$60.06 - $75.94......      2,376              8.5               68.43              836             69.16
$80.95 - $94.99......        367              8.4               93.06              166             91.15


    The following summarizes the activity relative to incentive stock awards
granted in 2003, 2002 and 2001 (shares in thousands):



                                                               2003     2002     2001
                                                               ----     ----     ----
                                                                       
Incentive shares, beginning of year.........................     735    1,320    1,788
Incentive shares granted....................................     102        -        -
Incentive shares vested.....................................    (533)    (570)    (439)
Incentive shares forfeited and canceled.....................     (16)     (15)     (29)
                                                              ------   ------   ------
Incentive shares, end of year...............................     288      735    1,320
                                                              ------   ------   ------
                                                              ------   ------   ------

Weighted average fair value of incentive shares at grant
  date......................................................  $49.88   $    -   $    -


    The balance of the incentive stock awards at December 31, 2003 are subject
to forfeiture if employment terminates prior to the end of the prescribed
vesting period.

    Employee Stock Purchase Plan

    Under the Company's Employee Stock Purchase Plan ("ESPP"), substantially all
employees can elect to have up to 10% of their annual wages withheld to purchase
Quest Diagnostics common stock. The purchase price of the stock is 85% of the
lower of its beginning-of-quarter or end-of-quarter market price. Under the
ESPP, the maximum number of shares of Quest Diagnostics common stock which may
be purchased by eligible employees is 4 million. Approximately 272, 236 and 203
thousand shares of common stock were purchased by eligible employees in 2003,
2002 and 2001, respectively.

    Employee Stock Ownership Plan

    Prior to 1999, the Company maintained its Employee Stock Ownership Plan
("ESOP") to account for certain shares of Quest Diagnostics common stock which
had been issued for the account of all active regular employees of the Company
as of December 31, 1996. Effective with the closing of the SBCL acquisition, the
Company modified certain provisions of the ESOP to provide an additional benefit
to employees through ownership of the Company's common stock. During the year
ended December 31, 2002, the ESOP was merged into the Company's defined
contribution plan. Prior to the merger of the ESOP into the Company's defined
contribution plan, substantially all of the Company's employees were eligible to
participate in the ESOP. The Company's contributions to the ESOP trust were
based on 2% of eligible employee compensation for those employees who were
actively employed or on a leave of absence on the last day of the Plan year.
Company contributions to the trust were made in the form of shares of Quest
Diagnostics common stock. The Company's contributions to this plan aggregated
$10.4 million and $19.7 million for 2002 and 2001, respectively.

                                      F-28




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    Defined Contribution Plan

    The Company maintains a qualified defined contribution plan covering
substantially all of its employees. During the year ended December 31, 2002, the
ESOP, to which the Company made annual contributions equal to 2% of eligible
compensation, was merged into the Company's defined contribution plan and the
Company increased its maximum matching contribution for its defined contribution
plan from 4% to 6% of an employee's eligible wages. The Company's expense for
contributions to its defined contribution plan aggregated $54 million, $42
million and $30 million for 2003, 2002 and 2001, respectively.

    Supplemental Deferred Compensation Plan

    The Company's supplemental deferred compensation plan is an unfunded,
non-qualified plan that provides for certain management and highly compensated
employees to defer up to 50% of their eligible compensation. The compensation
deferred under this plan, together with Company matching amounts, are credited
with earnings or losses measured by the mirrored rate of return on investments
elected by plan participants. Each plan participant is fully vested in all
deferred compensation, Company match and earnings credited to their account.
Although the Company is currently contributing all participant deferrals and
matching amounts to a trust, the funds in the trust, totaling $19.2 million and
$14.8 million at December 31, 2003 and 2002, respectively, are general assets of
the Company and are subject to any claims of the Company's creditors. The
Company's expense for matching contributions to this plan were $0.4 million,
$0.4 million and $0.6 million for 2003, 2002 and 2001, respectively.

14. RELATED PARTY TRANSACTIONS

    As a result of the merger of Glaxo Wellcome and SmithKline Beecham in
December 2000, GlaxoSmithKline plc ("GSK") currently beneficially owns
approximately 22% of the outstanding shares of Quest Diagnostics common stock.

    As part of the SBCL acquisition agreements, SmithKline Beecham and Quest
Diagnostics entered into data access agreements under which Quest Diagnostics
granted SmithKline Beecham and certain affiliated companies certain
non-exclusive rights and access to use Quest Diagnostics' proprietary clinical
laboratory information database, which were terminated as of December 31, 2002.

    In addition to the contracts outlined above, GSK has a long-term contractual
relationship with Quest Diagnostics under which Quest Diagnostics is the primary
provider of testing to support GSK's and SmithKline Beecham's clinical trials
testing requirements worldwide (the "Clinical Trials Agreements").

    Significant transactions with GSK and SmithKline Beecham during 2003, 2002
and 2001 included:



                                                               2003      2002      2001
                                                               ----      ----      ----
                                                                         
Net revenues, primarily derived under the Clinical Trials
  Agreements................................................ $50,060   $32,822   $27,806


    In addition, under the SBCL acquisition agreements, SmithKline Beecham has
agreed to indemnify Quest Diagnostics, on an after tax basis, against certain
matters primarily related to taxes and billing and professional liability
claims.

    At December 31, 2003 and 2002, accounts payable and accrued expenses
included $21 million and $26 million, respectively, due to SmithKline Beecham,
primarily related to tax benefits associated with indemnifiable matters.

    During 2001, the Company received $8.7 million from Corning related to
certain indemnified billing-related claims settled in 2001 and 2000.

                                      F-29




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

15. COMMITMENTS AND CONTINGENCIES

    Minimum rental commitments under noncancelable operating leases, primarily
real estate, in effect at December 31, 2003 are as follows:



YEAR ENDING DECEMBER 31,
- ------------------------
                                                           
2004........................................................  $122,596
2005........................................................    96,987
2006........................................................    73,249
2007........................................................    56,690
2008........................................................    44,109
2009 and thereafter.........................................   136,150
                                                              --------
Minimum lease payments......................................   529,781
Noncancelable sub-lease income..............................      (763)
                                                              --------
Net minimum lease payments..................................  $529,018
                                                              --------
                                                              --------


    Operating lease rental expense for 2003, 2002 and 2001 aggregated $121
million, $97 million and $83 million, respectively.

    The Company has certain noncancelable commitments to purchase products or
services from various suppliers, mainly for telecommunications and standing
orders to purchase reagents and other laboratory supplies. At December 31, 2003,
the approximate total future purchase commitments are $75 million, of which $39
million are expected to be incurred in 2004.

    In support of its risk management program, the Company has standby letters
of credit issued under its letter of credit lines and unsecured revolving credit
facility to ensure its performance or payment to third parties, which amounted
to $57 million at December 31, 2003, of which $44 million was issued against the
letter of credit lines with the remaining $13 million issued against our $325
million unsecured revolving credit facility. The letters of credit, which are
renewed annually, primarily represent collateral for current and future
automobile liability and workers' compensation loss payments. During January
2004, $13 million in letters of credit issued against the $325 million unsecured
revolving credit facility were cancelled and $17 million of letters of credit
were issued under the letter of credit lines.

    The Company has entered into several settlement agreements with various
government and private payers during recent years relating to industry-wide
billing and marketing practices that had been substantially discontinued by
the mid-1990s. In addition, the Company is aware of several pending lawsuits
filed under the qui tam provisions of the civil False Claims Act and has
received notices of private claims relating to billing issues similar to those
that were the subject of prior settlements with various government payers. Some
of the proceedings against the Company involve claims that are substantial in
amount. Some of the cases involve the operations of Unilab prior to the closing
of the Unilab acquisition.

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

    In addition to the billing-related settlement reserves discussed above, the
Company is involved in various legal proceedings arising in the ordinary course
of business. Some of the proceedings against the Company involve claims that are
substantial in amount. Although management cannot predict the outcome of such
proceedings or any claims made against the Company, management does not
anticipate that the ultimate outcome of the various proceedings or claims will
have a material adverse effect on our financial position but may be material to
the Company's results of operations and cash flows in the period in which such
proceedings or claims are resolved.

                                      F-30




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

    As a general matter, providers of clinical laboratory testing services may
be subject to lawsuits alleging negligence or other similar legal claims. These
suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on the Company's client base and
reputation. The Company maintains various liability insurance programs for
claims that could result from providing or failing to provide clinical
laboratory testing services, including inaccurate testing results and other
exposures. The Company's insurance coverage limits its maximum exposure on
individual claims; however, the Company is essentially self-insured for a
significant portion of these claims. The basis for claims reserves incorporates
actuarially determined losses based upon the Company's historical and projected
loss experience. Management believes that present insurance coverage and
reserves are sufficient to cover currently estimated exposures. Although
management cannot predict the outcome of any claims made against the Company,
management does not anticipate that the ultimate outcome of any such proceedings
or claims will have a material adverse effect on the Company's financial
position but may be material to the Company's results of operations and cash
flows in the period in which such claims are resolved.

16. SUMMARIZED FINANCIAL INFORMATION

    As described in Note 11, the Senior Notes and the Debentures are guaranteed
by the Subsidiary Guarantors. With the exception of Quest Diagnostics
Receivables Incorporated (see paragraph below), the non-guarantor subsidiaries
are primarily foreign and less than wholly owned subsidiaries.

    In conjunction with the Company's secured receivables credit facility
described in Note 11, the Company formed a new wholly owned non-guarantor
subsidiary, Quest Diagnostics Receivables Incorporated ("QDRI"). The Company and
the Subsidiary Guarantors, with the exception of AML and Unilab, transfer all
private domestic receivables (principally excluding receivables due from
Medicare, Medicaid and other federal programs, and receivables due from
customers of its joint ventures) to QDRI. QDRI utilizes the transferred
receivables to collateralize the Company's secured receivables credit facility.
The Company and the Subsidiary Guarantors provide collection services to QDRI.
QDRI uses cash collections principally to purchase new receivables from the
Company and the Subsidiary Guarantors.

    The following condensed consolidating financial data illustrates the
composition of the combined guarantors. Investments in subsidiaries are
accounted for by the parent using the equity method for purposes of the
supplemental consolidating presentation. Earnings (losses) of subsidiaries are
therefore reflected in the parent's investment accounts and earnings. The
principal elimination entries relate to investments in subsidiaries and
intercompany balances and transactions. On April 1, 2002, Quest Diagnostics
acquired AML (see Note 3), which has been included in the accompanying condensed
consolidating financial data, subsequent to the closing of the acquisition, as a
Subsidiary Guarantor. On February 28, 2003, Quest Diagnostics acquired Unilab
(see Note 3), which has been included in the accompanying condensed
consolidating financial data, subsequent to the closing of the acquisition, as a
Subsidiary Guarantor.

                                      F-31




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Condensed Consolidating Balance Sheet
December 31, 2003



                                                                              NON-
                                                             SUBSIDIARY    GUARANTOR
                                                  PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                  ------     ----------   ------------   ------------   ------------
                                                                                         
Assets
Current assets:
Cash and cash equivalents.....................  $  141,588   $    1,991    $  11,379     $         -     $  154,958
Accounts receivable, net......................      17,919      164,247      427,021               -        609,187
Other current assets..........................      36,576      114,758       80,307               -        231,641
                                                ----------   ----------    ---------     -----------     ----------
    Total current assets......................     196,083      280,996      518,707               -        995,786
Property, plant and equipment, net............     228,109      350,196       29,000               -        607,305
Goodwill and intangible assets, net...........     158,295    2,332,147       45,411               -      2,535,853
Intercompany receivable (payable).............     510,958     (106,078)    (404,880)              -              -
Investment in subsidiaries....................   1,929,235            -            -      (1,929,235)             -
Other assets..................................      73,398       50,053       39,023               -        162,474
                                                ----------   ----------    ---------     -----------     ----------
    Total assets..............................  $3,096,078   $2,907,314    $ 227,261     $(1,929,235)    $4,301,418
                                                ----------   ----------    ---------     -----------     ----------
                                                ----------   ----------    ---------     -----------     ----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.........  $  337,635   $  281,753    $  30,462     $         -     $  649,850
Current portion of long-term debt.............           -       73,950            -               -         73,950
                                                ----------   ----------    ---------     -----------     ----------
    Total current liabilities.................     337,635      355,703       30,462               -        723,800
Long-term debt................................     315,844      710,908        1,955               -      1,028,707
Other liabilities.............................      47,905       83,781       22,531               -        154,217
Common stockholders' equity...................   2,394,694    1,756,922      172,313      (1,929,235)     2,394,694
                                                ----------   ----------    ---------     -----------     ----------
    Total liabilities and stockholders'
      equity..................................  $3,096,078   $2,907,314    $ 227,261     $(1,929,235)    $4,301,418
                                                ----------   ----------    ---------     -----------     ----------
                                                ----------   ----------    ---------     -----------     ----------


Condensed Consolidating Balance Sheet
December 31, 2002



                                                                              NON-
                                                             SUBSIDIARY    GUARANTOR
                                                  PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                  ------     ----------   ------------   ------------   ------------
                                                                                         
Assets
Current assets:
Cash and cash equivalents.....................  $   79,015   $    7,377    $  10,385     $         -     $   96,777
Accounts receivable, net......................      15,032       89,626      417,473               -        522,131
Other current assets..........................      52,952       63,148       89,435               -        205,535
                                                ----------   ----------    ---------     -----------     ----------
    Total current assets......................     146,999      160,151      517,293               -        824,443
Property, plant and equipment, net............     227,263      317,243       25,643               -        570,149
Goodwill and intangible assets, net...........     159,293    1,607,767       43,873               -      1,810,933
Intercompany receivable (payable).............     194,874      236,752     (431,626)              -              -
Investment in subsidiaries....................   1,631,868            -            -      (1,631,868)             -
Other assets..................................      61,653       26,905       30,114               -        118,672
                                                ----------   ----------    ---------     -----------     ----------
    Total assets..............................  $2,421,950   $2,348,818    $ 185,297     $(1,631,868)    $3,324,197
                                                ----------   ----------    ---------     -----------     ----------
                                                ----------   ----------    ---------     -----------     ----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.........  $  295,479   $  287,539    $  26,927     $         -     $  609,945
Current portion of long-term debt.............           -       25,689          343               -         26,032
                                                ----------   ----------    ---------     -----------     ----------
    Total current liabilities.................     295,479      313,228       27,270               -        635,977
Long-term debt................................     315,109      478,863        2,535               -        796,507
Other liabilities.............................      42,499       62,339       18,012               -        122,850
Common stockholders' equity...................   1,768,863    1,494,388      137,480      (1,631,868)     1,768,863
                                                ----------   ----------    ---------     -----------     ----------
    Total liabilities and stockholders'
      equity..................................  $2,421,950   $2,348,818    $ 185,297     $(1,631,868)    $3,324,197
                                                ----------   ----------    ---------     -----------     ----------
                                                ----------   ----------    ---------     -----------     ----------


                                      F-32




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2003



                                                                             NON-
                                                            SUBSIDIARY    GUARANTOR
                                                 PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                 ------     ----------   ------------   ------------   ------------
                                                                                        
Net revenues..................................  $ 791,399   $3,709,590     $467,559      $(230,590)     $4,737,958
Operating costs and expenses:
    Cost of services..........................    457,819    2,147,387      163,417              -       2,768,623
    Selling, general and administrative.......     76,626      880,951      223,762        (15,639)      1,165,700
    Amortization of intangible assets.........      1,723        6,461           17              -           8,201
    Royalty (income) expense..................   (308,495)     308,495            -              -               -
    Other operating (income) expense, net.....        119       (2,197)       1,058              -          (1,020)
                                                ---------   ----------     --------      ---------      ----------
        Total operating costs and expenses....    227,792    3,341,097      388,254        (15,639)      3,941,504
                                                ---------   ----------     --------      ---------      ----------
Operating income..............................    563,607      368,493       79,305       (214,951)        796,454
Non-operating expenses, net...................    (65,689)    (202,146)      (5,772)       214,951         (58,656)
                                                ---------   ----------     --------      ---------      ----------
Income before taxes...........................    497,918      166,347       73,533              -         737,798
Income tax expense............................    204,795       66,539       29,747              -         301,081
                                                ---------   ----------     --------      ---------      ----------
Income before equity earnings.................    293,123       99,808       43,786              -         436,717
Equity earnings from subsidiaries.............    143,594            -            -       (143,594)              -
                                                ---------   ----------     --------      ---------      ----------
Net income....................................  $ 436,717   $   99,808     $ 43,786      $(143,594)     $  436,717
                                                ---------   ----------     --------      ---------      ----------
                                                ---------   ----------     --------      ---------      ----------



Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2002



                                                                             NON-
                                                            SUBSIDIARY    GUARANTOR
                                                 PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                 ------     ----------   ------------   ------------   ------------
                                                                                        
Net revenues..................................  $ 749,268   $3,143,063     $483,637      $(267,917)     $4,108,051
Operating costs and expenses:
    Cost of services..........................    477,683    1,804,150      150,555              -       2,432,388
    Selling, general and administrative.......    167,736      663,560      258,667        (15,122)      1,074,841
    Amortization of intangible assets.........      2,154        6,219            -              -           8,373
    Royalty (income) expense..................   (246,687)     246,687            -              -               -
    Other operating (income) expense, net.....      2,527         (923)      (1,297)             -             307
                                                ---------   ----------     --------      ---------      ----------
        Total operating costs and expenses....    403,413    2,719,693      407,925        (15,122)      3,515,909
                                                ---------   ----------     --------      ---------      ----------
Operating income..............................    345,855      423,370       75,712       (252,795)        592,142
Non-operating expenses, net...................    (73,700)    (220,396)      (8,464)       252,795         (49,765)
                                                ---------   ----------     --------      ---------      ----------
Income before taxes...........................    272,155      202,974       67,248              -         542,377
Income tax expense............................    109,337       81,190       29,696              -         220,223
                                                ---------   ----------     --------      ---------      ----------
Income before equity earnings.................    162,818      121,784       37,552              -         322,154
Equity earnings from subsidiaries.............    159,336            -            -       (159,336)              -
                                                ---------   ----------     --------      ---------      ----------
Net income....................................  $ 322,154   $  121,784     $ 37,552      $(159,336)     $  322,154
                                                ---------   ----------     --------      ---------      ----------
                                                ---------   ----------     --------      ---------      ----------


                                      F-33




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2001



                                                                             NON-
                                                            SUBSIDIARY    GUARANTOR
                                                 PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                 ------     ----------   ------------   ------------   ------------
                                                                                        
Net revenues..................................  $ 596,909   $2,862,536     $451,525      $(283,199)     $3,627,771
Operating costs and expenses:
    Cost of services..........................    431,382    1,610,902      109,310              -       2,151,594
    Selling, general and administrative.......    159,439      623,419      250,420        (14,598)      1,018,680
    Amortization of goodwill and other
      intangible assets.......................      3,826       41,696          585              -          46,107
    Royalty (income) expense..................   (241,886)     241,886            -              -               -
    Other operating (income) expense, net.....       (370)         172           38              -            (160)
                                                ---------   ----------     --------      ---------      ----------
        Total operating costs and expenses....    352,391    2,518,075      360,353        (14,598)      3,216,221
                                                ---------   ----------     --------      ---------      ----------
Operating income..............................    244,518      344,461       91,172       (268,601)        411,550
Non-operating expenses, net...................    (88,375)    (268,762)     (26,425)       268,601        (114,961)
                                                ---------   ----------     --------      ---------      ----------
Income before taxes...........................    156,143       75,699       64,747              -         296,589
Income tax expense............................     66,345       42,645       25,296              -         134,286
                                                ---------   ----------     --------      ---------      ----------
Income before equity earnings.................     89,798       33,054       39,451              -         162,303
Equity earnings from subsidiaries.............     72,505            -            -        (72,505)              -
                                                ---------   ----------     --------      ---------      ----------
Net income....................................  $ 162,303   $   33,054     $ 39,451      $ (72,505)     $  162,303
                                                ---------   ----------     --------      ---------      ----------
                                                ---------   ----------     --------      ---------      ----------



Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2003



                                                                               NON-
                                                              SUBSIDIARY    GUARANTOR
                                                   PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   ------     ----------   ------------   ------------   ------------
                                                                                          
  Cash flows from operating activities:
  Net income...................................   $ 436,717   $  99,808     $  43,786      $(143,594)     $ 436,717
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization............      53,611      91,501         8,791              -        153,903
      Provision for doubtful accounts..........       4,944      64,835       158,443              -        228,222
      Other, net...............................     (78,968)      2,463        18,604        143,594         85,693
      Changes in operating assets and
        liabilities............................      54,277    (178,027)     (117,986)             -       (241,736)
                                                  ---------   ---------     ---------      ---------      ---------
  Net cash provided by operating activities....     470,581      80,580       111,638              -        662,799
  Net cash used in investing activities........    (271,820)    (96,957)      (17,342)       (30,931)      (417,050)
  Net cash provided by (used in) financing
    activities.................................    (136,188)     10,991       (93,302)        30,931       (187,568)
                                                  ---------   ---------     ---------      ---------      ---------
  Net change in cash and cash equivalents......      62,573      (5,386)          994              -         58,181
  Cash and cash equivalents, beginning of
    year.......................................      79,015       7,377        10,385              -         96,777
                                                  ---------   ---------     ---------      ---------      ---------
  Cash and cash equivalents, end of year.......   $ 141,588   $   1,991     $  11,379      $       -      $ 154,958
                                                  ---------   ---------     ---------      ---------      ---------
                                                  ---------   ---------     ---------      ---------      ---------


                                      F-34




                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
               (DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2002



                                                                             NON-
                                                            SUBSIDIARY    GUARANTOR
                                                 PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                 ------     ----------   ------------   ------------   ------------
                                                                                        
Cash flows from operating activities:
Net income....................................  $ 322,154   $ 121,784     $  37,552      $(159,336)     $ 322,154
Adjustments to reconcile net income to net
  cash provided by (used in) operating
  activities:
    Depreciation and amortization.............     45,718      78,160         7,513              -        131,391
    Provision for doubtful accounts...........      7,966      29,513       179,881              -        217,360
    Other, net................................    (52,282)     15,317        35,626        159,336        157,997
    Changes in operating assets and
      liabilities.............................    168,559    (250,548)     (150,542)             -       (232,531)
                                                ---------   ---------     ---------      ---------      ---------
Net cash provided (used in) by operating
     activities...............................    492,115      (5,774)      110,030              -        596,371
Net cash used in investing activities.........   (439,848)     (2,480)       (6,075)       (28,809)      (477,212)
Net cash provided by (used in) financing
  activities..................................     26,748     (94,940)     (105,331)        28,809       (144,714)
                                                ---------   ---------     ---------      ---------      ---------
Net change in cash and cash equivalents.......     79,015    (103,194)       (1,376)             -        (25,555)
Cash and cash equivalents, beginning of
  year........................................          -     110,571        11,761              -        122,332
                                                ---------   ---------     ---------      ---------      ---------
Cash and cash equivalents, end of year........  $  79,015   $   7,377     $  10,385      $       -      $  96,777
                                                ---------   ---------     ---------      ---------      ---------
                                                ---------   ---------     ---------      ---------      ---------


Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2001



                                                                             NON-
                                                            SUBSIDIARY    GUARANTOR
                                                 PARENT     GUARANTORS   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                 ------     ----------   ------------   ------------   ------------
                                                                                        
Cash flows from operating activities:
Net income....................................  $ 162,303   $  33,054     $  39,451      $ (72,505)     $ 162,303
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Depreciation and amortization.............     40,726     102,020         4,981              -        147,727
    Provision for doubtful accounts...........        627      21,198       196,446              -        218,271
    Loss on debt extinguishment...............     12,464      25,945         3,603              -         42,012
    Other, net................................     34,863      35,735       (40,087)        72,505        103,016
    Changes in operating assets and
      liabilities.............................    (84,349)    (40,535)      (82,642)             -       (207,526)
                                                ---------   ---------     ---------      ---------      ---------
Net cash provided by operating activities.....    166,634     177,417       121,752              -        465,803
Net cash used in investing activities.........   (395,196)    (45,293)       (4,087)       147,960       (296,616)
Net cash provided by (used in) financing
  activities..................................    228,562    (185,416)     (113,518)      (147,960)      (218,332)
                                                ---------   ---------     ---------      ---------      ---------
Net change in cash and cash equivalents.......          -     (53,292)        4,147              -        (49,145)
Cash and cash equivalents, beginning of
  year........................................          -     163,863         7,614              -        171,477
                                                ---------   ---------     ---------      ---------      ---------
Cash and cash equivalents, end of year........  $       -   $ 110,571     $  11,761      $       -      $ 122,332
                                                ---------   ---------     ---------      ---------      ---------
                                                ---------   ---------     ---------      ---------      ---------


                                      F-35






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
                    QUARTERLY OPERATING RESULTS (UNAUDITED)



                                           FIRST        SECOND       THIRD        FOURTH
                                          QUARTER      QUARTER      QUARTER      QUARTER     TOTAL YEAR
                                          -------      -------      -------      -------     ----------
                                                                              
2003(a)
Net revenues...........................  $1,092,797   $1,219,935   $1,221,221   $1,204,005   $4,737,958
Gross profit...........................     444,700      516,811      510,041      497,783    1,969,335
Net income.............................      88,036      120,412      120,024      108,245      436,717

Basic earnings per common share:
Net income.............................        0.88         1.15         1.15         1.04         4.22

Diluted earnings per common share:
Net income.............................        0.86         1.12         1.12         1.02         4.12



                                           FIRST        SECOND       THIRD        FOURTH
                                          QUARTER      QUARTER      QUARTER      QUARTER     TOTAL YEAR
                                          -------      -------      -------      -------     ----------
2002(b)
                                                                              
Net revenues...........................  $  946,762   $1,068,810   $1,058,714   $1,033,765   $4,108,051
Gross profit...........................     389,024      438,552      433,639      414,448    1,675,663
Net income.............................      66,689       87,151       86,617       81,697      322,154

Basic earnings per common share:
Net income.............................        0.70         0.90         0.89         0.84         3.34

Diluted earnings per common share:
Net income.............................        0.67         0.87         0.87         0.82         3.23


 (a) On February 28, 2003, Quest Diagnostics completed the acquisition of
     Unilab. The quarterly operating results include the results of operations
     of Unilab subsequent to the closing of the acquisition (see Note 3).

 (b) On April 1, 2002, Quest Diagnostics completed its acquisition of AML. The
     quarterly operating results include the results of operations of AML
     subsequent to the closing of the acquisition (see Note 3).

                                      F-36






                QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                 SCHEDULE II -- VALUATION ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)



                                                              PROVISION FOR
                                                BALANCE AT       DOUBTFUL      NET DEDUCTIONS   BALANCE AT
                                                  1-1-03         ACCOUNTS        AND OTHER       12-31-03
                                                  ------         --------        ---------       --------
                                                                                    
Year ended December 31, 2003
    Doubtful accounts and allowances..........   $193,456        $228,222         $209,939       $211,739



                                                              PROVISION FOR
                                                BALANCE AT       DOUBTFUL      NET DEDUCTIONS   BALANCE AT
                                                  1-1-02         ACCOUNTS        AND OTHER       12-31-02
                                                  ------         --------        ---------       --------
                                                                                    
Year ended December 31, 2002
    Doubtful accounts and allowances..........   $216,203        $217,360         $240,107       $193,456



                                                              PROVISION FOR
                                                BALANCE AT       DOUBTFUL      NET DEDUCTIONS   BALANCE AT
                                                  1-1-01         ACCOUNTS        AND OTHER       12-31-01
                                                  ------         --------        ---------       --------
                                                                                    
Year ended December 31, 2001
    Doubtful accounts and allowances..........   $204,358        $218,271         $206,426       $216,203


                                      F-37








                         STATEMENT OF DIFFERENCES
                         ------------------------

The trademark symbol shall be expressed as.............................. 'TM'
The registered trademark symbol shall be expressed as...................  'r'
The section symbol shall be expressed as................................ 'SS'

EX-4

                                                                     Exhibit 4.5

                         QUEST DIAGNOSTICS INCORPORATED
                      APPOINTMENT OF SUCCESSOR RIGHTS AGENT

Pursuant to resolutions duly adopted by the Board of Directors of Quest
Diagnostics Incorporated (the "Corporation") hereby appoints National City Bank
as successor Rights Agent under the Corporation's Rights Agreement dated as of
December 31, 1996, as amended on July 1, 1999, December 31, 1999, and October
18, 2000. Henceforth, all references to the Rights Agent, whether in the Rights
Agreement or in a Rights Legend appearing on the Corporation's stock
certificate, shall mean National City Bank, and the address for National City
Bank shall be:

                   Mr. Matthew Hostelley
                   National City Bank
                   Corporate Trust Administration
                   1900 East Ninth Street
                   Cleveland, OH 44114

National City Bank hereby accepts appointment as successor Rights Agent.

Dated as of the 24th day of November, 2003.

QUEST DIAGNOSTICS INCORPORATED


By /s/ Leo C. Farrenkopf, Jr.
   --------------------------
       Leo C. Farrenkopf, Jr.
Its    Vice President and Secretary


NATIONAL CITY BANK


By /s/ Matthew Hostelly
   --------------------
Its Vice President

EX-10

                                                                   Exhibit 10.15

                                    TERM LOAN

                                CREDIT AGREEMENT

                                      among

                         QUEST DIAGNOSTICS INCORPORATED

                                  as Borrower,

                                       AND

                      CERTAIN SUBSIDIARIES OF THE BORROWER

                                 as Guarantors,

                                       AND

                  THE LENDERS PARTIES HERETO FROM TIME TO TIME,

                                       AND

                       SUMITOMO MITSUI BANKING CORPORATION

                   as Administrative Agent and Initial Lender

                          DATED AS OF DECEMBER 19, 2003







                                TABLE OF CONTENTS

[omitted]



SCHEDULES
               
Schedule 1.1(a)   Commitment Percentages/Lending Offices
Schedule 6.10     Litigation
Schedule 6.21     Subsidiaries
Schedule 8.1      Indebtedness
Schedule 8.2      Liens
Schedule 8.6      Investments
Schedule 8.7      Affiliate Transactions
Schedule 11.1     Notices

EXHIBITS

Exhibit 2.1(b)    Form of Notice of Borrowing
Exhibit 2.1(e)    Form of Term Note
Exhibit 2.2       Form of Notice of Continuation/Conversion
Exhibit 7.1(c)    Form of Officer's Certificate
Exhibit 7.12      Form of Joinder Agreement
Exhibit 11.3(b)   Form of Assignment Agreement



                                        i







                           TERM LOAN CREDIT AGREEMENT

     THIS TERM LOAN CREDIT AGREEMENT (this "Credit Agreement"), is entered into
as of December 19, 2003 among QUEST DIAGNOSTICS INCORPORATED, a Delaware
corporation (the "Borrower"), certain of the Subsidiaries of the Borrower
(individually a "Guarantor" and collectively the "Guarantors"), the Lenders (as
defined herein), and SUMITOMO MITSUI BANKING CORPORATION, as Administrative
Agent for the Lenders.

                                    RECITALS

     WHEREAS, the Borrower and the Guarantors have requested the Initial Lender
to provide a term loan credit facility to the Borrower in an aggregate principal
amount of up to $75,000,000; and

     WHEREAS, the Initial Lender hereto has agreed to make the requested term
loan credit facility available to the Borrower on the terms and conditions
hereinafter set forth.

     NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

                                    SECTION 1

                        DEFINITIONS AND ACCOUNTING TERMS

     1.1  Definitions.

     As used herein, the following terms shall have the meanings herein
specified unless the context otherwise requires. Defined terms herein shall
include in the singular number the plural and in the plural the singular:

          "Acquisition" means the acquisition by any Person of (a) more than 50%
     of the Capital Stock of another Person, (b) all or substantially all of the
     assets of another Person or (c) all or substantially all of a line of
     business of another Person, in each case whether or not involving a merger
     or consolidation with such other Person.

          "Additional Credit Party" means each Person that becomes a Guarantor
     after the Closing Date, as provided in Section 7.12 or otherwise.

          "Adjusted Eurodollar Rate" means the Eurodollar Rate plus the
     Applicable Percentage.

          "Administrative Agent" means Sumitomo Mitsui Banking Corporation (or
     any successor thereto) or any successor administrative agent appointed
     pursuant to Section 10.9.







          "Administrative Fees" has the meaning set forth in Section 3.4.

          "Affiliate" means, with respect to any Person, any other Person
     directly or indirectly controlling (including but not limited to all
     directors and officers of such Person), controlled by or under direct or
     indirect common control with such Person. A Person shall be deemed to
     control a corporation if such Person possesses, directly or indirectly, the
     power (a) to vote 10% or more of the securities having ordinary voting
     power for the election of directors of such corporation or (b) to direct or
     cause direction of the management and policies of such corporation, whether
     through the ownership of voting securities, by contract or otherwise.

          "Agent-Related Person" means the Administrative Agent (including any
     successor administrative agent), together with its Affiliates, and their
     respective officers, directors, employees, agents, counsel and
     attorneys-in-fact.

          "Applicable Percentage" means the appropriate applicable percentages
     corresponding to the Debt Rating of the Borrower in effect from time to
     time as described below:



     ================================================================
                                                        Applicable
                                                      Percentage for
     Pricing Level            Debt Rating            Eurodollar Loans
     ----------------------------------------------------------------
                                                   
           I         >=BBB+ from S&P/                     0.500%
                     >=Baa1 from Moody's
     ----------------------------------------------------------------
           II        >=BBB but *BBB+ from S&P/            0.550%
                     >=Baa2 but *Baa1 from Moody's
     ----------------------------------------------------------------
          III        >=BBB- but *BBB from S&P/            0.800%
                     >=Baa3 but *Baa2 from Moody's
     ----------------------------------------------------------------
           IV        >=BB+ but *BBB- from S&P/            1.250%
                     >=Ba1 but *Baa3 from Moody's
     ----------------------------------------------------------------
           V         *BB+ or unrated by S&P/             1.6875%
                     *Ba1 or unrated by Moody's
     ================================================================


     The Applicable Percentage for Eurodollar Loans shall, in each case, be
     determined and adjusted on the date (each a "Calculation Date") one
     Business Day after the date on which the Borrower's Debt Rating is upgraded
     or downgraded in a manner which requires a change in the then applicable
     Pricing Level set forth above. If at any time there is a split in the
     Borrower's Debt Ratings between S&P and Moody's, the Applicable Percentages
     shall be determined by the higher of the two Debt Ratings (i.e. the lower
     pricing); provided that if the two Debt Ratings are more than one level
     apart, the Applicable Percentage shall be based on the Debt Rating which is
     one level higher than the lower rating. Each Applicable Percentage shall be
     effective from one Calculation Date until the next Calculation Date. Any
     adjustment in the Applicable Percentage shall be applicable to all existing
     Eurodollar Loans as well as any new Eurodollar Loans made.

          "Attorneys' Costs" means all reasonable fees and disbursements of any
     law firm or other external counsel and the reasonable allocated cost of
     internal legal services and all disbursements of internal counsel.


                                       -2-







          "Attributable Debt" means, with respect to a Sale and Leaseback
     Transaction, an amount equal to the lesser of: (a) the fair market value of
     the Principal Property (as determined in good faith by the Borrower's board
     of directors); and (b) the present value of the total net amount of rent
     payments to be made under the lease during its remaining term, discounted
     at the rate of interest set forth or implicit in the terms of the lease,
     compounded semi-annually.

          "Authorized Officer" means any of the chief executive officer,
     president, chief financial officer, corporate controller, treasurer or
     assistant treasurer of the Borrower.

          "Bankruptcy Code" means the Bankruptcy Code in Title 11 of the United
     States Code, as amended, modified, succeeded or replaced from time to time.

          "Base Rate" means, for any day, the rate per annum equal to the
     greater of (a) the Federal Funds Rate in effect on such day plus 1/2 of 1%
     or (b) the Prime Rate in effect on such day. If for any reason the
     Administrative Agent shall have determined (which determination shall be
     conclusive absent manifest error) that it is unable after due inquiry to
     ascertain the Federal Funds Rate for any reason, including the inability or
     failure of the Administrative Agent to obtain sufficient quotations in
     accordance with the terms hereof, the Base Rate shall be determined without
     regard to clause (a) of the first sentence of this definition until the
     circumstances giving rise to such inability no longer exist. Any change in
     the Base Rate due to a change in the Prime Rate or the Federal Funds Rate
     shall be effective at the opening of business on the day specified in the
     public announcement of such change.

          "Base Rate Loan" means any Term Loan when it bears interest at a rate
     determined by reference to the Base Rate.

          "Borrower" means Quest Diagnostics Incorporated, a Delaware
     corporation, together with any successors and permitted assigns.

          "Business Day" means any day other than a Saturday, a Sunday, a legal
     holiday or a day on which banking institutions are authorized or required
     by law or other governmental action to close in New York, New York;
     provided that in the case of Eurodollar Loans, such day is also a day on
     which dealings between banks are carried on in U.S. dollar deposits in the
     London interbank market.

          "Calculation Date" has the meaning set forth in the definition of
     Applicable Percentage.

          "CAP" means the College of American Pathologists.

          "Capital Expenditures" means all expenditures of the Borrower and its
     Subsidiaries on a consolidated basis which, in accordance with GAAP, would
     be classified as capital


                                      -3-







     expenditures, including, without limitation, Capital Leases which would be
     so classified in accordance with GAAP.

          "Capital Lease" means, as applied to any Person, any lease of any
     Property (whether real, personal or mixed) by that Person as lessee which,
     in accordance with GAAP, is or should be accounted for as a capital lease
     on the balance sheet of that Person and the amount of such obligation shall
     be the capitalized amount thereof determined in accordance with GAAP.

          "Capital Stock" means (a) in the case of a corporation, all classes of
     capital stock of such corporation, (b) in the case of a partnership,
     partnership interests (whether general or limited), (c) in the case of a
     limited liability company, membership interests and (d) any other interest
     or participation that confers on a Person the right to receive a share of
     the profits and losses of, or distributions of assets of, the issuing
     Person.

          "Cash Equivalents" means (a) securities issued or directly and fully
     guaranteed or insured by the United States of America or any agency or
     instrumentality thereof (provided that the full faith and credit of the
     United States of America is pledged in support thereof) having maturities
     of not more than eighteen months from the date of acquisition, (b) Dollar
     denominated time and demand deposits, certificates of deposit and banker's
     acceptances of (i) any Lender, (ii) any domestic commercial bank having
     capital and surplus in excess of $500,000,000 or (iii) any bank whose
     short-term commercial paper rating from S&P is at least A-1 or the
     equivalent thereof or from Moody's is at least P-1 or the equivalent
     thereof (any such bank being an "Approved Bank"), in each case with
     maturities of not more than 270 days from the date of acquisition, (c)
     commercial paper and variable or fixed rate notes issued by any Approved
     Bank (or by the parent company thereof) or any variable rate notes issued
     by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent
     thereof) or better by S&P or P-1 (or the equivalent thereof) or better by
     Moody's and maturing within six months of the date of acquisition, (d)
     repurchase agreements with a bank or trust company (including any of the
     Lenders) or recognized securities dealer having capital and surplus in
     excess of $500,000,000 for direct obligations issued by or fully guaranteed
     by the United States of America in which the Borrower shall have a
     perfected first priority security interest (subject to no other Liens) and
     having, on the date of purchase thereof, a fair market value of at least
     100% of the amount of the repurchase obligations, (e) Investments in
     tax-exempt municipal bonds rated A (or the equivalent thereof) or better by
     S&P or MIG2 (or the equivalent thereof) or better by Moody's and (f)
     Investments, classified in accordance with GAAP as current assets, in money
     market investment programs registered under the Investment Company Act of
     1940, as amended, which are administered by reputable financial
     institutions having capital of at least $500,000,000 and the portfolios of
     which are limited to Investments of the character described in the
     foregoing subdivisions (a) through (e).

          "Cash Interest Expenses" means all Interest Expense actually paid in
     cash by the Borrower and its Subsidiaries.


                                      -4-







          "Cash Taxes" means the total amount of federal, state, foreign or
     other income or franchise taxes, paid in cash, of the Borrower and its
     Subsidiaries on a consolidated basis.

          "CHAMPUS" means the United States Department of Defense Civilian
     Health and Medical Program of the United States or any successor thereto
     including, without limitation, TRICARE.

          "Change of Control" means either of the following events:

               (a) any "person" or "group" (within the meaning of Section 13(d)
          or 14(d) of the Exchange Act) has become, directly or indirectly, the
          "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
          Exchange Act), by way of merger, consolidation or otherwise of 35% or
          more of the Voting Stock of the Borrower on a fully-diluted basis,
          after giving effect to the conversion and exercise of all outstanding
          warrants, options and other securities of the Borrower convertible
          into or exercisable for Voting Stock of the Borrower (whether or not
          such securities are then currently convertible or exercisable); or

               (b) during any period of twelve calendar months, individuals who
          at the beginning of such period constituted the board of directors of
          the Borrower together with any new members of such board of directors
          whose elections by such board or board of directors or whose
          nomination for election by the stockholders of the Borrower was
          approved by a vote of a majority of the members of such board of
          directors then still in office who either were directors at the
          beginning of such period or whose election or nomination for election
          was previously so approved cease for any reason to constitute a
          majority of the directors of the Borrower then in office.

          "CLIA" means the Clinical Laboratory Improvement Act as set forth at
     42 U.S.C. 263a and the regulations promulgated thereunder, as amended.

          "Closing Date" means the date hereof.

          "Code" means the Internal Revenue Code of 1986 and the rules and
     regulations promulgated thereunder, as amended, modified, succeeded or
     replaced from time to time.

          "Commitment" means the commitment of the Initial Lender in the amount
     of $75,000,000.

          "Convertible Notes" means those certain 1 3/4% contingent convertible
     debentures due November 30, 2021 issued by the Borrower in an aggregate
     principal amount of $250,000,000.

          "Credit Documents" means this Credit Agreement, the Notes, any Joinder
     Agreement and any Notice of Borrowing.


                                      -5-







          "Credit Exposure" has the meaning set forth in the definition of
     Required Lenders in this Section 1.1.

          "Credit Parties" means the Borrower and the Guarantors and "Credit
     Party" means any one of them.

          "Credit Party Obligations" means, without duplication, all of the
     obligations of the Credit Parties to the Lenders and the Administrative
     Agent, whenever arising, under this Credit Agreement, the Notes, or any of
     the other Credit Documents.

          "Debt Rating" means the long-term senior unsecured, non-credit
     enhanced debt rating of the Borrower from S&P and Moody's.

          "Default" means any event, act or condition which with notice or lapse
     of time, or both, would constitute an Event of Default.

          "Defaulting Lender" means, at any time, any Lender that, (a) has
     failed to make a Loan or purchase a Participation Interest required
     pursuant to the terms of this Credit Agreement (but only for so long as
     such Loan is not made or such Participation Interest is not purchased), (b)
     has failed to pay to the Administrative Agent or any Lender an amount owed
     by such Lender pursuant to the terms of this Credit Agreement (but only for
     so long as such amount has not been repaid) or (c) has been deemed
     insolvent or has become subject to a bankruptcy or insolvency proceeding or
     to a receiver, trustee or similar official.

          "Dividends" means any payment of dividends or any other distribution
     upon any shares of any class of Capital Stock of the Borrower.

          "Dollars" and "$" means dollars in lawful currency of the United
     States of America.

          "Domestic Subsidiary" means each direct and indirect Subsidiary of the
     Borrower that is domiciled or organized under the laws of any State of the
     United States or the District of Columbia.

          "EBITDA" means, for any period, with respect to the Borrower and its
     Subsidiaries on a consolidated basis, (a) Net Income for such period
     (excluding the effect of any extraordinary or other non-recurring gains and
     losses (including any gain or loss from the sale of Property)) plus (b) an
     amount which, in the determination of Net Income for such period, has been
     deducted for (i) Interest Expense for such period, (ii) total Federal,
     state, foreign or other income or franchise taxes for such period, (iii)
     all depreciation and amortization for such period, (iv) other items of
     expense during such period that do not involve a cash payment at any time
     (other than the provision for bad debt in connection with uncollectible
     accounts receivable), (v) cash charges during such period for which the
     Borrower and its Subsidiaries are reimbursed by a third party during such
     period and (vi) special or restructuring items during any such period
     included in Net Income that do not involve a cash payment during such
     period (collectively, "Non-Cash Items") minus (c) any actual cash payments
     during the applicable period related to Non-Cash Items


                                      -6-







     expensed or reserved under clause (vi) above during an applicable period
     beginning after March 31, 2001 plus (d) Tender Costs during such period.

          "Eligible Assets" means (a) MedPlus and its Subsidiaries and (b) any
     assets or any business (or any substantial part thereof) used or useful in
     the same or a similar line of business as the Borrower and its Subsidiaries
     are engaged on the Closing Date or other healthcare-related businesses.

          "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a Lender;
     and (c) any other Person approved by the Administrative Agent and the
     Borrower (such approval not to be unreasonably withheld or delayed);
     provided that (i) the Borrower's consent is not required during the
     existence and continuation of a Default or an Event of Default, (ii)
     approval by the Borrower shall be deemed given if no objection is received
     by the assigning Lender and the Administrative Agent from the Borrower
     within five Business Days after notice of such proposed assignment has been
     delivered to the Borrower; (iii) neither the Borrower nor an Affiliate of
     the Borrower shall qualify as an Eligible Assignee; and (iv) no competitor
     of the Borrower shall qualify as an Eligible Assignee.

          "Environmental Laws" means any current or future legally enforceable
     requirement of any Governmental Authority pertaining to (a) the protection
     of the indoor or outdoor environment, (b) the conservation, management, or
     use of natural resources and wildlife, (c) the protection or use of surface
     water and groundwater or (d) the management, manufacture, possession,
     presence, use, generation, transportation, treatment, storage, disposal,
     release, threatened release, abatement, removal, remediation or handling
     of, or exposure to, any hazardous or toxic substance or material or (e)
     pollution (including any release to land surface water and groundwater) and
     includes, without limitation, the Comprehensive Environmental Response,
     Compensation, and Liability Act of 1980, as amended by the Superfund
     Amendments and Reauthorization Act of 1986, 42 USC 9601 et seq., Solid
     Waste Disposal Act, as amended by the Resource Conservation and Recovery
     Act of 1976 and Hazardous and Solid Waste Amendments of 1984, 42 USC 6901
     et seq., Federal Water Pollution Control Act, as amended by the Clean Water
     Act of 1977, 33 USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC
     7401 et seq., Toxic Substances Control Act of 1976, 15 USC 2601 et seq.,
     Hazardous Materials Transportation Act, 49 USC App. 1801 et seq.,
     Occupational Safety and Health Act of 1970, as amended, 29 USC 651 et seq.,
     Oil Pollution Act of 1990, 33 USC 2701 et seq., Emergency Planning and
     Community Right-to-Know Act of 1986, 42 USC 11001 et seq., National
     Environmental Policy Act of 1969, 42 USC 4321 et seq., Safe Drinking Water
     Act of 1974, as amended, 42 USC 300(f) et seq., any analogous implementing
     or successor law, and any amendment, rule, regulation, order, or directive
     issued thereunder.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
     amended, and any successor statute thereto, as interpreted by the rules and
     regulations thereunder, all as the same may be in effect from time to time.
     References to sections of ERISA shall be construed also to refer to any
     successor sections.


                                      -7-







          "ERISA Affiliate" means an entity, whether or not incorporated, which
     is treated as a single employer with the Borrower or any Subsidiary of the
     Borrower under Sections 414(b) or (c) of the Code and solely for purposes
     of Section 412 of the Code under Section 414(m) of the Code.

          "ERISA Event" means (a) with respect to any Single Employer or
     Multiple Employer Plan, the occurrence of a Reportable Event or the
     substantial cessation of operations (within the meaning of Section 4062(e)
     of ERISA); (b) the withdrawal of the Borrower, any Subsidiary of the
     Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan
     year in which it was a substantial employer (as such term is defined in
     Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer
     Plan; (c) the distribution of a notice of intent to terminate or the actual
     termination of a Plan pursuant to Section 4041(a)(2) or 4041A of ERISA; (d)
     the institution of proceedings to terminate or the actual termination of
     any Plan by the PBGC under Section 4042 of ERISA; (e) any event or
     condition which might constitute grounds under Section 4042 of ERISA for
     the termination of, or the appointment of a trustee to administer, any
     Plan; (f) the complete or partial withdrawal of the Borrower, any
     Subsidiary of the Borrower or any ERISA Affiliate from a Multiemployer Plan
     or notification that a Multiemployer Plan is in reorganization; (g) the
     conditions for imposition of a lien under Section 302(f) of ERISA exist
     with respect to any Plan; or (h) the adoption of an amendment to any Plan
     requiring the provision of security to such Plan pursuant to Section 307 of
     ERISA.

          "Eurodollar Loan" means any Loan bearing interest based at a rate
     determined by reference to the Eurodollar Rate.

          "Eurodollar Rate" means, for the Interest Period for each Eurodollar
     Loan comprising part of the same borrowing (including conversions,
     extensions and renewals), a per annum interest rate equal to the London
     Interbank Offered Rate.

          "Eurodollar Reserve Percentage" means, with respect to each Lender,
     the percentage (expressed as a decimal) applicable to such Lender which is
     in effect from time to time under Regulation D as the reserve requirement
     (including, without limitation, any basic, supplemental, emergency,
     special, or marginal reserves) applicable with respect to its Eurocurrency
     liabilities, as that term is defined in Regulation D (or against any other
     category of liabilities that includes deposits by reference to which the
     interest rate of Eurodollar Loans is determined). Eurodollar Loans made by
     a Lender shall be deemed to constitute Eurocurrency liabilities and as such
     shall be deemed subject to reserve requirements, if applicable, without
     benefits of credits for proration, exceptions or offsets that may be
     available from time to time to such Lender.

          "Event of Default" means any of the events or circumstances specified
     in Section 9.1.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended,
     and the rules and regulations promulgated thereunder, as amended, modified,
     succeeded or replaced from time to time.


                                      -8-







          "Extension of Credit" means, as to any Lender, the making of a Loan by
     such Lender (or a participation therein by a Lender).

          "Federal Funds Rate" means for any day the rate per annum equal to the
     weighted average of the rates on overnight Federal funds transactions with
     members of the Federal Reserve System arranged by Federal funds brokers on
     such day, as published by the Federal Reserve Bank of New York on the
     Business Day next succeeding such day; provided that (a) if such day is not
     a Business Day, the Federal Funds Rate for such day shall be such rate on
     such transactions on the next preceding Business Day and (b) if no such
     rate is so published on such next preceding Business Day, the Federal Funds
     Rate for such day shall be the average rate quoted to the Administrative
     Agent on such day on such transactions from three Federal Funds brokers of
     recognized standing selected by it.

          "Fixed Charge Coverage Ratio" means, as of the end of each fiscal
     quarter of the Credit Parties for the twelve month period ending on such
     date, with respect to the Borrower and its Subsidiaries on a consolidated
     basis, the ratio of (a) the sum of (i) EBITDA for such period minus (ii)
     Capital Expenditures for such period minus (iii) Cash Taxes for such period
     to (b) the sum of (i) Cash Interest Expense for such period plus (ii)
     Scheduled Funded Debt Payments, after giving effect to any reductions
     arising from voluntary prepayments previously made, for such period, plus
     (iii) cash Dividends for such period.

          "Foreign Subsidiary" means any Subsidiary of the Borrower that is not
     a Domestic Subsidiary.

          "Funded Debt" means, without duplication, the sum of (a) all
     Indebtedness of the Borrower and its Subsidiaries for borrowed money, (b)
     all purchase money Indebtedness of the Borrower and its Subsidiaries, (c)
     the principal portion of all obligations of the Borrower and its
     Subsidiaries under Capital Leases, (d) all drawn but unreimbursed amounts
     under all letters of credit (other than letters of credit supporting trade
     payables in the ordinary course of business) issued for the account of the
     Borrower or any of its Subsidiaries, (e) all Funded Debt of another Person
     secured by a Lien on any Property of the Borrower and its Subsidiaries
     whether or not such Funded Debt has been assumed by a Borrower or any of
     its Subsidiaries, (f) all Funded Debt of any partnership or unincorporated
     joint venture to the extent the Borrower or one of its Subsidiaries is
     legally obligated with respect thereto and (g) the amount of principal
     attributable under any outstanding Synthetic Lease. It is understood and
     agreed that Indebtedness incurred pursuant to Hedging Agreements is not
     Funded Debt.

          "Funding Date" means the date on which all of the conditions set forth
     in Section 5.2 have been fulfilled (or waived in the sole discretion of the
     Initial Lender) and on which the initial Loans are made.

          "GAAP" means generally accepted accounting principles in the United
     States applied on a consistent basis and subject to Section 1.3.


                                      -9-







          "Governmental Authority" means any Federal, state, local, provincial
     or foreign court or governmental agency, authority, instrumentality or
     regulatory body.

          "Guarantor" means each of the Material Domestic Subsidiaries of the
     Borrower, any other Subsidiary of the Borrower that guaranties the Senior
     Unsecured Notes or the 2001 Senior Credit Agreement and each Additional
     Credit Party, together with their successors and assigns.

          "Guaranty" means the guaranty of the Credit Party Obligations provided
     by the Guarantors pursuant to Section 4.

          "Guaranty Obligations" means, with respect to any Person, without
     duplication, any obligations (other than endorsements in the ordinary
     course of business of negotiable instruments for deposit or collection)
     guaranteeing any Indebtedness of any other Person in any manner, whether
     direct or indirect, and including without limitation any obligation,
     whether or not contingent, (a) to purchase any such Indebtedness or other
     obligation or any Property constituting security therefor, (b) to advance
     or provide funds or other support for the payment or purchase of such
     Indebtedness or obligation or to maintain working capital, solvency or
     other balance sheet condition of such other Person (including, without
     limitation, maintenance agreements, comfort letters, take or pay
     arrangements, put agreements or similar agreements or arrangements) for the
     benefit of the holder of Indebtedness of such other Person, (c) to lease or
     purchase Property, securities or services primarily for the purpose of
     assuring the owner of such Indebtedness or (d) to otherwise assure or hold
     harmless the owner of such Indebtedness or obligation against loss in
     respect thereof. The amount of any Guaranty Obligation hereunder shall
     (subject to any limitations set forth therein) be deemed to be an amount
     equal to the outstanding principal amount (or maximum principal amount, if
     larger) of the Indebtedness in respect of which such Guaranty Obligation is
     made.

          "Hazardous Materials" means any substance, material or waste defined
     in or regulated under any Environmental Laws.

          "HCFA" means the United States Health Care Financing Administration
     and any successor thereto.

          "Hedging Agreements" means, collectively, interest rate protection
     agreements, foreign currency exchange agreements, commodity purchase or
     option agreements or other interest or exchange rate or commodity price
     hedging agreements, in each case, entered into or purchased by a Credit
     Party.

          "Indebtedness" of any Person means, without duplication, (a) all
     obligations of such Person for borrowed money, (b) all obligations of such
     Person evidenced by bonds, debentures, notes or similar instruments, or
     upon which interest payments are customarily made, (c) all obligations of
     such Person under conditional sale or other title retention agreements
     relating to Property purchased by such Person to the extent of the value of
     such Property (other than customary reservations or retentions of title
     under agreements with


                                      -10-







     suppliers entered into in the ordinary course of business), (d) all
     obligations, other than intercompany items, of such Person issued or
     assumed as the deferred purchase price of property or services purchased by
     such Person which would appear as liabilities on a balance sheet of such
     Person, (e) all Indebtedness of others secured by (or for which the holder
     of such Indebtedness has an existing right, contingent or otherwise, to be
     secured by) any Lien on, or payable out of the proceeds of production from,
     property owned or acquired by such Person, whether or not the obligations
     secured thereby have been assumed, (f) all Guaranty Obligations of such
     Person, (g) the principal portion of all obligations of such Person under
     (i) Capital Leases and (ii) any synthetic lease, tax retention operating
     lease, off-balance sheet loan or similar off-balance sheet financing
     product of such Person where such transaction is considered borrowed money
     indebtedness for tax purposes but is classified as an operating lease in
     accordance with GAAP, (h) all obligations of such Person to repurchase any
     securities which repurchase obligation is related to the issuance thereof,
     including, without limitation, obligations commonly known as residual
     equity appreciation potential shares, (i) all net obligations of such
     Person in respect of Hedging Agreements, (j) the maximum amount of all
     performance and standby letters of credit issued or bankers' acceptances
     facilities created for the account of such Person and, without duplication,
     all drafts drawn thereunder (to the extent unreimbursed), and (k) the
     aggregate amount of uncollected accounts receivable of such Person subject
     at such time to a sale of receivables (or similar transaction) regardless
     of whether such transaction is effected without recourse to such Person or
     in a manner that would not be reflected on the balance sheet of such Person
     in accordance with GAAP. The Indebtedness of any Person shall include the
     Indebtedness of any partnership or unincorporated joint venture in which
     such Person is legally obligated.

          "Indemnified Liabilities" has the meaning set forth in Section 11.5.

          "Initial Lender" means Sumitomo Mitsui Banking Corporation.

          "Intellectual Property" has the meaning set forth in Section 6.20.

          "Interest Expense" means, for any period, with respect to the Borrower
     and its Subsidiaries on a consolidated basis, all interest expense,
     including, without duplication, the interest component under Capital
     Leases, as determined in accordance with GAAP.

          "Interest Payment Date" means (a) as to Base Rate Loans, the last day
     of each calendar quarter and the Maturity Date and (b) as to Eurodollar
     Loans, the last day of each applicable Interest Period and the Maturity
     Date and in addition, where the applicable Interest Period for a Eurodollar
     Loan is greater than three months, then also the date three months from the
     beginning of the Interest Period and each three months thereafter. If an
     Interest Payment Date falls on a date which is not a Business Day, such
     Interest Payment Date shall be deemed to be the next succeeding Business
     Day, except that in the case of Eurodollar Loans where the next succeeding
     Business Day falls in the next succeeding calendar month, then on the next
     preceding Business Day.

          "Interest Period" means, as to Eurodollar Loans, a period of two
     weeks' or one, two, three or six months' duration, as the Borrower may
     elect, commencing, in each case, on the


                                      -11-







     date of the borrowing (including continuations and conversions thereof);
     provided, however, (i) if any Interest Period would end on a day which is
     not a Business Day, such Interest Period shall be extended to the next
     succeeding Business Day (except that where the next succeeding Business Day
     falls in the next succeeding calendar month, then on the next preceding
     Business Day), (ii) no Interest Period shall extend beyond the Maturity
     Date and (iii) where an Interest Period begins on a day for which there is
     no numerically corresponding day in the calendar month in which the
     Interest Period is to end, such Interest Period shall end on the last
     Business Day of such calendar month.

          "Investment" in any Person means (a) the acquisition (whether for
     cash, property, services, assumption of Indebtedness, securities or
     otherwise) of assets, shares of Capital Stock, bonds, notes, debentures,
     partnership, joint ventures or other ownership interests or other
     securities of such other Person or (b) any deposit with, or advance, loan
     or other extension of credit to, such Person (other than deposits or
     advances made in connection with the purchase of equipment or other assets
     or services in the ordinary course of business) or (c) any other capital
     contribution to or investment in such Person, including, without
     limitation, any Guaranty Obligation (including any support for a letter of
     credit issued on behalf of such Person) incurred for the benefit of such
     Person.

          "Joinder Agreement" means a Joinder Agreement substantially in the
     form of Exhibit 7.12.

          "Lender" means the Initial Lender and any Eligible Assignee which may
     become a Lender by way of assignment in accordance with the terms hereof,
     together with their successors and permitted assigns.

          "Lending Office" means, as to any Lender, the office or offices of
     such Lender described as such on Schedule 1.1(a), or such other office or
     offices as a Lender may from time notify to the Borrower and the
     Administrative Agent.

          "Leverage Ratio" means, as of the last day of each fiscal quarter, the
     ratio of (a)(i) Funded Debt on such date less (ii) if no Competitive Bid
     Loans, Revolving Loans or Swing Line Loans (as all such terms are defined
     in the 2001 Senior Credit Agreement) are outstanding on such date, the
     amount of Available Cash (as defined below) on such date to (b) EBITDA for
     the twelve month period ending on such date. For the purposes hereof,
     "Available Cash" means all cash and Cash Equivalents of the Borrower and
     its Subsidiaries located in the United States and reflected in its
     consolidated balance sheet in excess of $40,000,000.

          "Lien" means any mortgage, pledge, hypothecation, assignment, deposit
     arrangement, security interest, encumbrance, lien (statutory or otherwise),
     preference, priority or charge of any kind, including, without limitation,
     any agreement to give any of the foregoing, any conditional sale or other
     title retention agreement, and any lease in the nature thereof (other than
     operating leases).


                                      -12-







          "Loan" or "Loans" means the Term Loans (or any portion thereof),
     individually or collectively, as appropriate, subject to Section 2.3.

          "London Interbank Offered Rate" means, with respect to any Eurodollar
     Loan for the Interest Period applicable thereto, the rate of interest per
     annum appearing on Telerate Page 3750 (or any successor page) as the London
     interbank offered rate for deposits in Dollars at approximately 11:00 A.M.
     (London time) two Business Days prior to the first day of such Interest
     Period for a term comparable to such Interest Period; provided, however, if
     more than one rate is specified on Telerate Page 3750, the applicable rate
     shall be the arithmetic mean of all such rates. If, for any reason, such
     rate is not available, the term "London Interbank Offered Rate" shall mean,
     with respect to any Eurodollar Loan for the Interest Period applicable
     thereto, the rate of interest per annum appearing on Reuters Screen LIBO
     Page as the London interbank offered rate for deposits in Dollars at
     approximately 11:00 A.M. (London time) two Business Days prior to the first
     day of such Interest Period for a term comparable to such Interest Period;
     provided, however, if more than one rate is specified on Reuters Screen
     LIBO Page, the applicable rate shall be the arithmetic mean of all such
     rates.

          "Material Adverse Effect" means a material adverse effect on (a) the
     business, operations or financial condition of the Borrower and its
     Subsidiaries taken as a whole, (b) the ability of a Credit Party to perform
     its obligations under this Credit Agreement or any of the other Credit
     Documents, or (c) the validity or enforceability of this Credit Agreement,
     any of the other Credit Documents, or the rights and remedies of the
     Lenders hereunder or thereunder taken as a whole.

          "Material Domestic Subsidiary" means any wholly-owned Domestic
     Subsidiary of the Borrower that, directly or indirectly, (a) owns assets in
     excess of $20,000,000 or (b) has annual revenues, as of the most recently
     ended fiscal year of the Borrower, in excess of two percent (2%) of the
     total revenues of the Borrower and its Subsidiaries on a consolidated
     basis; provided that Quest Receivables shall not be deemed to be a Material
     Domestic Subsidiary.

          "Maturity Date" means December 31, 2008.

          "Medicaid" shall mean that entitlement program under Title XIX of the
     Social Security Act that provides federal grants to states for medical
     assistance based on specific eligibility criteria.

          "Medicaid Provider Agreement" means an agreement entered into between
     a state agency or other such entity administering the Medicaid program and
     a health care provider or supplier under which the health care provider or
     supplier agrees to provide services for Medicaid patients in accordance
     with the terms of the agreement and Medicaid Regulations.

          "Medicaid Regulations" means, collectively, (a) all federal statutes
     (whether set forth in Title XIX of the Social Security Act or elsewhere)
     affecting the medical


                                      -13-







     assistance program established by Title XIX of the Social Security Act and
     any statutes succeeding thereto; (b) all applicable provisions of all
     federal rules, regulations, manuals and orders of all Governmental
     Authorities promulgated pursuant to or in connection with the statutes
     described in clause (a) above and all federal administrative, reimbursement
     and other guidelines of all Governmental Authorities having the force of
     law promulgated pursuant to or in connection with the statutes described in
     clause (a) above; (c) all state statutes and plans for medical assistance
     enacted in connection with the statutes and provisions described in clauses
     (a) and (b) above; and (d) all applicable provisions of all rules,
     regulations, manuals and orders of all Governmental Authorities promulgated
     pursuant to or in connection with the statutes described in clause (c)
     above and all state administrative, reimbursement and other guidelines of
     all Governmental Authorities having the force of law promulgated pursuant
     to or in connection with the statutes described in clause (b) above, in
     each case as may be amended, supplemented or otherwise modified from time
     to time.

          "Medical Reimbursement Programs" shall mean Medicare, Medicaid,
     CHAMPUS and TRICARE programs and any other healthcare program operated by
     or financed in whole or in part by any foreign, domestic, federal, state or
     local government and any other non-government funded third party payor
     programs.

          "Medicare Provider Agreement" means an agreement entered into between
     HCFA or other such entity administering the Medicare program on behalf of
     the HCFA, and a health care provider or supplier under which the health
     care provider or supplier agrees to provide services for Medicare patients
     in accordance with the terms of the agreement and Medicare Regulations.

          "Medicare" shall mean that government-sponsored entitlement program
     under Title XVIII of the Social Security Act that provides for a health
     insurance system for eligible elderly and disabled individuals.

          "Medicare Regulations" shall mean, collectively, all Federal statutes
     (whether set forth in Title XVIII of the Social Security Act or elsewhere)
     affecting the health insurance program for the aged and disabled
     established by Title XVIII of the Social Security Act and any statutes
     succeeding thereto; together with all applicable provisions of all rules,
     regulations, manuals and orders and administrative, reimbursement and other
     guidelines having the force of law of all Governmental Authorities
     (including, without limitation, the United States Department of Health and
     Human Services ("HHS"), HCFA, the OIG, or any person succeeding to the
     functions of any of the foregoing) promulgated pursuant to or in connection
     with any of the foregoing having the force of law, as each may be amended,
     supplemented or otherwise modified from time to time.

          "MedPlus" means MedPlus, Inc., an Ohio corporation.

          "Moody's" means Moody's Investors Service, Inc., or any successor or
     assignee of the business of such company in the business of rating
     securities.


                                      -14-







          "Multiemployer Plan" means a Plan which is a multiemployer plan as
     defined in Sections 3(37) or 4001(a)(3) of ERISA.

          "Multiple Employer Plan" means a Plan covered by Title IV of ERISA
     (other than a Multiemployer Plan) in which the Borrower, any Subsidiary of
     the Borrower or any ERISA Affiliate and at least one employer other than
     the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate are
     contributing sponsors.

          "Net Income" means, for any period, the net income after taxes for
     such period of the Borrower and its Subsidiaries on a consolidated basis,
     as determined in accordance with GAAP.

          "Non-Cash Items" has the meaning set forth in the definition of EBITDA
     in Section 1.1.

          "Non-Material Domestic Subsidiary" means any wholly-owned Domestic
     Subsidiary that is not a Guarantor other than Quest Receivables.

          "Note" or "Notes" means the Term Notes, individually or collectively,
     as appropriate.

          "Notice of Borrowing" means the request by the Borrower for the
     initial Loans in the form of Exhibit 2.1(b).

          "Notice of Continuation/Conversion" means a request by the Borrower to
     continue an existing Eurodollar Loan to a new Interest Period or Interest
     Periods or to convert a Eurodollar Loan to a Base Rate Loan or a Base Rate
     Loan to a Eurodollar Loan, in the form of Exhibit 2.2.

          "OIG" means the Office of Inspector General of the United States
     Department of Health and Human Services.

          "Participation Interest" means the Extension of Credit by a Lender by
     way of a purchase of a participation in any Loans as provided in Section
     3.8.

          "PBGC" means the Pension Benefit Guaranty Corporation established
     pursuant to Subtitle A of Title IV of ERISA and any successor thereto.

          "Permitted Acquisition" means any Acquisition by the Borrower or any
     of its Subsidiaries; provided that (i) substantially all of the Property
     acquired (or the Property of the Person acquired) in such Acquisition
     constitutes Eligible Assets (or goodwill associated therewith), (ii) in the
     case of an Acquisition of the Capital Stock of another Person, the board of
     directors (or other comparable governing body) of such other Person or its
     parent shall have duly approved such Acquisition, (iii) the Leverage Ratio
     (A) as of the most recently ended fiscal quarter for which an officer's
     certificate has been delivered pursuant to Section 7.1(c) is less than 2.75
     to 1.0 and (B) on a Pro Forma Basis giving


                                      -15-







     effect to such Acquisition is less than 2.75 to 1.0, (iv) if such
     Acquisition involves total consideration (cash and non-cash) in excess of
     $100,000,000, the Borrower shall deliver to the Administrative Agent, prior
     to the closing of such Acquisition, a certificate of an Authorized Officer
     of the Borrower providing calculations showing that the requirement in
     clause (b)(iii)(B) above is accurate, (v) on the date of such Acquisition
     no Event of Default exists, (vi) after giving effect to such Acquisition,
     no Default or Event of Default shall exist, (vii) if such Acquisition
     involves the formation of a new Subsidiary of the Borrower, such Subsidiary
     complies with Section 7.12 and (viii) such Acquisition is undertaken in
     accordance with all laws, rules, regulations, orders, writs, judgments,
     injunctions, decrees and awards to which any party to such Acquisition may
     be subject.

          "Permitted Investments" means Investments which constitute the
     following: (a) cash or Cash Equivalents, (b) trade accounts receivable
     created, acquired or made in the ordinary course of business, (c)
     inventory, raw materials, general intangibles and other current assets
     acquired in the ordinary course of business, (d) Investments by the
     Borrower or one of its Subsidiaries in each other, (e) Permitted
     Acquisitions, (f) advances to management personnel and employees in the
     ordinary course of business, (g) Investments existing as of the Closing
     Date; provided that any such Investment in excess of $2,000,000 is set
     forth on Schedule 8.6, (h) Investments consisting of non-cash consideration
     received in the form of securities, notes or similar obligations in
     connection with any conveyance, sale, lease, assignment, transfer or other
     disposition of any Property by the Borrower or one of its Subsidiaries to
     any Person, and which are permitted hereunder, (i) increases in the value
     of Persons in the Strategic Investment Portfolio that did not result from
     any incremental investment by the Borrower or one of its Subsidiaries, (j)
     other Investments (in addition to those set forth above) not to exceed, in
     the aggregate, during any consecutive period during the term of this Credit
     Agreement that the Leverage Ratio is greater than or equal to 2.75 to 1.0,
     the sum of (i) $50,000,000 plus (ii) the amount of cash proceeds from sales
     of assets in the Strategic Investment Portfolio and (k) any other
     Investment as long as (i) the Leverage Ratio (A) as of the end of the most
     recent fiscal quarter for which an officer's certificate has been delivered
     pursuant to Section 7.1(c) is less than 2.75 to 1.0 and (B) on a Pro Forma
     Basis giving effect to such Investment is less than 2.75 to 1.0, (ii) if
     such Investment involves total consideration (cash and non-cash) in excess
     of $100,000,000, the Borrower shall deliver to the Administrative Agent,
     prior to the closing of such Investment, a certificate of an Authorized
     Officer of the Borrower providing calculations showing that the requirement
     in clause (k)(i)(B) above is accurate, (iii) on the date of such
     Investment, no Event of Default exists and (iv) after giving effect to such
     Investment no Default or Event of Default shall exist.

          "Permitted Liens" means (a) Liens securing Credit Party Obligations,
     if any, (b) Liens for taxes not yet due or Liens for taxes being contested
     in good faith by appropriate proceedings for which adequate reserves
     determined in accordance with GAAP have been established (and as to which
     the Property subject to any such Lien is not yet subject to foreclosure,
     sale, collection, levy or loss on account thereof), (c) Liens in respect of
     Property imposed by law arising in the ordinary course of business such as
     materialmen's, mechanics', warehousemen's, carrier's, landlords' and other
     nonconsensual statutory Liens which are not yet due and payable or which
     are being contested in good faith by appropriate


                                      -16-







     proceedings for which adequate reserves determined in accordance with GAAP
     have been established (and as to which the Property subject to any such
     Lien is not yet subject to foreclosure, sale or loss on account thereof),
     (d) Liens (other than Liens imposed under ERISA) consisting of pledges or
     deposits made in the ordinary course of business to secure payment of
     worker's compensation insurance, unemployment insurance, pensions or social
     security programs, (e) Liens arising from good faith deposits in connection
     with or to secure performance of tenders, bids, leases, government
     contracts, performance and return-of-money bonds and other similar
     obligations incurred in the ordinary course of business (other than
     obligations in respect of the payment of borrowed money), (f) Liens arising
     from good faith deposits in connection with or to secure performance of
     statutory obligations and surety and appeal bonds, (g) easements,
     rights-of-way, restrictions (including zoning restrictions), matters of
     plat, minor defects or irregularities in title and other similar charges or
     encumbrances not, in any material respect, impairing the use of the
     encumbered Property for its intended purposes, (h) judgment Liens that
     would not constitute an Event of Default, (i) Liens in connection with
     Indebtedness permitted by Sections 8.1(d), (j) Liens arising by virtue of
     any statutory or common law provision relating to banker's liens, rights of
     setoff or similar rights as to deposit accounts or other funds maintained
     with a creditor depository institution, (k) Liens existing on the Closing
     Date and identified on Schedule 8.2, (l) Liens upon Property acquired (or
     the Property of a Subsidiary that is acquired) after the Closing Date by
     the Borrower or its Subsidiaries, which Liens either (i) existed on such
     Property before the time of such acquisition and was not created in
     anticipation thereof or (ii) were created solely for the purpose of
     securing Indebtedness representing, or incurred to finance or refinance,
     the cost of such Property or improvements thereon; provided, however; that
     (A) no such Lien shall extend to or cover any Property of any Credit Party
     other than the Property so acquired and improvements thereon and proceeds
     thereof, (B) the principal amount of Indebtedness secured by any such Lien
     shall at no time exceed 100% of the fair market value of such Property at
     the time it was acquired or constructed and (C) the Indebtedness secured by
     any such Lien is permitted hereunder; provided that (x) no such Lien shall
     extend to any Property other than the Property subject thereto on the
     closing date of such acquisition and (y) the principal amount of the
     Indebtedness secured by such Liens shall not be increased, (m) Liens in
     connection with Permitted Receivables Financing, (n) Liens with respect to
     lease filings for notice purposes only, (o) Liens on purchase money
     Indebtedness incurred by the Borrower in an amount not to exceed, in the
     aggregate, $50,000,000 less Indebtedness incurred by Subsidiaries of the
     Borrower pursuant to Section 8.1(d), (p) Liens on Property of non-wholly
     owned Subsidiaries of the Borrowers incurred to finance working capital and
     (q) renewals and extensions of the foregoing so long as such Lien (i) does
     not cover any additional Property, (ii) does not secure additional
     Indebtedness and (iii) is not otherwise prohibited by this Credit
     Agreement.

          "Permitted Receivables Financing" means any transaction entered into
     pursuant to documentation reasonably acceptable to the Administrative Agent
     in which (a) one or more Credit Parties sells, conveys or otherwise
     transfers to Quest Receivables and (b) Quest Receivables sells, conveys or
     otherwise transfers to any other Person or grants a security interest to
     any Person in, any Receivables (whether now existing or hereafter acquired)
     of a Credit Party, and any assets related thereto including all collateral
     securing such Receivables, all contracts and all Guaranty Obligations or
     other obligations in respect of


                                      -17-







     such Receivables, all proceeds of such Receivables and all other assets
     that are customarily transferred or in respect of which security interests
     are customarily granted in connection with asset securitization
     transactions involving Receivables.

          "Person" means any individual, partnership, joint venture, firm,
     corporation, limited liability company, association, trust or other
     enterprise (whether or not incorporated), or any Governmental Authority.

          "Plan" means any employee benefit plan (as defined in Section 3(3) of
     ERISA) which is covered by ERISA and with respect to which the Borrower,
     any Subsidiary of the Borrower or any ERISA Affiliate is (or, if such plan
     were terminated at such time, would under Section 4069 of ERISA be deemed
     to be) an "employer" within the meaning of Section 3(5) of ERISA.

          "Prime Rate" means the per annum rate of interest established from
     time to time by the Administrative Agent at the office of its New York
     Branch in New York, New York (or such other principal office of the
     Administrative Agent as communicated in writing to the Borrower and the
     Lenders) as its Prime Rate. Any change in the interest rate resulting from
     a change in the Prime Rate shall become effective as of 12:01 a.m. of the
     Business Day on which each change in the Prime Rate is announced by the
     Administrative Agent. The Prime Rate is a reference rate used by the
     Administrative Agent in determining interest rates on certain loans and is
     not intended to be the lowest rate of interest charged on any extension of
     credit to any debtor.

          "Principal Property" means any real property and any related
     buildings, fixtures or other improvements located in the United States
     owned by the Borrower or its Subsidiaries (a) on or in which one of its 30
     largest domestic clinical laboratories conducts operations, as determined
     by net revenues for the four most recent fiscal quarters for which
     financial statements have been filed with the Securities and Exchange
     Commission, or (b) the net book value of which at the time of the
     determination exceeds 1% of Total Assets.

          "Prior Senior Subordinated Notes" means those certain 10 3/4% senior
     subordinated notes due 2006 that were issued by the Borrower and were
     tendered for in connection with the closing of the 2001 Senior Credit
     Agreement.

          "Pro Forma Basis" means, in connection with any Permitted Acquisition,
     Permitted Investment or Stock Repurchase, that such Acquisition,
     Investment, or Stock Repurchase occurred as of the end of the last fiscal
     quarter for which the Borrower has delivered an officer's certificate
     pursuant to Section 7.1(c).

          "Property" means any right, title or interest in or to any property or
     asset of any kind whatsoever, whether real, personal or mixed and whether
     tangible or intangible.

          "Quest Receivables" means Quest Diagnostics Receivables Incorporated,
     a Delaware corporation, a wholly-owned, bankruptcy-remote, special purpose
     Subsidiary of the Borrower.


                                      -18-







          "Real Properties" has the meaning given thereto in Section 6.19.

          "Receivable" means the indebtedness and payment obligations of any
     Person to any Credit Party or acquired by any Credit Party (including
     obligations constituting an account or general intangible or evidenced by a
     note, instrument, contract, security agreement, chattel paper or other
     evidence of indebtedness or security) arising from a sale of merchandise or
     the provision of services in the ordinary course of business by such Credit
     Party or the Person from which such indebtedness and payment obligation
     were acquired by any Credit Party, including (a) any right to payment for
     goods sold or for services rendered and (b) the right to payment of any
     interest, sales taxes, finance charges, returned check or late charges and
     other obligations of such Person with respect thereto.

          "Regulation A, D, T, U or X" means Regulation A, D, T, U or X,
     respectively, of the Board of Governors of the Federal Reserve System as
     from time to time in effect and any successor to all or a portion thereof.

          "Required Lenders" means Lenders whose aggregate Credit Exposure (as
     hereinafter defined) constitutes more than 50% of the Credit Exposure of
     all Lenders at such time; provided, however, that if any Lender shall be a
     Defaulting Lender at such time then the aggregate principal amount of
     Credit Exposure of such Lender at such time shall be excluded from the
     determination of Required Lenders. For purposes hereof, the term "Credit
     Exposure" as applied to each Lender shall mean (a) at any time prior to the
     termination of the Commitments, the Term Loan Percentage of such Lender
     multiplied by the Commitment and (b) at any time after the termination of
     the Commitments, the principal balance of the outstanding Loans of such
     Lender.

          "Requirement of Law" means, as to any Person, the articles or
     certificate of incorporation and by-laws or other organizational or
     governing documents of such Person, and any law, treaty, rule or regulation
     or final, non-appealable determination of an arbitrator or a court or other
     Governmental Authority, in each case applicable to or binding upon such
     Person or to which any of its material Property is subject.

          "Reportable Event" means any of the events set forth in Section
     4043(c) of ERISA, other than those events as to which the notice
     requirement has been waived by regulation or by the PBGC.

          "Sale and Leaseback Transaction" means any arrangement with any Person
     providing for the leasing by the Borrower or one of its Subsidiaries of any
     Principal Property that has been or is to be sold or transferred by the
     Borrower or any Guarantor to such Person, as the case may be.

          "S&P" means Standard & Poor's Ratings Services, a division of The
     McGraw-Hill Companies, Inc. or any successor or assignee of the business of
     such division in the business of rating securities.


                                      -19-







          "SBCL Acquisition Agreement" means the Stock and Asset Purchase
     Agreement, dated as of February 9, 1999, among the Borrower, SmithKline
     Beecham plc and SmithKline Beecham Corporation, as amended.

          "Scheduled Funded Debt Payments" means, for any period, with respect
     to the Borrower and its Subsidiaries on a consolidated basis, the sum of
     all scheduled payments of principal on Funded Debt (including the implied
     principal component of payments due on Capital Leases and Synthetic
     Leases). It is understood and agreed that any amortization payments made in
     connection with a Permitted Receivables Financing are not Scheduled Funded
     Debt Payments; provided, however, should such Indebtedness pursuant to a
     Permitted Receivables Financing be required to be repaid due to the
     termination (whether at its stated maturity or otherwise) of such Permitted
     Receivables Financing and should no replacement facility be in effect on
     such termination date, the repayment of such Indebtedness shall constitute
     a Scheduled Funded Debt Payment.

          "Securities Act" means the Securities Act of 1933, as amended, and the
     rules and regulations promulgated thereunder, as amended, modified,
     succeeded or replaced from time to time.

          "Senior Unsecured Notes" means those certain senior unsecured notes
     issued by the Borrower on June 27, 2001.

          "Single Employer Plan" means any Plan which is covered by Title IV of
     ERISA, but which is not a Multiemployer Plan or a Multiple Employer Plan.

          "Social Security Act" means the Social Security Act as set forth in
     Title 42 of the United States Code, as amended, and any successor statute
     thereto, as interpreted by the rules and regulations issued thereunder, in
     each case as in effect from time to time. References to sections of the
     Social Security Act shall be construed also to refer to any successor
     sections.

          "Solvent" means, with respect to any Person as of a particular date,
     that on such date (a) such Person is able to pay its debts and other
     liabilities, contingent obligations and other commitments as they mature in
     the normal course of business, (b) such Person does not intend to, and does
     not believe that it will, incur debts or liabilities beyond such Person's
     ability to pay as such debts and liabilities mature in their ordinary
     course, (c) such Person is not engaged in a business or a transaction, and
     is not about to engage in a business or a transaction, for which such
     Person's assets would constitute unreasonably small capital after giving
     due consideration to the prevailing practice in the industry in which such
     Person is engaged or is to engage, (d) the fair value of the assets of such
     Person is greater than the total amount of liabilities, including, without
     limitation, contingent liabilities, of such Person and (e) the present fair
     saleable value of the assets of such Person is not less than the amount
     that will be required to pay the probable liability of such Person on its
     debts as they become absolute and matured. In computing the amount of
     contingent liabilities at any time, it is intended that such liabilities
     will be computed at the amount which, in light of all the facts and
     circumstances existing at such time, represents the amount that can
     reasonably be


                                      -20-







     expected to become an actual or matured liability reduced by the amount of
     any contribution or indemnity that can reasonably be expected to be
     received.

          "Stock Repurchase" has the meaning set forth in Section 8.9.

          "Strategic Investment Portfolio" means all Investments in Persons in
     which the Borrower and its Subsidiaries own less than 50% of the Voting
     Stock of such Person.

          "Subsidiary" means, as to any Person, (a) any corporation more than
     50% of whose stock of any class or classes having by the terms thereof
     ordinary voting power to elect a majority of the directors of such
     corporation (irrespective of whether or not at the time, any class or
     classes of such corporation shall have or might have voting power by reason
     of the happening of any contingency) is at the time owned by such Person
     directly or indirectly through Subsidiaries, and (b) any partnership,
     association, joint venture or other entity in which such person directly or
     indirectly through Subsidiaries has more than a 50% equity interest at any
     time.

          "Synthetic Lease" means any synthetic lease, tax retention operating
     lease, off-balance sheet loan or similar off-balance sheet financing
     product where such transaction is considered borrowed money indebtedness
     for tax purposes but is classified as an operating lease in accordance with
     GAAP.

          "Tender Costs" means the costs incurred by the Borrower in connection
     with the tender for the Prior Senior Subordinated Notes and the termination
     of the interest rate swap contracts existing prior to June 27, 2001 in an
     aggregate amount not to exceed $20,000,000.

          "Term Loans" means the Term Loans made to the Borrower pursuant to
     Section 2.1.

          "Term Loan Percentage" means, for each Lender, the percentage
     identified as its Term Loan Percentage on Schedule 1.1(a), as such
     percentage may be modified in connection with any assignment made in
     accordance with the provisions of Section 11.3.

          "Term Notes" means the promissory notes of the Borrower in favor of
     each of the Lenders evidencing the Term Loans provided pursuant to Section
     2.1, individually or collectively, as appropriate, as such promissory notes
     may be amended, modified, supplemented, extended, renewed or replaced from
     time to time and as evidenced in the form of Exhibit 2.1(f).

          "Total Assets" means all items that in accordance with GAAP would be
     classified as assets of the Borrower and its Subsidiaries on a consolidated
     basis.

          "TRICARE" means the United States Department of Defense health care
     program for service families including, but not limited to, TRICARE Prime,
     TRICARE Extra and TRICARE Standard, and any successor to or predecessor
     thereof (including, without limitation, CHAMPUS).


                                      -21-







          "2001 Senior Credit Agreement" means that certain Credit Agreement,
     dated as of June 27, 2001, among the Borrower, as borrower, the guarantors
     party thereto, the lenders signatories thereto, and Bank of America, N.A.,
     as administrative agent, as amended or modified from time to time.

          "2002 Term Loan Agreement" means that certain Term Loan Credit
     Agreement, dated as of June 21, 2002, among the Borrower, as borrower, the
     guarantors party thereto, the lenders signatories thereto, and Bank of
     America, N.A., as administrative agent, as amended or modified from time to
     time.

          "Voting Stock" means all classes of the Capital Stock of such Person
     then outstanding and normally entitled to vote in the election of directors
     (or similar governing authority).

     1.2 Computation of Time Periods and Other Definitional Provisions.

     For purposes of computation of periods of time hereunder, the word "from"
means "from and including" and the words "to" and "until" each mean "to but
excluding." References in this Credit Agreement to "Articles", "Sections",
"Schedules" or "Exhibits" shall be to Articles, Sections, Schedules or Exhibits
of or to this Credit Agreement unless otherwise specifically provided.

     1.3 Accounting Terms/Calculation of Financial Covenants.

          (a) Except as otherwise expressly provided herein, all accounting
     terms used herein shall be interpreted, and all financial statements and
     certificates and reports as to financial matters required to be delivered
     to the Lenders hereunder shall be prepared, in accordance with GAAP applied
     on a consistent basis. All calculations made for the purposes of
     determining compliance with this Credit Agreement shall (except as
     otherwise expressly provided herein) be made by application of GAAP applied
     on a basis consistent with the most recent annual or quarterly financial
     statements delivered pursuant to Section 7.1 (or, prior to the delivery of
     the first financial statements pursuant to Section 7.1, consistent with the
     financial statements delivered to the Lenders prior to the Funding Date);
     provided, however, if (a) the Borrower shall object to determining such
     compliance on such basis at the time of delivery of such financial
     statements due to any change in GAAP or the rules promulgated with respect
     thereto or (b) the Administrative Agent or the Required Lenders shall so
     object in writing within 30 days after delivery of such financial
     statements, then such calculations shall be made on a basis consistent with
     GAAP as in effect as of the date of the most recent financial statements
     delivered by the Borrower to the Lenders to which no such objection shall
     have been made.

          (b) Notwithstanding anything herein to the contrary, for the purposes
     of calculating the financial covenants set forth in Section 7.2, (i) income
     statement items (positive or negative) attributable to any Person or
     Property acquired in a Permitted Acquisition and Indebtedness incurred in
     connection with such Permitted Acquisition


                                      -22-







     shall, without duplication, be treated as if such Person or Property was
     acquired or such Indebtedness incurred as of the first day of the twelve
     month period ending as of the most recently completely fiscal quarter of
     the Borrower and (ii) income statement items (positive or negative)
     attributable to Property disposed of in any asset sale permitted by Section
     8.5(g) and Indebtedness retired in connection with such sale shall, without
     duplication, be treated as if such sale occurred as of the first day of the
     twelve month period ending as of the most recently completed fiscal quarter
     of the Borrower.

     1.4 Time.

     All references to time herein shall be references to Eastern Standard Time
or Eastern Daylight time, as the case may be, unless specified otherwise.

                                    SECTION 2

                                 CREDIT FACILITY

     2.1 Term Loans.

          (a) Term Loans. Subject to the terms and conditions set forth herein,
     the Initial Lender agrees to make a term loan or loans (the "Term Loans" or
     "Loans") to the Borrower, in Dollars, in an amount equal to the Commitment.
     Once repaid or prepaid, the Term Loans cannot be reborrowed.

          (b) Method of Borrowing Term Loans. By no later than 11:00 a.m. (i) on
     the date of the requested borrowing if the Term Loan requested will be a
     Base Rate Loan or (ii) three Business Days prior to the date of the
     requested borrowing if the Term Loan requested will be a Eurodollar Loan or
     Loans, the Borrower shall provide telephonic notice to the Initial Lender
     followed promptly by a written Notice of Borrowing in the form of Exhibit
     2.1(b) (which may be submitted by telecopy), setting forth (A) the amount
     requested, (B) whether such Term Loan shall be a Base Rate Loan or
     Eurodollar Loans, (C) if the Term Loan is to be a Eurodollar Loan, the
     Interest Period or Interest Periods applicable thereto and (D)
     certification that the Borrower has complied in all respects with Section
     5.3. Notwithstanding anything to the contrary herein, (x) the Borrower may
     not request more than one (1) borrowing under this Section 2.1 and (y) the
     Borrower may not request any borrowing subsequent to January 31, 2004.

          (c) Funding of Loans. Upon receipt of the Notice of Borrowing, the
     Initial Lender shall make the Term Loans available to the Borrower in the
     amount of its Commitment on the Funding Date as directed by the Borrower.


                                      -23-







          (d) Amortization. The principal amount of the Term Loans shall be
     repaid on the dates set forth below:



     ----------------------------------------------------------
           Principal Amortization          Term Loan Principal
               Payment Dates              Amortization Payments
     ----------------------------------------------------------
                                       
     Third Anniversary of Funding Date     20% of Initial Loans
     ----------------------------------------------------------
     Fourth Anniversary of Funding Date    20% of Initial Loans
     ----------------------------------------------------------
               Maturity Date               outstanding balance
     ----------------------------------------------------------


          (e) Term Notes. The Term Loans shall initially be evidenced by a duly
     executed promissory note of the Borrower to the Initial Lender in
     substantially the form of Exhibit 2.1(e) and upon any assignment pursuant
     to Section 11.3(b), the Loans shall be evidenced by promissory notes in
     substantially such form payable to each Lender requesting issuance of a
     Note.

     2.2 Continuations and Conversions.

     Subject to the terms below, the Borrower shall have the option, on any
Business Day, to continue existing Eurodollar Loans for a subsequent Interest
Period, to convert Base Rate Loans into Eurodollar Loans or to convert
Eurodollar Loans into Base Rate Loans. Subject to the limitations of Section 2.3
and this Section, the initial borrowing may bear more than one Interest Period,
and the continuation or conversion of any Loan may be to more than one Interest
Period. By no later than 11:00 a.m. (a) on the date of the requested conversion
of a Eurodollar Loan to a Base Rate Loan or (b) three Business Days prior to the
date of the requested continuation of a Eurodollar Loan or conversion of a Base
Rate Loan to a Eurodollar Loan, the Borrower shall provide telephonic notice to
the Initial Lender if such Lender is the sole lender at such time, or to the
Administrative Agent, followed promptly by a written Notice of
Continuation/Conversion, in the form of Exhibit 2.2 setting forth (i) whether
the Borrower wishes to continue or convert such Loans and (ii) if the request is
to continue a Eurodollar Loan or convert a Base Rate Loan to a Eurodollar Loan,
the Interest Period(s) applicable thereto. Notwithstanding anything herein to
the contrary, (A) except as provided in Section 3.11, Eurodollar Loans may only
be continued or converted into Base Rate Loans on the last day of the Interest
Period applicable thereto, (B) Eurodollar Loans may not be continued nor may
Base Rate Loans be converted into Eurodollar Loans during the existence and
continuation of a Default or an Event of Default, (C) any request to continue a
Eurodollar Loan that fails to comply with the terms hereof or any failure to
request a continuation of a Eurodollar Loan at the end of an Interest Period
shall constitute a conversion to a Base Rate Loan on the last day of the
applicable Interest Period and (D) any failure to state the Interest Period with
respect to the continuation of a Eurodollar Loan or the conversion of a Base
Rate Loan to a Eurodollar Loan shall constitute a request for a one month
Interest Period.

     2.3 Minimum Amounts.

     Each request for a conversion or continuation shall be subject to the
requirements that (a) each Eurodollar Loan shall be in a minimum amount of
$10,000,000 and in integral multiples of $1,000,000 in excess thereof, (b) each
Base Rate Loan shall be in a minimum amount of the lesser of $5,000,000 (and in
integral multiples of $1,000,000 in excess thereof) and (c) no more than four


                                      -24-







Eurodollar Loans shall be outstanding hereunder at any one time. For the
purposes of this Section 2.3, all Eurodollar Loans with the same Interest
Periods that begin and end on the same date shall be considered as one
Eurodollar Loan, but Eurodollar Loans with different Interest Periods, even if
they begin on the same date, shall be considered as separate Eurodollar Loans.

                                    SECTION 3

                     GENERAL PROVISIONS APPLICABLE TO LOANS

     3.1 Interest.

          (a) Interest Rate. Subject to Section 3.1(b), (i) all Base Rate Loans
     shall accrue interest at the Base Rate and (ii) all Eurodollar Loans shall
     accrue interest at the Adjusted Eurodollar Rate.

          (b) Default Rate of Interest. Upon the occurrence, and during the
     continuation of an Event of Default pursuant to Section 9.1(a), the
     principal of and, to the extent permitted by law, interest on the Loans and
     any other amounts owing hereunder or under the other Credit Documents
     (including without limitation fees and expenses) shall bear interest,
     payable on demand, at a per annum rate equal to 2% plus the rate which
     would otherwise be applicable (or if no rate is applicable, then the Base
     Rate plus two percent (2%) per annum).

          (c) Interest Payments. Interest on Loans shall be due and payable in
     arrears on each Interest Payment Date.

     3.2 Place and Manner of Payments.

     All payments of principal, interest, fees, expenses and other amounts to be
made by a Credit Party under this Credit Agreement shall be made unconditionally
and without any setoff, deduction, counterclaim, defense, recoupment or
withholding of any kind and received not later than 2:00 p.m. on the date when
due, in Dollars and in immediately available funds, by the Administrative Agent.
Payments received after such time shall be deemed to have been received on the
next Business Day. The Borrower shall, at the time it makes any payment under
this Credit Agreement, specify to the Administrative Agent the Loans, fees or
other amounts payable by the Borrower hereunder to which such payment is to be
applied (and in the event that it fails to specify, or if such application would
be inconsistent with the terms hereof, the Administrative Agent shall, subject
to Section 3.7, distribute such payment to the Lenders in such manner as the
Administrative Agent may reasonably deem appropriate). The Administrative Agent
will distribute such payments to the Lenders on the same Business Day if any
such payment is received at or before 2:00 p.m.; otherwise the Administrative
Agent will distribute such payment to the Lenders on the next succeeding
Business Day. Whenever any payment hereunder shall be stated to be due on a day
which is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day (subject to accrual of interest and fees for the period
of such extension), except that, in the case of Eurodollar Loans (or interest
payable with respect thereto), if the extension would cause the payment to be
made in the


                                      -25-







next following calendar month, then such payment shall instead be made on the
next preceding Business Day.

     3.3 Prepayments.

          (a) Voluntary Prepayments. The Borrower shall have the right to prepay
     Loans in whole or in part from time to time without premium or penalty;
     provided, however, that (i) Eurodollar Loans may only be prepaid on three
     Business Days' prior written notice to the Administrative Agent and (ii)
     each such partial prepayment of Eurodollar Loans or Base Rate Loans shall
     be in the minimum principal amount of $5,000,000 and integral multiples of
     $1,000,000. Amounts prepaid pursuant to this Section 3.3(a) shall be
     applied (A) first to the next scheduled amortization payment set forth in
     Section 2.1(d) and (B) second to the remaining scheduled amortization
     payments set forth in Section 2.1(d) on a pro rata basis. Within the
     foregoing parameters, amounts prepaid pursuant to this Section 3.3(a) shall
     be applied first to Base Rate Loans and then to Eurodollar Loans in direct
     order of Interest Period maturities. All prepayments under this Section
     3.3(a) shall be subject to Section 3.14.

          (b) Revision of Amortization Schedule. If the Borrower makes a
     prepayment in accordance with this Section 3.3, and the Initial Lender is
     not the sole Lender at the time, the Administrative Agent shall recalculate
     the outstanding principal amount of the Term Loans following such
     prepayment, reschedule the remaining amortization payments giving effect to
     such prepayment, and promptly distribute to the Borrower and to each of the
     Lenders a revised version of the schedule which appears in Section 2.1(d).

     3.4 [intentionally omitted]

     3.5 Payment in full at Maturity or Otherwise.

     The entire outstanding principal balance of all Loans, together with
accrued but unpaid interest and all other sums owing with respect thereto, shall
be due and payable in full, unless accelerated sooner pursuant to Section 9 on
the Maturity Date.

     3.6 Computations of Interest and Fees.

          (a) Except for Base Rate Loans that are based upon the Prime Rate, in
     which case interest shall be computed on the basis of the actual number of
     days elapsed over a year of 365 or 366 days, as the case may be, all
     computations of interest and fees hereunder shall be made on the basis of
     the actual number of days elapsed over a year of 360 days. Interest shall
     accrue from and include the date of borrowing (or continuation or
     conversion) but exclude the date of payment.

          (b) It is the intent of the Lenders and the Credit Parties to conform
     to and contract in strict compliance with applicable usury law from time to
     time in effect. All agreements between the Lenders and the Credit Parties
     are hereby limited by the provisions of this paragraph which shall override
     and control all such agreements, whether now


                                      -26-







     existing or hereafter arising and whether written or oral. In no way, nor
     in any event or contingency (including but not limited to prepayment or
     acceleration of the maturity of any obligation), shall the interest taken,
     reserved, contracted for, charged, or received under this Credit Agreement,
     under the Notes or otherwise, exceed the maximum nonusurious amount
     permissible under applicable law. If, from any possible construction of any
     of the Credit Documents or any other document, interest would otherwise be
     payable in excess of the maximum nonusurious amount, any such construction
     shall be subject to the provisions of this paragraph and such documents
     shall be automatically reduced to the maximum nonusurious amount permitted
     under applicable law, without the necessity of execution of any amendment
     or new document. If any Lender shall ever receive anything of value which
     is characterized as interest on the Loans under applicable law and which
     would, apart from this provision, be in excess of the maximum nonusurious
     amount, an amount equal to the amount which would have been excessive
     interest shall, without penalty, be applied to the reduction of the
     principal amount owing on the Loans and not to the payment of interest, or
     refunded to the Borrower or the other payor thereof if and to the extent
     such amount which would have been excessive exceeds such unpaid principal
     amount of the Loans. The right to demand payment of the Loans or any other
     Indebtedness evidenced by any of the Credit Documents does not include the
     right to accelerate the payment of any interest which has not otherwise
     accrued on the date of such demand, and the Lenders do not intend to charge
     or receive any unearned interest in the event of such demand. All interest
     paid or agreed to be paid to the Lenders with respect to the Loans shall,
     to the extent permitted by applicable law, be amortized, prorated,
     allocated, and spread throughout the full stated term (including any
     renewal or extension) of the Loans so that the amount of interest on
     account of such Indebtedness does not exceed the maximum nonusurious amount
     permitted by applicable law.

     3.7 Pro Rata Treatment.

     Except to the extent otherwise provided herein or when the Initial Lender
is the sole Lender, each payment or prepayment of principal of any Loan, and
each conversion or continuation of any Loan shall (except as otherwise provided
in Section 3.11) be allocated pro rata among the Lenders in accordance with the
respective principal amounts of the outstanding Loans and Participation
Interests of the Lenders); provided that, in the event any amount paid to any
Lender pursuant to this Section 3.7 is rescinded or must otherwise be returned
by the Administrative Agent, each Lender shall, upon the request of the
Administrative Agent, repay to the Administrative Agent the amount so paid to
such Lender, with interest for the period commencing on the date such payment is
returned by the Administrative Agent until the date the Administrative Agent
receives such repayment at a rate per annum equal to, during the period to but
excluding the date two Business Days after such request, the Federal Funds Rate,
and thereafter, the Base Rate plus two percent (2%) per annum.

     3.8 Sharing of Payments.

     The Lenders agree among themselves that, except to the extent otherwise
provided herein, in the event that any Lender shall obtain payment in respect of
any Loan, or any other obligation owing to such Lender under this Credit
Agreement through the exercise of a right of setoff, banker's


                                      -27-







lien or counterclaim, or pursuant to a secured claim under Section 506 of the
Bankruptcy Code or other security or interest arising from, or in lieu of, such
secured claim, received by such Lender under any applicable bankruptcy,
insolvency or other similar law or otherwise, or by any other means, in excess
of its pro rata share of such payment as provided for in this Credit Agreement,
such Lender shall promptly pay in cash or purchase from the other Lenders a
participation in such Loans, and other obligations in such amounts, and make
such other adjustments from time to time, as shall be equitable to the end that
all Lenders share such payment in accordance with their respective ratable
shares as provided for in this Credit Agreement. The Lenders further agree among
themselves that if payment to a Lender obtained by such Lender through the
exercise of a right of setoff, banker's lien, counterclaim or other event as
aforesaid shall be rescinded or must otherwise be restored, each Lender which
shall have shared the benefit of such payment shall, by payment in cash or a
repurchase of a participation theretofore sold, return its share of that benefit
(together with its share of any accrued interest payable with respect thereto)
to each Lender whose payment shall have been rescinded or otherwise restored.
The Borrower agrees that any Lender so purchasing such a participation may, to
the fullest extent permitted by law, exercise all rights of payment, including
setoff, banker's lien or counterclaim, with respect to such participation as
fully as if such Lender were a holder of such Loan, or other obligation in the
amount of such participation. Except as otherwise expressly provided in this
Credit Agreement, if any Lender or the Administrative Agent shall fail to remit
to any other Lender an amount payable by such Lender or the Administrative Agent
to such other Lender pursuant to this Credit Agreement on the date when such
amount is due, such payments shall be made together with interest thereon for
each date from the date such amount is due until the date such amount is paid to
the Administrative Agent or such other Lender at a rate per annum equal to the
Federal Funds Rate. If under any applicable bankruptcy, insolvency or other
similar law, any Lender receives a secured claim in lieu of a setoff to which
this Section 3.8 applies, such Lender shall, to the extent practicable, exercise
its rights in respect of such secured claim in a manner consistent with the
rights of the Lenders under this Section 3.8 to share in the benefits of any
recovery on such secured claim.

     3.9 Capital Adequacy/Regulation D.

          (a) If, after the date thereof, any Lender determines that the
     introduction after the Closing Date of any law, rule or regulation or other
     Requirement of Law regarding capital adequacy or any change therein or in
     the interpretation thereof, or compliance by such Lender (or its Lending
     Office) therewith, has or would have the effect of reducing the rate of
     return on the capital or assets of such Lender or any corporation
     controlling such Lender as a consequence of such Lender's obligations
     hereunder (taking into consideration its policies with respect to capital
     adequacy and such Lender's desired return on capital), then from time to
     time upon demand of such Lender (with a copy of such demand to the
     Administrative Agent), the Borrower shall pay to such Lender such
     additional amounts as will compensate such Lender for such reduction.

          (b) The Borrower shall pay to each Lender, as long as such Lender
     shall be required under regulations of the Board of Governors of the
     Federal Reserve System of the United States of America to maintain reserves
     with respect to liabilities or assets consisting of or including
     Eurocurrency funds or deposits (currently known as "Eurocurrency
     liabilities"), additional interest on the unpaid principal amount of each
     Eurodollar Loan


                                      -28-







     equal to (i) (A) the applicable Eurodollar Rate divided by (B) one minus
     the Eurodollar Reserve Percentage minus (ii) the applicable Eurodollar
     Rate. Such additional interest shall be due and payable on each date on
     which interest is payable on such Loan; provided the Borrower shall have
     received at least five days' prior notice (with a copy to the
     Administrative Agent) of such additional interest from such Lender. If a
     Lender fails to give notice five days prior to the relevant Interest
     Payment Date, such additional interest shall be due and payable five days
     from the receipt by the Borrower of such notice.

     3.10 Inability To Determine Interest Rate.

     If the Administrative Agent (the Initial Lender if it is the sole Lender)
determines (which determination shall be conclusive and binding upon the
Borrower) in connection with any request for a Eurodollar Loan or a conversion
to or continuation of a Eurodollar Loan that (a) Dollar deposits are not being
offered to banks in the applicable offshore Dollar market for the applicable
amount and Interest Period of such Eurodollar Loan, (b) adequate and reasonable
means do not exist for determining the Eurodollar Rate for such Eurodollar Loan,
or (c) the Eurodollar Rate for such Eurodollar Loan does not adequately and
fairly reflect the cost to the Lenders of funding such Eurodollar Loan, the
Administrative Agent will promptly notify the Borrower and all the Lenders.
Thereafter, the obligation of the Lenders to make or maintain Eurodollar Loans
shall be suspended until the Administrative Agent revokes such notice. Upon
receipt of such notice, the Borrower may revoke any pending Notice of Borrowing
or Notice of Continuation/Conversion with respect to Eurodollar Loans or,
failing that, will be deemed to have converted such request into a request for a
borrowing of or conversion into a Base Rate Loan in the amount specified
therein.

     3.11 Illegality.

     If any Lender determines that any Requirement of Law has made it unlawful,
or that any Governmental Authority has asserted that it is unlawful, for any
Lender or its applicable Lending Office to make, maintain or fund Eurodollar
Loans, or materially restricts the authority of such Lender to purchase or sell,
or to take deposits of, Dollars in the applicable offshore Dollar market, or to
determine or charge interest rates based upon the Eurodollar Rate, then, on
notice thereof by such Lender to the Borrower through the Administrative Agent,
any obligation of such Lender to make or continue Eurodollar Loans or to convert
Base Rate Loans to Eurodollar Loans shall be suspended until such Lender
notifies the Administrative Agent and the Borrower that the circumstances giving
rise to such determination no longer exist. Upon receipt of such notice, the
Borrower shall, upon demand from such Lender (with a copy to the Administrative
Agent), prepay or, if applicable, convert all Eurodollar Loans of such Lender to
Base Rate Loans, either on the last day of the Interest Period thereof, if such
Lender may lawfully continue to maintain such Eurodollar Loans to such day, or
immediately, if such Lender may not lawfully continue to maintain such
Eurodollar Loans. Upon any such prepayment or conversion, the Borrower shall
also pay interest on the amount so prepaid or converted, together with any
amounts due with respect thereto pursuant to Section 3.14. Each Lender agrees to
designate a different Lending Office if such designation will avoid the need for
such notice and will not, in the good faith judgment of such Lender, otherwise
be materially disadvantageous to such Lender.


                                      -29-







     3.12 Requirements of Law.

     If any Lender determines that as a result of the introduction of or any
change in, or in the interpretation of, any Requirement of Law, or such Lender's
compliance therewith, there shall be any increase in the cost to such Lender of
agreeing to make or making, funding or maintaining Eurodollar Loans or a
reduction in the amount received or receivable by such Lender in connection with
any of the foregoing (excluding for purposes of this subsection (a) any such
increased costs or reduction in amount resulting from (i) Taxes or Other Taxes
(as to which Section 3.13 shall govern) and (ii) reserve requirements utilized
in the determination of the Eurodollar Rate), then from time to time, within 10
days of demand of such Lender (with a copy of such demand to the Administrative
Agent), the Borrower shall pay to such Lender such additional amounts as will
compensate such Lender for such increased cost or reduction in yield.

     3.13 Taxes.

          (a) Any and all payments by a Credit Party to or for the account of
     the Administrative Agent or any Lender under any Credit Document shall be
     made free and clear of and without deduction for any and all present or
     future income, stamp or other taxes, duties, levies, imposts, deductions,
     assessments, fees, withholdings or similar charges, and all liabilities
     with respect thereto, but excluding, in the case of the Administrative
     Agent and each Lender, taxes imposed on or measured by its net income, and
     franchise taxes imposed on it (in lieu of net income taxes), by the
     jurisdiction (or any political subdivision thereof) under the laws of which
     the Administrative Agent or such Lender, as the case may be, is organized
     or maintains its Lending Office (all such non-excluded present or future
     income, stamp or other taxes, duties, levies, imposts, deductions,
     assessments, fees, withholdings or similar charges, and liabilities being
     hereinafter referred to as "Taxes"). If a Credit Party shall be required by
     any Requirement of Law to deduct any Taxes from or in respect of any sum
     payable under any Credit Document to the Administrative Agent or any
     Lender, (i) the sum payable shall be increased as necessary so that after
     making all required deductions (including deductions applicable to
     additional sums payable under this Section 3.13(a)), the Administrative
     Agent or such Lender, as the case may be, receives an amount equal to the
     sum it would have received had no such deductions been made, (ii) such
     Credit Party shall make such deductions, (iii) such Credit Party shall pay
     the full amount deducted to the relevant taxation authority or other
     Governmental Authority in accordance with applicable Requirements of Law,
     and (iv) within 30 days after the date of such payment, such Credit Party
     shall furnish to the Administrative Agent (which shall forward the same to
     such Lender) the original or a certified copy of a receipt evidencing
     payment thereof, to the extent such receipt is issued therefor, or other
     written proof of payment thereof that is reasonably satisfactory to the
     Administrative Agent.

          (b) In addition, each Credit Party agrees to pay any and all present
     or future stamp, court or documentary taxes and any other excise or
     property taxes or charges or similar levies which arise from any payment
     made under any Credit Document or from


                                      -30-







     the execution, delivery, performance, enforcement or registration of, or
     otherwise with respect to, any Credit Document (hereinafter referred to as
     "Other Taxes").

          (c) If a Credit Party shall be required to deduct or pay any Taxes or
     Other Taxes from or in respect of any sum payable under any Credit Document
     to the Administrative Agent or any Lender, such Credit Party shall also pay
     to the Administrative Agent (for the account of such Lender) or to such
     Lender, at the time interest is paid, such additional amount that such
     Lender reasonably specifies by written notice to such Credit Party as
     necessary to preserve the after-tax yield (after factoring in all taxes,
     including taxes imposed on or measured by net income) such Lender would
     have received if such Taxes or Other Taxes had not been imposed; provided
     that if such Lender fails to provide such notice to such Credit Party
     before the date which is five days prior to the date such interest is paid,
     such Credit Party shall pay at the time such interest is paid such amount
     as such Credit Party reasonably estimates will preserve such Lender's
     after-tax yield (after factoring in only such Taxes or Other Taxes) and pay
     the balance within five days after receiving such notice.

          (d) Each Credit Party agrees to indemnify the Administrative Agent and
     each Lender for (i) the full amount of Taxes and Other Taxes (including any
     Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts
     payable under this Section 3.13(d)) paid by the Administrative Agent and
     such Lender, and (ii) any liability (including penalties, interest and
     reasonable expenses) arising therefrom or with respect thereto.

          (e) In the case of any payment hereunder or under any other Credit
     Document by or on behalf of a Credit Party through an account or branch
     outside the United States, or on behalf of a Credit Party by a payor that
     is not a United States person, if such Credit Party determines that no
     taxes are payable in respect thereof, such Credit Party shall furnish, or
     shall cause such payor to furnish, to the Administrative Agent, an opinion
     of counsel reasonably acceptable to the Administrative Agent stating that
     such payment is exempt from Taxes. For purposes of this subsection (e), the
     terms "United States" and "United States person" shall have the meanings
     specified in Section 7701 of the Code.

          (f) Each Lender that is a foreign corporation, foreign partnership or
     foreign trust within the meaning of the Code shall deliver to the
     Administrative Agent, prior to receipt of any payment subject to
     withholding under the Code, two duly signed completed copies of either IRS
     Form W-8BEN or any successor thereto (relating to such Lender and entitling
     it to an exemption from, or reduction of, withholding tax on all payments
     to be made to such Lender by the Credit Parties pursuant to this Credit
     Agreement) or IRS Form W-8ECI or any successor thereto (relating to all
     payments to be made to such Lender by a Credit Party pursuant to this
     Credit Agreement), as appropriate, or such other evidence satisfactory to
     the Borrower and the Administrative Agent that such Lender is entitled to
     an exemption from, or reduction of, United States withholding tax.
     Thereafter and from time to time, each such Lender shall (i) promptly
     submit to the Administrative Agent such additional duly completed and
     signed copies of one of such forms (or such successor forms as shall be
     adopted from time to time by the relevant


                                      -31-







     United States taxing authorities), as appropriate, as may reasonably be
     requested by the Borrower or the Administrative Agent and then be available
     under then current United States laws and regulations to avoid, or such
     evidence as is satisfactory to the Borrower and the Administrative Agent of
     any available exemption from or reduction of, United States withholding
     taxes in respect of all payments to be made to such Lender by the Borrower
     pursuant to this Credit Agreement, (ii) promptly notify the Administrative
     Agent of any change in circumstances which would modify or render invalid
     any claimed exemption or reduction, and (iii) take such steps as shall not
     be materially disadvantageous to it, in the reasonable judgment of such
     Lender, and as may be reasonably necessary (including the re-designation of
     its Lending Office) to avoid any Requirement of Law that the Credit Parties
     make any deduction or withholding for taxes from amounts payable to such
     Lender. If the forms or other evidence provided by such Lender at the time
     such Lender first becomes a party to this Credit Agreement indicate a
     United States interest withholding tax rate in excess of zero, withholding
     tax at such rate shall be considered excluded from Taxes unless and until
     such Lender provides the appropriate forms certifying that a lesser rate
     applies, whereupon withholding tax at such lesser rate only shall be
     considered excluded from Taxes for periods governed by such forms;
     provided, however, that, if at the date of any assignment pursuant to which
     a Lender becomes a party to this Credit Agreement, the Lender assignor was
     entitled to payments under subsection (a) of this Section 3.13 in respect
     of United States withholding tax with respect to interest paid at such
     date, then, to such extent, the term Taxes shall include (in addition to
     withholding taxes that may be imposed in the future or other amounts
     otherwise includable in Taxes) United States withholding tax, if any,
     applicable with respect to the Lender assignee on such date. If such Lender
     fails to deliver the above forms or other evidence, then the Administrative
     Agent may withhold from any interest payment to such Lender an amount equal
     to the applicable withholding tax imposed by Sections 1441 and 1442 of the
     Code, without reduction. If any Governmental Authority asserts that the
     Administrative Agent did not properly withhold any tax or other amount from
     payments made in respect of such Lender, such Lender shall indemnify the
     Administrative Agent therefor, including all penalties and interest, any
     taxes imposed by any jurisdiction on the amounts payable to the
     Administrative Agent under this Section 3.13(f), and costs and expenses
     (including Attorney Costs) of the Administrative Agent. For any period with
     respect to which a Lender has failed to provide the Borrower with the above
     forms or other evidence (other than if such failure is due to a change in
     the applicable law, or in the interpretation or application thereof,
     occurring after the date on which such form or other evidence originally
     was required to be provided or if such form or other evidence otherwise is
     not required, such Lender shall not be entitled to indemnification under
     subsection (a) or (c) of this Section 3.13 with respect to Taxes imposed by
     the United States by reason of such failure; provided, however, that should
     a Lender become subject to Taxes because of its failure to deliver such
     form or other evidence required hereunder, the Borrower shall take such
     steps as such Lender shall reasonably request to assist such Lender in
     recovering such Taxes. The obligation of the Lenders under this Section
     3.13(f) shall survive the payment of all Credit Party Obligations and the
     resignation or replacement of the Administrative Agent.


                                      -32-







          (g) In the event that an additional payment is made under Section
     3.13(a) or (c) for the account of any Lender and such Lender, in its
     reasonable judgment, determines that it has finally and irrevocably
     received or been granted a credit against or release or remission for, or
     repayment of, any tax paid or payable by it in respect of or calculated
     with reference to the deduction or withholding giving rise to such payment,
     such Lender shall, to the extent that it determines that it can do so
     without prejudice to the retention of the amount of such credit, relief,
     remission or repayment, pay to the Borrower such amount as such Lender
     shall, in its reasonable judgment, have determined to be attributable to
     such deduction or withholding and which will leave such Lender (after such
     payment) in no worse position than it would have been in if the Borrower
     had not been required to make such deduction or withholding. Nothing herein
     contained shall interfere with the right of a Lender to arrange its tax
     affairs in whatever manner it thinks fit nor oblige any Lender to claim any
     tax credit or to disclose any information relating to its tax affairs or
     any computations in respect thereof or require any Lender to do anything
     that would prejudice its ability to benefit from any other credits,
     reliefs, remissions or repayments to which it may be entitled.

     3.14 Compensation.

     Upon the written demand of any Lender, the Borrower shall promptly
compensate such Lender for and hold such Lender harmless from any loss, cost or
expense incurred by it as a result of:

          (a) any continuation, conversion, payment or prepayment of any
     Eurodollar Loan on a day other than the last day of the Interest Period for
     such Eurodollar Loan (whether voluntary, mandatory, automatic, by reason of
     acceleration, or otherwise); or

          (b) any failure by the Borrower (for a reason other than the failure
     of such Lender to make a Eurodollar Loan) to prepay, borrow, continue or
     convert any Eurodollar Loan on the date or in the amount previously
     requested by the Borrower.

The amount each such Lender shall be compensated pursuant to this Section 3.14
shall include, without limitation, (i) any loss incurred by such Lender in
connection with the re-employment of funds prepaid, repaid, not borrowed or
paid, as the case may be and (ii) any reasonable out-of-pocket expenses
(including Attorney Costs) incurred and reasonably attributable thereto.

For purposes of calculating amounts payable by the Borrower to the Lenders under
this Section 3.14, each Lender may deem that it funded each Eurodollar Loan made
by it at the Eurodollar Rate for such Eurodollar Loan by a matching deposit or
other borrowing in the applicable offshore Dollar interbank market for a
comparable amount and for a comparable period, whether or not such Eurodollar
Loan was in fact so funded.

     3.15 Determination and Survival of Provisions.

     All determinations by the Administrative Agent or a Lender of amounts owing
under Sections 3.9 through 3.14, inclusive, shall, absent manifest error, be
conclusive and binding on


                                      -33-







the parties hereto. In determining such amount, the Administrative Agent or such
Lender may use any reasonable averaging and attribution methods. Section 3.9
through 3.14, inclusive, shall survive the termination of this Credit Agreement
and the payment of all Credit Party Obligations.

     3.16 Notification by Lenders.

     Subject to Section 3.13(c), each Lender shall notify the Borrower (and any
applicable Credit Party) of any event that will entitle such Lender to
compensation under Section 3.9, 3.12, 3.13 or 3.14 as promptly as practicable,
but in any event within 90 days after such Lender obtains actual knowledge
thereof; provided, however, that if any Lender fails to give such notice within
90 days after it obtains actual knowledge of such an event, such Lender shall,
with respect to compensation payable pursuant to Section 3.9, 3.12, 3.13 or 3.14
in respect of any costs resulting from such event, only be entitled to payment
under Section 3.9, 3.12, 3.13 or 3.14 for costs incurred from and after the date
90 days prior to the date that such Lender gives such notice. If requested by
the Borrower, each Lender will furnish to Borrower within ten Business Days of
the time the Lender requests compensation under Section 3.9, 3.12, 3.13 or 3.14,
a certificate setting forth the basis, amount and reasonable detail of
computation of each request by such Lender for compensation under Section 3.9,
3.12, 3.13 or 3.14, which certificate shall, except for demonstrable error, be
final, conclusive and binding for all purposes.

     3.17 Mitigation; Mandatory Assignment.

     Each Lender shall use reasonable efforts to avoid or mitigate any increased
cost or suspension of the availability of an interest rate under Sections 3.9
through 3.14 above to the greatest extent practicable (including transferring
the Loans to another Lending Office or Affiliate of a Lender) unless, in the
reasonable opinion of such Lender, such efforts would be likely to have an
adverse effect upon it. In the event a Lender makes a request to the Borrower
for additional payments in accordance with Section 3.9, 3.11, 3.12, 3.13 or
3.14, then, provided that no Default or Event of Default has occurred and is
continuing at such time, the Borrower may, at its own expense (such expense to
include, without limitation, any transfer fee payable to the Administrative
Agent under Section 11.3(b)) and in its sole discretion, require such Lender to
transfer and assign in whole (but not in part), without recourse (in accordance
with and subject to the terms and conditions of Section 11.3(b)), all of its
interests, rights and obligations under this Credit Agreement to an Eligible
Assignee which shall assume such assigned obligations (which assignee may be
another Lender, if a Lender accepts such assignment); provided that (a) such
assignment shall not conflict with any law, rule or regulation or order of any
court or other Governmental Authority and (b) the Borrower or such assignee
shall have paid to the assigning Lender in immediately available funds the
principal of and interest accrued to the date of such payment on the portion of
the Loans hereunder held by such assigning Lender and all other amounts owed to
such assigning Lender hereunder, including amounts owed pursuant to Sections 3.9
through 3.14 hereof.


                                      -34-







                                    SECTION 4

                                    GUARANTY

     4.1 Guaranty of Payment.

     Subject to Section 4.7 below, each of the Guarantors hereby, jointly and
severally, unconditionally guarantees to each Lender and the Administrative
Agent the prompt payment of the Credit Party Obligations in full when due
(whether at stated maturity, as a mandatory prepayment, by acceleration or
otherwise) and the timely performance of all other obligations under the Credit
Documents. This Guaranty is a guaranty of payment and not of collection and is a
continuing guaranty and shall apply to all Credit Party Obligations whenever
arising.

     4.2 Obligations Unconditional.

     The obligations of the Guarantors hereunder are absolute and unconditional,
irrespective of the value, genuineness, validity, regularity or enforceability
of any of the Credit Documents, or any other agreement or instrument referred to
therein, to the fullest extent permitted by applicable law, irrespective of any
other circumstance whatsoever which might otherwise constitute a legal or
equitable discharge or defense of a surety or guarantor. Each Guarantor agrees
that this Guaranty may be enforced by the Lenders without the necessity at any
time of resorting to or exhausting any other security or collateral and without
the necessity at any time of having recourse to the Notes or any other of the
Credit Documents or any collateral, if any, hereafter securing the Credit Party
Obligations or otherwise and each Guarantor hereby waives the right to require
the Lenders to proceed against the Borrower or any other Person (including a
co-guarantor) or to require the Lenders to pursue any other remedy or enforce
any other right. Each Guarantor further agrees that it shall have no right of
subrogation, indemnity, reimbursement or contribution against the Borrower or
any other Guarantor of the Credit Party Obligations for amounts paid under this
Guaranty until such time as the Lenders have been paid in full and all
Commitments under the Credit Agreement have been terminated. Each Guarantor
further agrees that nothing contained herein shall prevent the Lenders from
suing on the Notes or any of the other Credit Documents or foreclosing its
security interest in or Lien on any collateral, if any, securing the Credit
Party Obligations or from exercising any other rights available to it under this
Credit Agreement, the Notes, any other of the Credit Documents, or any other
instrument of security, if any, and the exercise of any of the aforesaid rights
and the completion of any foreclosure proceedings shall not constitute a
discharge of any of such Guarantor's obligations hereunder; it being the purpose
and intent of each Guarantor that its obligations hereunder shall be absolute,
independent and unconditional under any and all circumstances. Neither any
Guarantor's obligations under this Guaranty nor any remedy for the enforcement
thereof shall be impaired, modified, changed or released in any manner
whatsoever by an impairment, modification, change, release or limitation of the
liability of the Borrower or by reason of the bankruptcy or insolvency of the
Borrower. Each Guarantor waives any and all notice of the creation, renewal,
extension or accrual of any of the Credit Party Obligations and notice of or
proof of reliance of by the Administrative Agent or any Lender upon this
Guaranty or acceptance of this Guaranty. The Credit Party Obligations, and any
of them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon this
Guaranty. All dealings between the Borrower and any of the Guarantors, on the
one hand, and


                                      -35-







the Administrative Agent and the Lenders, on the other hand, likewise shall be
conclusively presumed to have been had or consummated in reliance upon this
Guaranty. The Guarantors further agree to all rights of set-off as set forth in
Section 11.2.

     4.3 Modifications.

     Each Guarantor agrees that (a) all or any part of the collateral, if any,
now or hereafter held for the Credit Party Obligations, if any, may be
exchanged, compromised or surrendered from time to time; (b) the Lenders shall
not have any obligation to protect, perfect, secure or insure any such security
interests, liens or encumbrances now or hereafter held, if any, for the Credit
Party Obligations or the properties subject thereto; (c) the time or place of
payment of the Credit Party Obligations may be changed or extended, in whole or
in part, to a time certain or otherwise, and may be renewed or accelerated, in
whole or in part; (d) the Borrower and any other party liable for payment under
the Credit Documents may be granted indulgences generally; (e) any of the
provisions of the Notes or any of the other Credit Documents may be modified,
amended or waived; (f) any party (including any co-guarantor) liable for the
payment thereof may be granted indulgences or be released; and (g) any deposit
balance for the credit of the Borrower or any other party liable for the payment
of the Credit Party Obligations or liable upon any security therefor may be
released, in whole or in part, at, before or after the stated, extended or
accelerated maturity of the Credit Party Obligations, all without notice to or
further assent by such Guarantor, which shall remain bound thereon,
notwithstanding any such exchange, compromise, surrender, extension, renewal,
acceleration, modification, indulgence or release.

     4.4 Waiver of Rights.

     Each Guarantor expressly waives to the fullest extent permitted by
applicable law: (a) notice of acceptance of this Guaranty by the Lenders and of
all extensions of credit to the Borrower by the Lenders; (b) presentment and
demand for payment or performance of any of the Credit Party Obligations; (c)
protest and notice of dishonor or of default (except as specifically required in
the Credit Agreement) with respect to the Credit Party Obligations or with
respect to any security therefor; (d) notice of the Lenders obtaining, amending,
substituting for, releasing, waiving or modifying any security interest, lien or
encumbrance, if any, hereafter securing the Credit Party Obligations, or the
Lenders' subordinating, compromising, discharging or releasing such security
interests, liens or encumbrances, if any; and (e) all other notices to which
such Guarantor might otherwise be entitled.

     4.5 Reinstatement.

     The obligations of the Guarantors under this Section 4 shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Credit Party Obligations is
rescinded or must be otherwise restored by any holder of any of the Credit Party
Obligations, whether as a result of any proceedings in bankruptcy or
reorganization or otherwise, and each Guarantor agrees that it will indemnify
the Administrative Agent and each Lender on demand for all reasonable costs and
expenses (including, without limitation, reasonable Attorney Costs) incurred by
the Administrative Agent or such Lender in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any


                                      -36-







claim alleging that such payment constituted a preference, fraudulent transfer
or similar payment under any bankruptcy, insolvency or similar law.

     4.6 Remedies.

     The Guarantors agree that, as between the Guarantors, on the one hand, and
the Administrative Agent and the Lenders, on the other hand, the Credit Party
Obligations may be declared to be forthwith due and payable as provided in
Section 9 (and shall be deemed to have become automatically due and payable in
the circumstances provided in Section 9) notwithstanding any stay, injunction or
other prohibition preventing such declaration (or preventing such Credit Party
Obligations from becoming automatically due and payable) as against any other
Person and that, in the event of such declaration (or such Credit Party
Obligations being deemed to have become automatically due and payable), such
Credit Party Obligations (whether or not due and payable by any other Person)
shall forthwith become due and payable by the Guarantors.

     4.7 Limitation of Guaranty.

     Notwithstanding any provision to the contrary contained herein or in any of
the other Credit Documents, to the extent the obligations of any Guarantor shall
be adjudicated to be invalid or unenforceable for any reason (including, without
limitation, because of any applicable state or federal law relating to
fraudulent conveyances or transfers) then the obligations of such Guarantor
hereunder shall be limited to the maximum amount that is permissible under
applicable law (whether federal or state or otherwise and including, without
limitation, the Bankruptcy Code).

     4.8 Rights of Contribution.

     The Credit Parties agree among themselves that, in connection with payments
made hereunder, each Credit Party shall have contribution rights against the
other Credit Parties as permitted under applicable law. Such contribution rights
shall be subordinate and subject in right of payment to the obligations of the
Credit Parties under the Credit Documents and no Credit Party shall exercise
such rights of contribution until all Credit Party Obligations have been paid in
full and the Commitments terminated.

     4.9 Release of Guarantors.

     Subject to Section 7.12(b), if any of the Guarantors shall cease to be a
Material Domestic Subsidiary of the Borrower for any reason subject to and in
accordance with the terms of the Credit Agreement, then such Guarantor shall,
automatically and without any further action on the part of any party to any
Credit Document, and upon notice to the Administrative Agent, be fully released
and discharged from all its liabilities and obligations under or in respect of
the Credit Documents to which such Guarantor is a party (other than liabilities
and obligations resulting from a demand on such Guarantor's Guaranty pursuant to
Section 9.2) and, promptly upon the request of the Borrower and at the expense
of the Borrower, the Administrative Agent shall execute such documents and take
such other action as is reasonably requested by the Borrower to evidence the
release and discharge of such Guarantor from all such liabilities and
obligations and


                                      -37-







shall, if applicable, certify to the Borrower that such Guarantor has no
liabilities or obligations resulting from a demand on such Guarantor's Guaranty
pursuant to Section 9.2.

                                    SECTION 5

                              CONDITIONS PRECEDENT

     5.1 Closing Conditions.

     This Credit Agreement shall become effective upon, and the obligation of
the Initial Lender to enter into this Credit Agreement is subject to, the
receipt by the Initial Lender of duly executed copies of this Credit Agreement.

     5.2 Conditions to Funding of the Term Loan.

     The obligation of the Initial Lender to make the initial Term Loan is
subject to satisfaction (or waiver) of the following conditions:

          (a) Credit Documents. Receipt by the Initial Lender of duly executed
     copies of the Note prior to the Funding Date.

          (b) Authority Documents. Receipt by the Initial Lender of the
     following with respect to each Credit Party, subject to the understanding
     that the Initial Lender has already received organizational documents in
     connection with the execution and delivery of the 2002 Credit Agreement and
     will deem the conditions of subclause (i), (ii) and (iv) below satisfied
     upon delivery of long form good standing certificates and organizational
     documents as to the Borrower and any Credit Party which was not a party to
     the 2002 Credit Agreement, together with bring-down telegrams with respect
     to the other Credit Parties whose good standing certificates and
     organizational documents were furnished previously:

               (i) Organizational Documents. Copies of the articles or
          certificates of incorporation or other organizational documents of
          each Credit Party certified to be true and complete as of a recent
          date by the appropriate Governmental Authority of the state or other
          jurisdiction of its formation and certified by a secretary or
          assistant secretary of such Credit Party to be true and correct as of
          the Funding Date.

               (ii) Bylaws. A copy of the bylaws or other governing documents of
          each Credit Party certified by a secretary or assistant secretary of
          such Credit Party to be true and correct as of the Funding Date.

               (iii) Resolutions. Copies of resolutions of the Board of
          Directors or other governing body of each Credit Party approving and
          adopting the Credit Documents to which it is a party, the transactions
          contemplated therein and authorizing execution and delivery thereof,
          certified by a secretary or assistant secretary of such Credit Party
          to be true and correct and in full force and effect as of the Funding
          Date.


                                      -38-







               (iv) Good Standing. Copies of certificates of good standing,
          existence or its equivalent with respect to each Credit Party
          certified as of a recent date in relation to the Funding Date by the
          appropriate Governmental Authority of the state or other jurisdiction
          of its formation.

               (v) Incumbency. An incumbency certificate of each Credit Party
          certified by a secretary or assistant secretary of such Credit Party
          to be true and correct as of the Funding Date.

          (c) Opinions of Counsel. Receipt by the Administrative Agent of
     opinions reasonably satisfactory to the Administrative Agent, addressed to
     the Administrative Agent on behalf of the Lenders and dated as of the
     Funding Date.

          (d) Officer's Certificates. The Administrative Agent shall have
     received a certificate or certificates executed by an Authorized Officer of
     the Borrower as of the Funding Date stating that (i) the financial
     statements and information delivered to the Administrative Agent on or
     before the Funding Date were prepared in good faith and that such financial
     statements were prepared in accordance with GAAP and (ii) immediately after
     giving effect to this Credit Agreement, the other Credit Documents and all
     the transactions contemplated herein or therein to occur on such date, (A)
     each Credit Party is Solvent and the Borrower and its Subsidiaries taken as
     a whole are Solvent, (B) no Default or Event of Default exists, (C) all
     representations and warranties contained herein and in the other Credit
     Documents are true and correct in all material respects, (D) the Credit
     Parties are in compliance with each of the financial covenants set forth in
     Section 7.2 and (E) the Borrower and each of its Material Domestic
     Subsidiaries are in compliance with the terms of all of their material debt
     obligations, including, without limitation, (I) the 2001 Senior Credit
     Agreement, (II) the Senior Unsecured Notes and (III) the Convertible Notes.

          (e) Material Adverse Effect. Since December 31, 2002 there shall not
     have occurred a Material Adverse Effect.

          (f) Other. Receipt by the Lenders of such other documents,
     instruments, agreements or information as reasonably and timely requested
     by any Lender through the Administrative Agent.

     5.3 Conditions to All Extensions of Credit.

     In addition to the conditions precedent stated elsewhere herein, the
Initial Lender shall not be obligated to make the initial Loan unless:

          (a) Notice. The Borrower shall have delivered to the Initial Lender,
     an appropriate Notice of Borrowing, duly executed and completed, by the
     time specified in Section 2.1.


                                      -39-







          (b) Representations and Warranties. The representations and warranties
     made by the Credit Parties in any Credit Document are true and correct in
     all material respects at and as if made as of such date except to the
     extent they expressly and exclusively relate to an earlier date.

          (c) No Default. No Default or Event of Default shall exist and be
     continuing either prior to or after giving effect to such Loan.

          (d) the date of the requested borrowing is on or prior to January 31,
     2004.

The delivery of each Notice of Borrowing shall constitute a representation and
warranty by the Borrower of the correctness of the matters specified in
subsections (b), (c), and (d) above.

                                    SECTION 6

                         REPRESENTATIONS AND WARRANTIES

     The Credit Parties hereby represent to the Administrative Agent and each
Lender that:

     6.1 Organization and Good Standing.

     Each Credit Party (a) is either a partnership, a corporation or a limited
liability company duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization, (b) is duly qualified and in
good standing as a foreign organization and authorized to do business in every
other jurisdiction where its ownership or operation of property or the conduct
of its business would require it to be qualified, in good standing and
authorized, unless the failure to be so qualified, in good standing or
authorized would not have or would not reasonably be expected to have a Material
Adverse Effect and (c) has the power and authority to own and operate its
properties and to carry on its business as now conducted and as currently
proposed to be conducted.

     6.2 Due Authorization.

     Each Credit Party (a) has the power and authority to execute, deliver and
perform this Credit Agreement and the other Credit Documents to which it is a
party and to incur the obligations herein and therein provided for and (b) has
duly taken all necessary action to authorize, and is duly authorized, to
execute, deliver and perform this Credit Agreement and the other Credit
Documents to which it is a party.

     6.3 Enforceable Obligations.

     Each Credit Party has duly executed this Credit Agreement and each other
Credit Document to which such Credit Party is a party and this Credit Agreement
and such other Credit Documents constitute legal, valid and binding obligations
of such Credit Party enforceable against such Credit Party in accordance with
their respective terms, except as may be limited by bankruptcy or


                                      -40-







insolvency laws or similar laws affecting creditors' rights generally or by
general equitable principles.

     6.4 No Conflicts.

     Neither the execution and delivery of the Credit Documents to which it is a
party, nor the consummation of the transactions contemplated herein and therein,
nor the performance of or compliance with the terms and provisions hereof and
thereof by a Credit Party will (a) violate, contravene or conflict with any
provision of such Credit Party's organizational documents, (b) violate,
contravene or conflict with any Requirement of Law (including, without
limitation, Regulations T, U or X), order, writ, judgment, injunction, decree,
license or permit applicable to such Credit Party which violation would have or
would reasonably be expected to have a Material Adverse Effect, (c) violate,
contravene or conflict with contractual provisions of, or cause an event of
default under, any indenture, loan agreement, mortgage, deed of trust, contract
or other agreement or instrument to which such Credit Party is a party or by
which it or its properties may be bound which violation would have or would
reasonably be expected to have a Material Adverse Effect, or (d) result in or
require the creation of any Lien upon or with respect to the properties of such
Credit Party.

     6.5 Consents.

     Except for consents, approvals and authorizations which have been obtained
or the absence of which would not have or would not reasonably be expected to
have a Material Adverse Effect, no consent, approval, authorization or order of,
or filing, registration or qualification with, any Governmental Authority,
equity owner or third party in respect of any Credit Party is required in
connection with the execution, delivery or performance of this Credit Agreement
or any of the other Credit Documents, or the consummation of any transaction
contemplated herein or therein by such Credit Party.

     6.6 Financial Condition.

     The financial statements delivered to the Administrative Agent and the
Lenders pursuant to Sections 7.1(a) and (b): (a) have been prepared in
accordance with GAAP and (b) present fairly the consolidated financial
condition, results of operations and cash flows of the Borrower and its
Subsidiaries as of such date and for such periods. Since December 31, 2002,
there has been no sale, transfer or other disposition by the Borrower or any of
its Subsidiaries of any material part of the business or property of the
Borrower and its Subsidiaries, taken as a whole, or purchase or other
acquisition by any such Person of any business or property (including any
Capital Stock of any other Person) material in relation to the consolidated
financial condition of the Borrower and its Subsidiaries, taken as a whole, in
each case, which, is not (i) reflected in the most recent financial statements
delivered to the Lenders prior to the Funding Date or pursuant to Section 7.1 or
in the notes thereto or (ii) otherwise permitted by the terms of this Credit
Agreement and communicated to the Administrative Agent and the Lenders.


                                      -41-







     6.7 No Material Change.

     Since December 31, 2002, there has been no development or event relating to
or affecting the Borrower or any of its Subsidiaries which has had or would
reasonably be expected to have a Material Adverse Effect.

     6.8 Disclosure.

     Neither this Credit Agreement, nor any other Credit Document, nor any
financial statements delivered to the Administrative Agent or the Lenders nor
any other document, certificate or statement furnished to the Administrative
Agent or the Lenders by or on behalf of any Credit Party in connection with the
transactions contemplated hereby, taken as a whole, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein or herein not misleading.

     6.9 No Default.

     No Default or Event of Default has occurred and is continuing or would
result from the consummation of the transactions contemplated by this Credit
Agreement and the other Credit Documents.

     6.10 Litigation.

     Except as set forth in Schedule 6.10, no litigation, investigation, claim,
criminal prosecution, civil investigative demand, imposition of criminal or
civil fines and penalties, or any other proceeding of or before any arbitrator
or Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of its or their respective Properties (a) with respect to the Credit Documents
or any Loan or any of the transactions contemplated hereby or (b) which would
reasonably be expected to have a Material Adverse Effect.

     6.11 Taxes.

     The Borrower and each of its Subsidiaries has filed, or caused to be filed,
all material tax returns (federal, state, local and foreign) required to be
filed and has paid (a) all amounts of taxes shown thereon to be due (including
interest and penalties) and (b) all other material taxes, fees, assessments and
other governmental charges (including mortgage recording taxes, documentary
stamp taxes and intangibles taxes) owing by it, except for such taxes (i) which
are not yet delinquent or (ii) that are being contested in good faith and by
proper proceedings, and against which adequate reserves are being maintained in
accordance with GAAP.

     6.12 Compliance with Law.

     Except to the extent the same would not have or would not reasonably be
expected to have a Material Adverse Effect:


                                      -42-







          (a) The Borrower and each of its Subsidiaries is in compliance with
     all Requirements of Law (including, without limitation, Environmental Laws,
     ERISA, Medicaid Regulations, Medicare Regulations, 42 U.S.C. Section
     1320a-7b and 42 U.S.C. Section 1395nn) and all material orders, writs,
     injunctions and decrees applicable to it, or to its Properties.

          (b) (i) Neither the Borrower nor any of its Subsidiaries nor any
     individual employed by the Borrower or any of its Subsidiaries who may
     reasonably be expected to be excluded or suspended from participation in
     any Medical Reimbursement Program for their corporate or individual actions
     or failures to act; and (ii) there is no member of management continuing to
     be employed by the Borrower or any of its Subsidiaries who may reasonably
     be expected to have individual criminal culpability for healthcare matters
     under investigation by any Governmental Authority unless such member of
     management has been, within a reasonable period of time after discovery of
     such actual or potential culpability, either suspended or removed from
     positions of responsibility related to those activities under challenge by
     the Governmental Authority.

          (c) Current billing policies, arrangements, protocols and instructions
     comply with all material requirements of Medical Reimbursement Programs and
     are administered by properly trained personnel.

          (d) Current medical director compensation arrangements and other
     arrangements with referring physicians comply with state and federal
     self-referral and anti-kickback laws, including without limitation 42
     U.S.C. Section 1320a-7b(b)(1) - (b)(2) and 42 U.S.C. Section 1395nn.

     6.13 Licensing and Accreditation.

     Except to the extent the same would not have or would not be reasonably
expected to have a Material Adverse Effect, each of the Credit Parties has, to
the extent applicable: (a) obtained and maintains in good standing all required
licenses, permits, authorization and approvals of each Governmental Authority
necessary to the conduct of its business; (b) to the extent prudent and
customary in the industry in which it is engaged, obtained and maintains
accreditation from all generally recognized accrediting agencies (including, but
not limited to, CAP); (c) obtained and maintains CLIA certification; (d) entered
into and maintains in good standing its Medicare Provider Agreements and its
Medicaid Provider Agreements; and (e) ensured that all such required licenses,
certifications and accreditations are in full force and effect on the date
hereof and have not been revoked or suspended or otherwise limited.

     6.14 Title to Properties, Liens.

     The Borrower and each of its Subsidiaries, is the owner of, and has good
title to, or has a valid license or lease to use, all of its material
Properties. All Liens on the Properties of the Borrower and its Subsidiaries are
Permitted Liens.


                                      -43-







     6.15 Insurance.

     The properties of the Borrower and each of its Subsidiaries are insured
with financially sound and reputable insurance companies that are not Affiliates
of the Borrower (except to the extent that self-insurance is maintained in
reasonable amounts), in such amounts, with such deductibles and covering such
risks, as is reasonable and prudent.

     6.16 Use of Proceeds.

     The proceeds of the Loans will be used solely for the purposes specified in
Section 7.10.

     6.17 Government Regulation.

          (a) "Margin stock" within the meaning of Regulation U does not
     constitute more than 25% of the value of the consolidated assets of the
     Borrower and its Subsidiaries. None of the transactions contemplated by the
     Credit Documents (including, without limitation, the direct or indirect use
     of the proceeds of the Loans) will violate or result in a violation of (i)
     the Securities Act, (ii) the Exchange Act or (iii) Regulations T, U or X.

          (b) Neither the Borrower nor any of its Subsidiaries is subject to
     regulation under the Public Utility Holding Company Act of 1935, the
     Federal Power Act or the Investment Company Act of 1940, each as amended.

     6.18 ERISA.

     Except as would not result in or would not reasonably be expected to result
in a Material Adverse Effect:

          (a) (i) No ERISA Event has occurred, and, to the best knowledge of the
     Borrower, each of its Subsidiaries and each ERISA Affiliate, no event or
     condition has occurred or exists as a result of which any ERISA Event could
     reasonably be expected to occur, with respect to any Plan; (ii) no
     "accumulated funding deficiency," as such term is defined in Section 302 of
     ERISA and Section 412 of the Code, whether or not waived, has occurred with
     respect to any Plan and no application for a funding waiver or an extension
     of any amortization period pursuant to Section 412 of the Code has been
     made with respect to any Plan; (iii) each Plan has been maintained,
     operated, and funded in compliance with its own terms and in material
     compliance with the provisions of ERISA, the Code, and any other applicable
     federal or state laws; (iv) each Plan that is intended to qualify under
     Section 401(a) of the Code has received a favorable determination letter
     from the IRS or an application for such a letter is currently being
     processed by the IRS with respect thereto and, to the best knowledge of the
     Borrower, each of its Subsidiaries and each ERISA Affiliate, nothing has
     occurred which would prevent, or cause the loss of, such qualification; and
     (v) no Lien in favor or the PBGC or a Plan has arisen or is reasonably
     likely to arise on account of any Plan.


                                      -44-







          (b) Neither the Borrower nor any Subsidiary of the Borrower nor any
     ERISA Affiliate has incurred, or, to the best of each such party's
     knowledge, is reasonably expected to incur, any liability under Title IV of
     ERISA with respect to any Single Employer Plan, or any withdrawal liability
     under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither
     the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has
     received any notification that any Multiemployer Plan is in reorganization
     (within the meaning of Section 4241 of ERISA), is insolvent (within the
     meaning of Section 4245 of ERISA), or has been terminated (within the
     meaning of Title IV of ERISA), and no Multiemployer Plan is, to the best of
     each such Person's knowledge, reasonably expected to be in reorganization,
     insolvent, or terminated. Neither the Borrower nor any Subsidiary of the
     Borrower nor any ERISA Affiliate has engaged in a transaction that could be
     subject to Sections 4069 or 4212(c) of ERISA.

          (c) No prohibited transaction (within the meaning of Section 406 of
     ERISA or Section 4975 of the Code) or breach of fiduciary responsibility
     has occurred with respect to a Plan which has subjected or may subject the
     Borrower, any Subsidiary of the Borrower or any ERISA Affiliate to any
     liability under Sections 406, 409, 502(i), or 502(l) of ERISA or Section
     4975 of the Code, or under any agreement or other instrument pursuant to
     which the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate
     has agreed or is required to indemnify any person against any such
     liability. There are no pending or, to the best knowledge of the Borrower,
     each of its Subsidiaries and each ERISA Affiliate, threatened claims,
     actions or lawsuits, or action by any Governmental Authority, with respect
     to any Plan that could reasonably be expected to have a Material Adverse
     Effect.

          (d) Each Plan that is a welfare plan (as defined in Section 3(1) of
     ERISA) to which Sections 601-609 of ERISA and Section 4980B of the Code
     apply has been administered in compliance in all material respects with
     such sections.

     6.19 Environmental Matters.

          (a) Except as would not result in or would not reasonably be expected
     to result in a Material Adverse Effect:

               (i) Each of the real properties owned, leased or operated by the
          Borrower or any of its Subsidiaries (the "Real Properties") and all
          operations at the Real Properties are in compliance with all
          applicable Environmental Laws, and there is no violation of any
          Environmental Law with respect to the Real Properties or the
          businesses operated by the Borrower or any of its Subsidiaries (the
          "Businesses"), and there are no conditions relating to the Businesses
          or Real Properties that would reasonably be expected to give rise to
          liability under any applicable Environmental Laws.

               (ii) No Credit Party has received any written notice of, or
          inquiry from any Governmental Authority regarding, any violation,
          alleged violation, non-compliance, liability or potential liability
          regarding Hazardous Materials or compliance with Environmental Laws
          with regard to any of the Real Properties or


                                      -45-







          the Businesses, nor, to the knowledge of the Borrower or any of its
          Subsidiaries, is any such notice being threatened.

               (iii) Hazardous Materials have not been transported or disposed
          of from the Real Properties, or generated, treated, stored or disposed
          of at, on or under any of the Real Properties or any other location,
          in each case by, or on behalf or with the permission of, the Borrower
          or any of its Subsidiaries in a manner that would give rise to
          liability under any applicable Environmental Laws.

               (iv) No judicial proceeding or governmental or administrative
          action is pending or, to the knowledge of the Borrower or any of its
          Subsidiaries, threatened, under any Environmental Law to which the
          Borrower or any of its Subsidiaries is or will be named as a party,
          nor are there any consent decrees or other decrees, consent orders,
          administrative orders or other orders, or other administrative or
          judicial requirements outstanding under any Environmental Law with
          respect to the Borrower or any of its Subsidiaries, the Real
          Properties or the Businesses.

               (v) There has been no release (including, without limitation,
          disposal) or threat of release of Hazardous Materials at or from the
          Real Properties, or arising from or related to the operations of the
          Borrower or any of its Subsidiaries in connection with the Real
          Properties or otherwise in connection with the Businesses where such
          release constituted a violation of, or would give rise to liability
          under, any applicable Environmental Laws.

               (vi) None of the Real Properties contains, or has previously
          contained, any Hazardous Materials at, on or under the Real Properties
          in amounts or concentrations that, if released, constitute or
          constituted a violation of, or could give rise to liability under,
          Environmental Laws.

               (vii) Neither the Borrower, nor any of its Subsidiaries, has
          assumed any liability of any Person (other than among themselves)
          under any Environmental Law.

          (b) The Credit Parties have adopted procedures that are designed to
     (i) ensure that each Credit Party, any of its operations and each of the
     Real Properties complies with applicable Environmental Laws and (ii)
     minimize any liabilities or potential liabilities that each Credit Party,
     any of its operations and each of the Real Properties may have under
     applicable Environmental Laws.

     6.20 Intellectual Property.

     The Borrower and each of its Subsidiaries owns, or has the legal right to
use, all material patents, trademarks, tradenames, copyrights, technology,
know-how and processes (the "Intellectual Property") necessary for each of them
to conduct its business as currently conducted other than as would not have or
would not be reasonably expected to have a Material Adverse Effect. No claim has
been asserted and is pending by any Person challenging or questioning the use of
any


                                      -46-







Intellectual Property owned by the Borrower or any of its Subsidiaries or that
the Borrower or any of its Subsidiaries has a right to use or the validity or
effectiveness of any such Intellectual Property, nor does the Borrower or any of
its Subsidiaries have knowledge of any such claim, and, to the knowledge of the
Borrower and its Subsidiaries, the use of any Intellectual Property by the
Borrower and its Subsidiaries does not infringe on the rights of any Person,
except for such claims and infringements that in the aggregate, would not have
or would not reasonably be expected to have a Material Adverse Effect.

     6.21 Subsidiaries.

     As of the Closing Date, set forth on Schedule 6.21 is a complete and
accurate list of all Subsidiaries of the Borrower and which of such Subsidiaries
are Material Domestic Subsidiaries.

     6.22 Solvency.

     Each Credit Party is and, after consummation of the transactions
contemplated by this Credit Agreement, will be Solvent.

                                    SECTION 7

                              AFFIRMATIVE COVENANTS

     Each Credit Party hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans, together with interest and fees and
other obligations then due and payable hereunder, have been paid in full and the
Commitments hereunder shall have terminated:

     7.1 Information Covenants.

     It is agreed that so long as the Initial Lender is the sole Lender
hereunder and receives the information below in its capacity as a party to the
2001 Senior Credit Agreement or the 2002 Term Loan Credit Agreement, the
information covenant herein stated will be deemed satisfied. If such information
is not furnished as described in the preceding sentence, the Credit Parties will
furnish, or cause to be furnished, to the Administrative Agent and each of the
Lenders an electronic (if readily available) and a hard copy of:

          (a) Annual Financial Statements. As soon as available, and in any
     event within 95 days after the close of each fiscal year of the Borrower, a
     consolidated balance sheet and income statement of the Borrower and its
     Subsidiaries, as of the end of such fiscal year, together with related
     consolidated statements of operations, cash flows and changes in
     stockholders' equity for such fiscal year, setting forth in comparative
     form consolidated figures for the preceding fiscal year, all such
     consolidated financial information described above to be audited by
     independent certified public accountants of recognized national standing
     and whose opinion shall be to the effect that such financial statements
     fairly present in all material respects the consolidated financial
     position, results of operations and cash flows of the Borrower and its
     Subsidiaries as at the end of, and for, such fiscal year in


                                      -47-







     accordance with GAAP and shall not be limited as to the scope of the audit
     or qualified in any manner.

          (b) Quarterly Financial Statements. As soon as available, and in any
     event within 50 days after the close of each of the first three fiscal
     quarters of the Borrower, a consolidated balance sheet and income statement
     of the Borrower and its Subsidiaries, as of the end of such fiscal quarter,
     together with related consolidated statements of operations, cash flows and
     changes in stockholders' equity for such fiscal quarter setting forth in
     each case in comparative form the corresponding consolidated statements of
     operations and cash flows for the corresponding period of the preceding
     fiscal year, and accompanied by a certificate of an Authorized Officer of
     the Borrower to the effect that such quarterly financial statements fairly
     present in all material respects the consolidated financial condition of
     the Borrower and its Subsidiaries and in accordance with GAAP, subject to
     changes resulting from audit and normal year-end audit adjustments.
     Notwithstanding the above, it is understood and agreed that delivery of the
     Borrower's applicable Form 10-Q shall satisfy the requirements of this
     Section 7.1(b).

          (c) Officer's Certificate. At the time of delivery of the financial
     statements provided for in Sections 7.1(a) and 7.1(b) above, a certificate
     of an Authorized Officer of the Borrower substantially in the form of
     Exhibit 7.1(c), (i) demonstrating compliance with the financial covenants
     contained in Section 7.2 and the covenant requirements in Sections 7.12(b)
     and 7.13 by calculation thereof as of the end of each such fiscal period,
     (ii) demonstrating compliance with any other terms of this Credit Agreement
     as reasonably requested by the Administrative Agent, (iii) stating that no
     Default or Event of Default exists, or if any Default or Event of Default
     does exist, specifying the nature and extent thereof and what action the
     Borrower proposes to take with respect thereto and (iv) updating Schedule
     6.21 as of the end of such fiscal period.

          (d) Reports. Promptly upon transmission or receipt thereof, copies of
     all financial statements, proxy statements, notices and reports as the
     Borrower or any of its Subsidiaries shall send to shareholders of the
     Borrower generally and, upon request of the Administrative Agent, copies of
     any filings and registrations with, and reports to or from, any
     Governmental Authority which has regulatory authority with respect to the
     Borrower and its Subsidiaries.

          (e) Notices. Upon a Credit Party obtaining knowledge thereof, the
     Borrower will give written notice to the Administrative Agent promptly (and
     in any event within five Business Days) of (i) the occurrence of an event
     or condition consisting of a Default or Event of Default, specifying the
     nature and existence thereof and what action the Borrower proposes to take
     with respect thereto, (ii) the occurrence of any of the following with
     respect to the Borrower or any of its Subsidiaries (A) the pendency or
     commencement of any litigation, arbitration or governmental proceeding
     against the Borrower or any of its Subsidiaries which (x) would have or
     would reasonably be expected to have a Material Adverse Effect, or (y)
     would result in a significant liability to the Credit Parties or (B)
     material non-compliance with, or the institution of any proceedings against
     the Borrower or any of its Subsidiaries with respect to, or the receipt of
     written notice by such Person of


                                      -48-







     potential liability or responsibility for violation, or alleged violation
     of, any Requirement of Law (including, without limitation, Environmental
     Laws) the violation of which would have or would reasonably be expected to
     have a Material Adverse Effect (iii) any change to the Debt Rating of the
     Borrower, (iv) any investigation or proceeding against the Borrower or any
     of its Subsidiaries to suspend, revoke or terminate, any Medicaid Provider
     Agreement, Medicare Provider Agreement, or exclusion from any Medical
     Reimbursement Program, which is reasonably expected to have a Material
     Adverse Effect; and (v) any breach by the Borrower or any of its
     Subsidiaries or any predecessor of the Borrower or any of its Subsidiaries
     of the Corporate Integrity Agreement entered into with the OIG if such
     breach causes the OIG to take any adverse action as a result of such
     breach.

          (f) ERISA. Upon the Borrower, any Subsidiary of the Borrower or any
     ERISA Affiliate obtaining knowledge thereof, such Person shall give written
     notice to the Administrative Agent and each of the Lenders promptly (and in
     any event within two Business Days) of the occurrence of any of the
     following events which has had or would be reasonably expected to have a
     Material Adverse Effect: (i) any Reportable Event, that constitutes an
     ERISA Event; (ii) with respect to any Multiemployer Plan, the receipt of
     notice as prescribed in ERISA or otherwise of any withdrawal liability
     assessed against the Borrower, any Subsidiary of the Borrower or any ERISA
     Affiliate, or of a determination that any Multiemployer Plan is in
     reorganization or insolvent (both within the meaning of Title IV of ERISA);
     (iii) the failure to make full payment on or before the due date (including
     extensions) thereof of all amounts which the Borrower, any Subsidiary of
     the Borrower or any ERISA Affiliate is required to contribute to each Plan
     pursuant to its terms and as required to meet the minimum funding standard
     set forth in ERISA and the Code with respect thereto; or (iv) any change in
     the funding status of any Plan that could have a Material Adverse Effect;
     in each case together with a description of any such event or condition or
     a copy of any such notice and a statement by an Authorized Officer of the
     Borrower briefly setting forth the details regarding such event, condition,
     or notice, and the action, if any, which has been or is being taken or is
     proposed to be taken by such Person with respect thereto. Promptly upon
     request, the Credit Parties shall furnish the Administrative Agent and the
     Lenders with such additional information concerning any Plan as may be
     reasonably requested, including, but not limited to, copies of each annual
     report/return (Form 5500 series), as well as all schedules and attachments
     thereto required to be filed with the Department of Labor and/or the
     Internal Revenue Service pursuant to ERISA and the Code, respectively, for
     each "plan year" (within the meaning of Section 3(39) of ERISA).

          (g) Environmental.

               (i) Subsequent to a written notice from any Governmental
          Authority that would reasonably be expected to result in a Material
          Adverse Effect, or during the existence of an Event of Default, and
          upon the written request of Administrative Agent, the Credit Parties
          will furnish or cause to be furnished to the Administrative Agent, at
          the Credit Parties' expense, a report of an environmental assessment
          of reasonable scope, form and depth, including, where appropriate,
          invasive soil or groundwater sampling, by a consultant reasonably
          acceptable to the Administrative


                                      -49-







          Agent addressing the subject of such notice or, if during the
          existence of an Event of Default, regarding any release or threat of
          release of Hazardous Materials on any Property owned, leased or
          operated by a Credit Party and the compliance by the Credit Parties
          with Environmental Laws. If the Credit Parties fail to deliver such an
          environmental report within seventy-five (75) days after receipt of
          such written request, then the Administrative Agent may arrange for
          same, and the Credit Parties hereby grant to the Administrative Agent
          and its representatives access to the Real Properties and a license of
          a scope reasonably necessary to undertake such an assessment
          (including, where appropriate, invasive soil or groundwater sampling).
          The reasonable cost of any assessment arranged for by the
          Administrative Agent pursuant to this provision will be payable by the
          Credit Parties on demand.

               (ii) Each Credit Party will conduct and complete, or cause to be
          conducted and completed, all investigations, studies, sampling, and
          testing and all remedial, removal, and other actions necessary to
          address all Hazardous Materials on, from, or affecting any Real
          Properties to the extent necessary to be in compliance with all
          Environmental Laws and all other applicable federal, state, and local
          laws, regulations, rules and policies and with the orders and
          directives of all Governmental Authorities exercising jurisdiction
          over such Real Properties to the extent any failure would have or
          would reasonably be expected to have a Material Adverse Effect.

     (h) Other Information. With reasonable promptness upon any such request,
     such other information regarding the business, properties or financial
     condition of the Borrower and its Subsidiaries as the Administrative Agent
     may reasonably request.

     7.2 Financial Covenants.

          (a) Leverage Ratio. The Leverage Ratio, as of the last day of each
     fiscal quarter of the Borrower, shall be less than or equal to 3.25 to 1.0.

          (b) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, as
     of the last day of each fiscal quarter of the Borrower, shall be greater
     than or equal to 1.5 to 1.0.

     7.3 Preservation of Existence and Franchises.

     The Borrower will, and will cause its Subsidiaries to, do all things
necessary to preserve and keep in full force and effect its existence, rights,
franchises, Intellectual Property and authority except as permitted by Section
8.4; provided that neither the Borrower nor any of its Subsidiaries shall be
required to preserve any rights, franchises, Intellectual Property or authority
if the Borrower or such Subsidiary shall determine that the preservation thereof
is no longer desirable in the conduct of its business and if the loss thereof
would not have or would not reasonably be expected to have a Material Adverse
Effect.


                                      -50-







     7.4 Books and Records.

     The Borrower will, and will cause its Subsidiaries to, keep complete and
accurate books and records of its transactions in order to produce its financial
statements in accordance with GAAP (including the establishment and maintenance
of appropriate reserves).

     7.5 Compliance with Law.

     Except to the extent the failure to do so would not have or would not
reasonably be expected to have a Material Adverse Effect, the Borrower will, and
will cause each of its Subsidiaries to, (a) comply with all Requirements of Law,
and all applicable restrictions imposed by all Governmental Authorities,
applicable to it and its Property (including, without limitation, Environmental
Laws and ERISA), (b) conform with and duly observe in all material respects all
laws, rules and regulations and all other valid requirements of any regulatory
authority with respect to the conduct of its business, including without
limitation Titles XVIII and XIX of the Social Security Act, Medicare
Regulations, Medicaid Regulations, and all laws, rules and regulations of
Governmental Authorities, pertaining to the business of the Credit Parties; (c)
obtain and maintain all licenses, permits, certifications and approvals of all
applicable Governmental Authorities as are required for the conduct of its
business as currently conducted and herein contemplated, including without
limitation professional licenses, CLIA certifications, Medicare Provider
Agreements and Medicaid Provider Agreements; and (d) ensure that (i) billing
policies, arrangements, protocols and instructions will comply with
reimbursement requirements under Medicare, Medicaid and other Medical
Reimbursement Programs and will be administered by properly trained personnel;
and (ii) medical director compensation arrangements and other arrangements with
referring physicians will comply with applicable state and federal self-referral
and anti-kickback laws, including without limitation 42 U.S.C. Section
1320a-7b(b)(1) - (b)(2) 42 U.S.C. and 42 U.S.C. Section 1395nn.

     7.6 Payment of Taxes and Other Indebtedness.

     The Borrower will, and will cause its Subsidiaries to, pay, settle or
discharge (a) all material taxes, assessments and governmental charges or levies
imposed upon it, or upon its income or profits, or upon any of its properties,
before they shall become delinquent, (b) all material lawful claims (including
claims for labor, materials and supplies) which, if unpaid, might give rise to a
Lien upon any of its properties, and (c) all of its other material Indebtedness
as it shall become due (to the extent such repayment is not otherwise prohibited
by this Credit Agreement); provided, however, that a Credit Party shall not be
required to pay any such tax, assessment, charge, levy, claim or Indebtedness
which is being contested in good faith by appropriate proceedings and as to
which adequate reserves therefor have been established in accordance with GAAP,
unless the failure to make any such payment (i) would give rise to an immediate
right to foreclose or collect on a Lien securing such amounts or (ii) would have
or would reasonably be expected to have a Material Adverse Effect.


                                      -51-







     7.7 Insurance.

     The Borrower will, and will cause each of its Subsidiaries to, at all times
maintain in full force and effect insurance (including worker's compensation,
liability, casualty and business interruption insurance) with reputable national
companies that are not Affiliates of the Borrower (except to the extent that
self-insurance is maintained in reasonable amounts), in such amounts, covering
such risks and liabilities as is reasonable and prudent.

     7.8 Maintenance of Property.

     The Borrower will, and will cause its Subsidiaries to, maintain and
preserve its properties and equipment in good repair, working order and
condition, normal wear and tear excepted, and will make, or cause to be made, in
such properties and equipment from time to time all repairs, renewals,
replacements, extensions, additions, betterments and improvements thereto as may
be needed or proper, in each case to the extent and in the manner customary for
companies in similar businesses.

     7.9 Performance of Obligations.

     Except to the extent the failure to do so would not have or would not
reasonably be expected to have a Material Adverse Effect, the Borrower will, and
will cause its Subsidiaries to, perform all of its obligations under the terms
of all contracts, agreements or other agreements not evidencing Indebtedness to
which it is a party or by which it or its Properties may be bound.

     7.10 Use of Proceeds.

     The Borrower will use the proceeds of the Loans for its general corporate
purposes.

     7.11 Audits/Inspections.

     Upon reasonable notice and during normal business hours, but not more than
once per calendar year, the Borrower will, and will cause each of its
Subsidiaries to, permit representatives appointed by the Administrative Agent or
any Lender, including, without limitation, independent accountants, agents,
attorneys and appraisers to visit and inspect the Borrower's or any Subsidiary's
Property, including its books and records, its accounts receivable and
inventory, its facilities and its other business assets, and to make photocopies
or photographs thereof and to write down and record any information such
representative obtains and shall permit the Administrative Agent, any Lender or
its representatives to investigate and verify the accuracy of information
provided to the Administrative Agent or the Lenders and to discuss all such
matters with the officers, employees and representatives of the Borrower and/or
its Subsidiaries; provided, however, during the existence of a Default or Event
of Default, the Administrative Agent and the Lenders may request as many
inspections as reasonable under the circumstances. Any expenses incurred in
connection with this Section 7.11 shall be for the account of the Lenders unless
an Event of Default exists in which case such expenses shall be for the account
of the Borrower. Any representatives appointed by the Administrative Agent shall
sign a confidentiality agreement reasonably acceptable to the Borrower prior to
any visit, investigation, inspection or verification permitted by this Section
7.11.


                                      -52-







     7.12 Additional Credit Parties.

          (a) At the time any Person becomes a Material Domestic Subsidiary or
     at the time any Subsidiary of the Borrower guaranties the 2001 Senior
     Credit Agreement or the Senior Unsecured Notes (if it is not already a
     Guarantor), the Borrower shall so notify the Administrative Agent and
     promptly thereafter (but in any event within 30 days) shall cause such
     Person to (i) execute a Joinder Agreement in substantially the same form as
     Exhibit 7.12, and (ii) deliver such other documentation as the
     Administrative Agent may reasonably request in connection with the
     foregoing, including, without limitation, certified resolutions and other
     organizational and authorizing documents of such Person and favorable
     opinions of counsel to such Person (which shall cover, among other things,
     the legality, validity, binding effect and enforceability of the
     documentation referred to above), all in form, content and scope reasonably
     satisfactory to the Administrative Agent.

          (b) If at any time Non-Material Domestic Subsidiaries own assets in an
     aggregate amount greater than five percent (5%) of Total Assets or produce
     revenues in an aggregate amount greater than five percent (5%) of the total
     revenues of the Borrower and its Subsidiaries on a consolidated basis, the
     Borrower will designate one or more Non-Material Domestic Subsidiaries to
     become a Guarantor (and such Non-Material Domestic Subsidiary shall become
     a Guarantor in accordance with clause (a) above) so that after giving
     effect to such designation and action, Non-Material Domestic Subsidiaries
     own assets in the aggregate of equal to or less than five percent (5%) of
     Total Assets and produce revenues in an aggregate amount equal to or less
     than five percent (5%) of the total revenues of the Borrower and its
     Subsidiaries on a consolidated basis.

     7.13 Credit Party Revenues.

     The Borrower will take such action as is necessary to cause the aggregate
annual net revenues of the Credit Parties, as of the end of each fiscal quarter
for the prior twelve month period, to be greater than or equal to the lesser of
(a) $2,800,000,000 or (b) 80% of the total consolidated annual net revenues of
the Borrower and its Subsidiaries for the prior twelve month period.

     7.14 Compliance Program.

     The Borrower will, and will cause each of its Domestic Subsidiaries that
operates a clinical laboratory to, maintain, and be operated in accordance with,
a compliance program which is reasonably designed to provide effective internal
controls that promote adherence to applicable federal and state law and the
program requirements of federal and state health plans, and which includes the
implementation of internal audits and monitoring on a regular basis to monitor
compliance with the requirements of the compliance program and applicable law,
regulations and company policies.


                                      -53-







                                    SECTION 8

                               NEGATIVE COVENANTS

     Each Credit Party hereby covenants and agrees that so long as this Credit
Agreement is in effect and until the Loans, together with interest, fees and
other obligations then due and payable hereunder, have been paid in full and the
Commitments hereunder shall have terminated:

     8.1 Indebtedness.

     The Borrower will not permit any of its Subsidiaries to, contract, create,
incur, assume or permit to exist any Indebtedness, other than:

          (a) Guaranty Obligations arising under this Credit Agreement and the
     other Credit Documents;

          (b) Indebtedness in respect of current accounts payable and accrued
     expenses incurred in the ordinary course of business;

          (c) Indebtedness owing by a Subsidiary of the Borrower to the Borrower
     or another Subsidiary of the Borrower;

          (d) purchase money Indebtedness (including Capital Leases) to finance
     the purchase of fixed assets (including equipment); provided that (i) the
     total of all such Indebtedness shall not exceed an aggregate principal
     amount of $50,000,000 (less any purchase money Indebtedness incurred by the
     Borrower) at any one time outstanding; (ii) such Indebtedness when incurred
     shall not exceed the purchase price of the asset(s) financed; and (iii) no
     such Indebtedness shall be refinanced for a principal amount in excess of
     the principal balance outstanding thereon at the time of such refinancing;

          (e) Indebtedness arising from Permitted Receivables Financings in an
     amount not to exceed $450,000,000, in the aggregate (less any Indebtedness
     incurred by the Borrower arising from Permitted Receivables Financings), at
     any one time outstanding;

          (f) Indebtedness evidenced by Hedging Agreements entered into in the
     ordinary course of business and not for speculative purposes;

          (g) any guaranty of Indebtedness of the Borrower;

          (h) Indebtedness incurred after the Closing Date in connection with
     the acquisition of a Person or Property as long as such Indebtedness
     existed prior to such acquisition and was not created in anticipation
     thereof;

          (i) Indebtedness existing on the Closing Date as set forth on Schedule
     8.1; and


                                      -54-







          (j) other unsecured Indebtedness in an amount not to exceed
     $200,000,000, in the aggregate, at any one time outstanding.

     8.2 Liens.

     The Borrower will not, nor will it permit its Subsidiaries to, contract,
create, incur, assume or permit to exist any Lien with respect to any of its
Property of any kind (whether real or personal, tangible or intangible), whether
now owned or after acquired, other than Permitted Liens.

     8.3 Nature of Business.

     The Borrower will not, nor will it permit its Subsidiaries to, alter the
character of its business from that conducted as of the Closing Date or engage
in any substantial manner in any business other than (a) the business conducted
by the Borrower and its Subsidiaries as of the Closing Date, (b) the business of
MedPlus and its Subsidiaries and (c) other healthcare-related businesses.

     8.4 Consolidation and Merger.

     The Borrower will not, nor will it permit any Subsidiary to, enter into any
transaction of merger or consolidation or liquidate, wind up or dissolve itself,
or suffer any such liquidation, wind-up or dissolution; provided that (subject
to Sections 7.12 and 7.13) (a) a Subsidiary of the Borrower may merge into the
Borrower or another Subsidiary of the Borrower, (b) a Subsidiary of the Borrower
may merge or consolidate with another Person in a transaction otherwise
permitted by Section 8.5 or (c) the Borrower or a Subsidiary of the Borrower may
merge or consolidate with or into another Person if the following conditions are
satisfied:

          (i) if such transaction involves total consideration (cash and
     non-cash) in excess of $100,000,000, the Administrative Agent is given
     prior written notice of such action;

          (ii) if the merger or consolidation involves a Credit Party, the
     surviving entity of such merger or consolidation shall either (A) be such
     Credit Party or (B) be a Subsidiary of the Borrower and expressly assume in
     writing all of the obligations of such Credit Party under the Credit
     Documents; provided that if the transaction is between the Borrower and
     another Person, the Borrower must be the surviving entity;

          (iii) the Credit Parties execute and deliver such documents,
     instruments and certificates as the Administrative Agent may reasonably
     request; and

          (iv) immediately after giving effect to such transaction, no Default
     or Event of Default shall have occurred and be continuing.

     8.5 Sale or Lease of Assets.

     The Borrower will not, nor will it permit its Subsidiaries to, convey,
sell, lease, transfer or otherwise voluntarily dispose of, in one transaction or
a series of transactions, all or any part of its


                                      -55-







business or assets whether now owned or hereafter acquired, including, without
limitation, inventory, receivables, equipment, real property interests (whether
owned or leasehold) and securities, other than a sale, lease, transfer or other
disposal of (a) subject to Sections 7.12 and 7.13, assets from the Borrower or
one of its Subsidiaries to each other; (b) inventory and supplies in the
ordinary course of business; (c) obsolete, surplus, slow-moving, idle or
worn-out assets no longer used or useful in the business of such Credit Party or
the trade-in of equipment for equipment in better condition or of better
quality; (d) assets which constitute a Permitted Investment in the ordinary
course of business; (e) Receivables pursuant to a Permitted Receivables
Financing; (f) Investments in the Strategic Investments Portfolio; and (g)
assets of the Borrower and its Subsidiaries, in addition to those permitted
above in this Section 8.5; provided that in the case of this clause (g) (i) no
Event of Default exists prior to such transfer, (ii) no Default or Event of
Default exists after giving effect to such transfer and (iii) after giving
effect to such transfer, the aggregate amount of all such transfers, calculated
on a net book value basis, does not exceed ten percent (10%) of Total Assets, as
determined on the last day of the most recently ended fiscal quarter of the
Borrower for which an officer's certificate has been delivered pursuant to
Section 7.1(c).

     8.6 Investments.

     The Borrower will not, nor will it permit its Subsidiaries to, make or
permit to exist any Investments except for Permitted Investments.

     8.7 Transactions with Affiliates.

     The Borrower will not, nor will it permit its Subsidiaries to, enter into
any transaction or series of transactions, whether or not in the ordinary course
of business, with any officer, director, shareholder, Subsidiary or Affiliate
other than on terms and conditions substantially as favorable as would be
obtainable in a comparable arm's-length transaction with a Person other than an
officer, director, shareholder, Subsidiary or Affiliate, except that,
notwithstanding the foregoing, each of the following shall be permitted: (a)
transactions between or among the Credit Parties; (b) transactions between or
among the Borrower and its wholly owned Subsidiaries as long as such transaction
is not disadvantageous to the Lenders in any material respect; (c) transactions
between or among the Borrower or one or more of its wholly owned Subsidiaries
(on the one hand) and one of the non-wholly owned Subsidiaries of the Borrower
(on the other hand) as long as none of the equity of such non-wholly owned
Subsidiary is owned or controlled by an officer or director of any Credit Party;
(d) advances to employees permitted by clause (f) of the definition of Permitted
Investments; (e) Dividends; (f) fees, compensation and other benefits paid to,
and customary indemnity and reimbursement provided on behalf of, officers,
directors and employees of any Credit Party in the ordinary course of business;
(g) any employment agreements entered into by the Borrower or any of its
Subsidiaries in the ordinary course of business; (h) any Permitted Receivables
Financing; (i) the SBCL Acquisition Agreement and each agreement contemplated
thereunder (including any registration rights agreement or purchase agreement
related thereto) as in effect on June 27, 2001 and (j) transactions and
agreements in existence on the Closing Date and listed on Schedule 8.7 and, in
each case, any amendment thereto, that is not disadvantageous to the Lenders in
any material respect.


                                      -56-







     8.8 Fiscal Year; Accounting; Organizational Documents.

     The Borrower will not, nor will it permit its Subsidiaries to, unless such
action would not affect the calculation of the financial covenants in Section
7.2 or would not or would not reasonably be likely to affect the rights of the
Lenders under the Credit Documents: (a) change its fiscal year other than
changing the fiscal year of a Subsidiary of the Borrower to a calendar year end,
(b) change its accounting procedures, except as a result of changes in GAAP and
in accordance with Section 1.3 or (c) change its organizational or governing
documents.

     8.9 Stock Repurchases.

     The Borrower will not, nor will it permit its Subsidiaries to, directly or
indirectly, purchase, redeem or otherwise acquire or retire or make any
provisions for redemption, acquisition or retirement of any shares of the
Capital Stock of the Borrower of any class or any warrants or options to
purchase any such shares (collectively, a "Stock Repurchase"); provided that the
Borrower or its Subsidiaries may consummate Stock Repurchases (a) in an amount
up to $50,000,000, in the aggregate, during any consecutive period during the
term of this Credit Agreement that the Leverage Ratio is greater than or equal
to 2.75 to 1.0 and (b) in an unlimited amount as long as (i) the Leverage Ratio
(A) as of the end of the most recent fiscal quarter of the Borrower for which an
officer's certificate has been delivered pursuant to Section 7.1(c) is less than
2.75 to 1.0 and (B) on a Pro Forma Basis giving effect to such Stock Repurchase,
is less than 2.75 to 1.0, (ii) if (A) the amount of Stock Repurchases during the
lesser of (x) the twelve month period preceding the anticipated Stock Repurchase
or (y) the period from the date of the last certificate delivered pursuant to
this clause (ii) and the date of the anticipated Stock Repurchase plus (B) the
amount of the anticipated Stock Repurchase exceeds, in the aggregate,
$100,000,000, the Borrower shall deliver to the Administrative Agent, prior to
making such Stock Repurchase, a certificate of an Authorized Officer of the
Borrower providing calculations showing that the requirement in clause (b)(i)(B)
above is accurate, (iii) on the date of such Stock Repurchase no Event of
Default exists and (iv) after giving effect to such Stock Repurchase no Default
or Event of Default exists.

     8.10 Sale/Leasebacks.

          (a) Except as set forth in clause (b) below, the Borrower will not,
     and will not permit any Subsidiary to, enter into any Sale and Leaseback
     Transaction with respect to any Principal Property unless:

               (i) the Sale and Leaseback Transaction is solely with the
          Borrower or a Guarantor; or

               (ii) the lease is for a period not in excess of five years,
          including renewal rights; or

               (iii) prior to or within 270 days after the completion of the
          sale of such Principal Property in connection with the Sale and
          Leaseback Transaction, the Borrower or its Subsidiary applies the net
          cash proceeds of the sale of such


                                      -57-







          Principal Property to: (A) the prepayment of the Revolving Loans (as
          defined in the 2001 Senior Credit Agreement) under the 2001 Senior
          Credit Agreement (with a corresponding permanent reduction in the
          Revolving Committed Amount (as defined in the 2001 Senior Credit
          Agreement)) or the prepayment of debt ranking equally with such
          Revolving Loans; or (B) the acquisition of different property,
          facilities or equipment or the expansion of the Borrower and its
          Subsidiaries' existing business, including the acquisition of other
          businesses.

          (b) In addition to the Sale and Leaseback Transactions permitted by
     clause (a) above, the Borrower or any of its Subsidiaries may enter into
     any Sale and Leaseback Transactions if all Attributable Debt (measured, in
     each case, at the time such Sale and Leaseback Transaction is entered into
     by the Borrower or its Subsidiary) in respect of such Sale and Leaseback
     Transactions (not including any Sale and Leaseback Transactions permitted
     under clause (a) above), in the aggregate, does not exceed 5% of Total
     Assets.

                                    SECTION 9

                                EVENTS OF DEFAULT

     9.1 Events of Default.

     An Event of Default shall exist upon the occurrence, and during the
continuation, of any of the following specified events (each an "Event of
Default"):

          (a) Payment. Any Credit Party shall default in the payment (i) when
     due of any principal of any of the Loans or (ii) within three Business Days
     of when due of any interest on the Loans or any fees or other amounts owing
     hereunder, under any of the other Credit Documents or in connection
     herewith.

          (b) Representations. Any representation, warranty or statement made or
     deemed to be made by any Credit Party herein, in any of the other Credit
     Documents, or in any statement or certificate delivered or required to be
     delivered pursuant hereto or thereto shall prove untrue in any material
     respect on the date as of which it was made or deemed to have been made.

          (c) Covenants. Any Credit Party shall:

               (i) default in the due performance or observance of any term,
          covenant or agreement contained in Sections 7.2, 7.3, 7.10, 7.12, 7.13
          or 7.15 or Section 8 inclusive;

               (ii) default in the due performance or observance by it of any
          term, covenant or agreement contained in Section 7.1 (excepting
          Section 7.1(e) for which the unremedied period shall only be five
          Business Days) and 7.11 and such default shall continue unremedied for
          a period of ten Business Days; or


                                      -58-







               (iii) default in the due performance or observance by it of any
          term, covenant or agreement (other than those referred to in
          subsections (a), (b) or (c)(i) or (ii) of this Section 9.1) contained
          in this Credit Agreement and such default shall continue unremedied
          for a period of at least 30 days after the earlier of an Authorized
          Officer of the Borrower becoming aware of such default or notice
          thereof given by the Administrative Agent.

          (d) Other Credit Documents. (i) Any Credit Party shall default in the
     due performance or observance of any term, covenant or agreement in any of
     the other Credit Documents and such default shall continue unremedied for a
     period of at least 30 days after the earlier of an Authorized Officer of
     the Borrower becoming aware of such default or notice thereof given by the
     Administrative Agent, (ii) any Credit Document shall fail to be in full
     force and effect or any Credit Party shall so assert or (iii) any Credit
     Document shall fail to give the Administrative Agent and/or the Lenders the
     rights, powers and privileges purported to be created by such Credit
     Document.

          (e) Guaranties. The guaranty given by the Credit Parties hereunder or
     by any Additional Credit Party or material provision thereof shall cease to
     be in full force and effect, or any Guarantor or any Person acting by or on
     behalf of such Guarantor shall deny or disaffirm such Guarantor's
     obligations under such guaranty or such Guarantor shall default in the due
     payment or performance of such guaranty.

          (f) Bankruptcy, etc. The occurrence of any of the following with
     respect to a Credit Party (i) a court or governmental agency having
     jurisdiction in the premises shall enter a decree or order for relief in
     respect of a Credit Party in an involuntary case under any applicable
     bankruptcy, insolvency or other similar law now or hereafter in effect, or
     appoint a receiver, liquidator, assignee, custodian, trustee, sequestrator,
     administrator or similar official of a Credit Party or for any substantial
     part of its Property or ordering the winding up or liquidation of, or an
     administrator in respect of, its affairs; or (ii) an involuntary case under
     any applicable bankruptcy, insolvency or other similar law now or hereafter
     in effect is commenced against a Credit Party and such petition remains
     unstayed and in effect for a period of 60 consecutive days; or (iii) a
     Credit Party shall commence a voluntary case under any applicable
     bankruptcy, insolvency or other similar law now or hereafter in effect, or
     consent to the entry of an order for relief in an involuntary case under
     any such law, or consent to the appointment or taking possession by a
     receiver, liquidator, assignee, custodian, trustee, sequestrator,
     administrator or similar official of such Person or any substantial part of
     its Property or make any general assignment for the benefit of creditors;
     or (iv) a Credit Party shall fail generally, or shall admit in writing its
     inability, to pay its debts as they become due or any action shall be taken
     by such Person in furtherance of any of the aforesaid purposes.

          (g) Defaults under Other Indebtedness. With respect to any
     Indebtedness in excess of $50,000,000 (other than Indebtedness outstanding
     under this Credit Agreement) of the Borrower or any of its Subsidiaries (A)
     such Person shall (x) default in any payment (beyond the applicable grace
     period with respect thereto, if any) with respect to any such


                                      -59-







     Indebtedness, or (y) default (after giving effect to any applicable grace
     period) in the observance or performance relating to such Indebtedness or
     contained in any instrument or agreement evidencing, securing or relating
     thereto, or any other event or condition shall occur or condition exist,
     the effect of which default or other event or condition is to cause, or
     permit, the holder or holders of such Indebtedness (or trustee or agent on
     behalf of such holders, if any) to require (determined without regard to
     whether any notice or lapse of time is required) any such Indebtedness to
     become due prior to its stated maturity; or (B) any such Indebtedness shall
     be declared due and payable, or required to be prepaid other than by a
     regularly scheduled required prepayment prior to the stated maturity
     thereof; or (C) any such Indebtedness shall mature and remain unpaid.

          (h) Judgments. One or more judgments, orders, or decrees shall be
     entered against any one or more of the Borrower and its Subsidiaries
     involving a liability of $50,000,000 or more, in the aggregate, (to the
     extent not paid, covered by insurance provided by a carrier who has
     acknowledged coverage or covered by an indemnification from Corning
     Incorporated or SmithKline Beecham PLC) and such judgments, orders or
     decrees (i) are the subject of any enforcement proceeding commenced by any
     creditor or (ii) shall continue unsatisfied, undischarged and unstayed for
     a period ending on the first to occur of (A) the last day on which such
     judgment, order or decree becomes final and unappealable or (B) 60 days.

          (i) ERISA. The occurrence of any of the following events or conditions
     which individually or in the aggregate has had or would reasonably be
     expected to have a Material Adverse Effect: (i) any "accumulated funding
     deficiency," as such term is defined in Section 302 of ERISA and Section
     412 of the Code, whether or not waived, shall exist with respect to any
     Plan, other than a Multiemployer Plan, or any Lien shall arise on the
     assets of the Borrower, any Subsidiary of the Borrower or any ERISA
     Affiliate in favor of the PBGC or a Plan, other than a Multiemployer Plan;
     (ii) an ERISA Event shall occur with respect to a Single Employer Plan,
     which is reasonably likely to result in the termination of such Plan for
     purposes of Title IV of ERISA; (iii) an ERISA Event shall occur with
     respect to a Multiemployer Plan or Multiple Employer Plan, which is
     reasonably likely to result in (A) the termination of such plan for
     purposes of Title IV of ERISA, or (B) the Borrower, any Subsidiary of the
     Borrower or any ERISA Affiliate incurring any liability in connection with
     a withdrawal from, reorganization of (within the meaning of Section 4241 of
     ERISA), or insolvency (within the meaning of Section 4245 of ERISA) of such
     plan; (iv) any prohibited transaction (within the meaning of Section 406 of
     ERISA or Section 4975 of the Code) or breach of fiduciary responsibility
     shall occur which may subject the Borrower, any Subsidiary of the Borrower
     or any ERISA Affiliate to any liability under Sections 406, 409, 502(i), or
     502(l) of ERISA or Section 4975 of the Code, or under any agreement or
     other instrument pursuant to which the Borrower, any Subsidiary of the
     Borrower or any ERISA Affiliate has agreed or is required to indemnify any
     Person against any such liability; or (v) the Borrower, any Subsidiary of
     the Borrower or any ERISA Affiliate fails to pay when due, after the
     expiration of any applicable grace period, any installment payment with
     respect to its withdrawal liability under Section 4201 of ERISA under a
     Multiemployer Plan in an aggregate amount in excess of $50,000,000.


                                      -60-







          (j) Ownership. There shall occur a Change of Control.

          (k) Cross Default. There shall occur an Event of Default as defined in
     the 2001 Senior Credit Agreement to the extent the 2001 Senior Credit
     Agreement has not been terminated, or an Event of Default as defined in the
     2002 Term Loan Agreement, unless the 2002 Term Loan Agreement has been
     fully repaid and the obligations thereunder satisfied (other than
     contingent obligations therein stated to survive termination).

     9.2 Acceleration; Remedies.

     Upon the occurrence and during the continuation of an Event of Default, the
Administrative Agent may or shall, upon the request and direction of the
Required Lenders, take the following actions without prejudice to the rights of
the Administrative Agent or any Lender to enforce its claims against the Credit
Parties, except as otherwise specifically provided for herein:

          (a) Termination of Commitments. Declare the Commitment terminated
     whereupon the Commitment shall be immediately terminated.

          (b) Acceleration of Loans. Declare the unpaid principal of and any
     accrued interest in respect of all Loans and any and all other Indebtedness
     or obligations of any and every kind owing by a Credit Party to any of the
     Lenders under the Credit Documents to be due whereupon the same shall be
     immediately due and payable without presentment, demand, protest or other
     notice of any kind, all of which are hereby waived by the Credit Parties.

          (c) Enforcement of Rights. To the extent permitted by law, enforce any
     and all rights and interests created and existing under the Credit
     Documents, including, without limitation, all rights and remedies against a
     Guarantor and all rights of set-off.

Notwithstanding the foregoing, if an Event of Default specified in Section
9.1(f) shall occur, then the Commitment shall automatically terminate and all
Loans, all accrued interest in respect thereof, all accrued and unpaid fees and
other indebtedness or obligations owing to the Lenders hereunder shall
immediately become due and payable without the giving of any notice or other
action by the Administrative Agent or the Lenders, which notice or other action
is expressly waived by the Credit Parties.

Notwithstanding the fact that enforcement powers reside primarily with the
Administrative Agent, each Lender has, to the extent permitted by law, a
separate right of payment and shall be considered a separate "creditor" holding
a separate "claim" within the meaning of Section 101(5) of the Bankruptcy Code
or any other insolvency statute.

     9.3 Allocation of Payments After Event of Default.

     Notwithstanding any other provisions of this Credit Agreement, after the
occurrence and during the continuation of an Event of Default, all amounts
collected or received by the


                                      -61-







Administrative Agent or any Lender on account of amounts outstanding under any
of the Credit Documents shall be paid over or delivered as follows:

          FIRST, to the payment of all reasonable out-of-pocket costs and
     expenses (including without limitation reasonable Attorneys' Costs) of the
     Administrative Agent or any of the Lenders in connection with enforcing the
     rights of the Lenders under the Credit Documents, pro rata as set forth
     below;

          SECOND, to payment of any fees owed to the Administrative Agent or any
     Lender, pro rata as set forth below;

          THIRD, to the payment of all accrued interest payable to the Lenders
     hereunder, pro rata as set forth below;

          FOURTH, to the payment of the outstanding principal amount of the
     Loans, pro rata as set forth below;

          FIFTH, to all other obligations which shall have become due and
     payable under the Credit Documents and not repaid pursuant to clauses
     "FIRST" through "FOURTH" above; and

          SIXTH, to the payment of the surplus, if any, to whoever may be
     lawfully entitled to receive such surplus.

In carrying out the foregoing, (a) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category; and (b) each of the Lenders shall receive an amount equal
to its pro rata share (based on the proportion that the then outstanding Loans
held by such Lender bears to the aggregate then outstanding Loans of amounts
available to be applied).

                                   SECTION 10

                                AGENCY PROVISIONS

     10.1 Appointment. Each Lender hereby irrevocably appoints, designates and
authorizes the Administrative Agent to take such action on its behalf under the
provisions of this Credit Agreement and each other Credit Document and to
exercise such powers and perform such duties as are expressly delegated to it by
the terms of this Credit Agreement or any other Credit Document, together with
such powers as are reasonably incidental thereto. Notwithstanding any provision
to the contrary contained elsewhere herein or in any other Credit Document, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, nor shall the Administrative Agent have or be deemed
to have any fiduciary or trustee relationship with any Lender or participant,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Credit


                                      -62-







Agreement or any other Credit Document or otherwise exist against the
Administrative Agent. Without limiting the generality of the foregoing sentence,
the use of the term "agent" herein and in the other Credit Documents with
reference to the Administrative Agent is not intended to connote any fiduciary
or other implied (or express) obligations arising under agency doctrine of any
applicable law. Instead, such term is used merely as a matter of market custom,
and is intended to create or reflect only an administrative relationship between
independent contracting parties.

     10.2 Delegation of Duties.

     The Administrative Agent may execute any of its duties under this Credit
Agreement or any other Credit Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel and other
consultants or experts concerning all matters pertaining to such duties. The
Administrative Agent shall not be responsible for the negligence or misconduct
of any agent or attorney-in-fact that it selects with reasonable care.

     10.3 Exculpatory Provisions.

     No Agent-Related Person shall (a) be liable for any action taken or omitted
to be taken by any of them under or in connection with this Credit Agreement or
any other Credit Document or the transactions contemplated hereby (except for
its own gross negligence or willful misconduct in connection with its duties
expressly set forth herein), or (b) be responsible in any manner to any Lender
or participant for any recital, statement, representation or warranty made by
any Credit Party or any officer thereof, contained herein or in any other Credit
Document, or in any certificate, report, statement or other document referred to
or provided for in, or received by the Administrative Agent under or in
connection with, this Credit Agreement or any other Credit Document, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Credit Agreement or any other Credit Document, or for any failure of any Credit
Party or any other party to any Credit Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender or participant to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this Credit
Agreement or any other Credit Document, or to inspect the properties, books or
records of any Credit Party or any Affiliate thereof.

     10.4 Reliance on Communications.

          (a) The Administrative Agent shall be entitled to rely, and shall be
     fully protected in relying, upon any writing, communication, signature,
     resolution, representation, notice, consent, certificate, affidavit,
     letter, telegram, facsimile, telex or telephone message, statement or other
     document or conversation believed by it to be genuine and correct and to
     have been signed, sent or made by the proper Person or Persons, and upon
     advice and statements of legal counsel (including counsel to any Credit
     Party), independent accountants and other experts selected by the
     Administrative Agent. The Administrative Agent may deem and treat each
     Lender as the owner of its interests hereunder for all purposes unless a
     written notice of assignment, negotiation or transfer thereof shall have
     been delivered to the Administrative Agent in accordance with


                                      -63-







     Section 11.3(b). The Administrative Agent shall be fully justified in
     failing or refusing to take any action under any Credit Document unless it
     shall first receive such advice or concurrence of the Required Lenders as
     it deems appropriate and, if it so requests, it shall first be indemnified
     to its satisfaction by the Lenders against any and all liability and
     expense which may be incurred by it by reason of taking or continuing to
     take any such action. The Administrative Agent shall in all cases be fully
     protected in acting, or in refraining from acting, under this Credit
     Agreement or any other Credit Document in accordance with a request or
     consent of the Required Lenders or all the Lenders, if required hereunder,
     and such request and any action taken or failure to act pursuant thereto
     shall be binding upon all the Lenders and participants, and their
     respective successors and assigns. Where this Credit Agreement expressly
     permits or prohibits an action unless the Required Lenders otherwise
     determine, the Administrative Agent shall, and in all other instances, the
     Administrative Agent may, but shall not be required to, initiate any
     solicitation for the consent or a vote of the Lenders.

          (b) For purposes of determining compliance with the conditions
     specified in Section 5.1, each Lender that has signed this Credit Agreement
     shall be deemed to have consented to, approved or accepted or to be
     satisfied with, each document or other matter either sent by the
     Administrative Agent to such Lender for consent, approval, acceptance or
     satisfaction, or required thereunder to be consented to or approved by or
     acceptable or satisfactory to a Lender.

     10.5 Notice of Default.

     The Administrative Agent shall not be deemed to have knowledge or notice of
the occurrence of any Default or Event of Default, except with respect to
defaults in the payment of principal, interest and fees required to be paid to
the Administrative Agent for the account of the Lenders, unless the
Administrative Agent shall have received written notice from a Lender or the
Borrower referring to this Credit Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default." The
Administrative Agent will notify the Lenders of its receipt of any such notice.
The Administrative Agent shall take such action with respect to such Default or
Event of Default as may be reasonably directed by the Required Lenders in
accordance with Section 9.2; provided, however, that unless and until the
Administrative Agent has received any such direction, the Administrative Agent
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to such Default or Event of Default as it shall deem
advisable or in the best interest of the Lenders.

     10.6 Non-Reliance on Administrative Agent and Other Lenders.

     Each Lender acknowledges that no Agent-Related Person has made any
representation or warranty to it, and that no act by the Administrative Agent
hereinafter taken, including any consent to and acceptance of any assignment or
review of the affairs of any Credit Party or any Affiliate thereof, shall be
deemed to constitute any representation or warranty by any Agent-Related Person
to any Lender as to any matter, including whether Agent-Related Persons have
disclosed material information in their possession. Each Lender represents to
the Administrative Agent that it has, independently and without reliance upon
any Agent-Related Person or any


                                      -64-







other Lender and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
prospects, operations, Property, financial and other condition and
creditworthiness of the Credit Parties and their respective Affiliates, and all
applicable bank or other regulatory laws relating to the transactions
contemplated hereby, and made its own decision to enter into this Credit
Agreement and to extend credit to the Borrower hereunder. Each Lender also
represents that it will, independently and without reliance upon any
Agent-Related Person or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Credit Agreement and the other Credit Documents, and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, Property, financial and other condition and
creditworthiness of the Borrower. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent herein, the Administrative Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, prospects, operations, Property, financial and other
condition or creditworthiness of any of the Credit Parties or any of their
respective Affiliates which may come into the possession of any Agent-Related
Person.

     10.7 Indemnification.

     Whether or not the transactions contemplated hereby are consummated, the
Lenders shall indemnify upon demand each Agent-Related Person (to the extent not
reimbursed by or on behalf of any Credit Party and without limiting the
obligation of any Credit Party to do so), pro rata, and hold harmless each
Agent-Related Person from and against any and all Indemnified Liabilities
incurred by it; provided, however, that no Lender shall be liable for the
payment to any Agent-Related Person of any portion of such Indemnified
Liabilities resulting from such Agent-Related Person's gross negligence or
willful misconduct; it being understood that no action taken in accordance with
the directions of the Required Lenders shall be deemed to constitute gross
negligence or willful misconduct for purposes of this Section 10.7. Without
limitation of the foregoing, each Lender shall reimburse the Administrative
Agent upon demand for its ratable share of any costs or out-of-pocket expenses
(including Attorney Costs) incurred by the Administrative Agent in connection
with the preparation, execution, delivery, administration, modification,
amendment or enforcement (whether through negotiations, legal proceedings or
otherwise) of, or legal advice in respect of rights or responsibilities under,
this Credit Agreement, any other Credit Document, or any document contemplated
by or referred to herein, to the extent that the Administrative Agent is not
reimbursed for such expenses by or on behalf of the Credit Parties. The
undertaking in this Section 10.7 shall survive termination of the Commitments,
the payment of all Obligations hereunder and the resignation or replacement of
the Administrative Agent.

     10.8 Administrative Agent in Its Individual Capacity.

     Sumitomo Mitsui Banking Corporation ("SMBC") may make loans to, issue
letters of credit for the account of, accept deposits from, acquire equity
interests in and generally engage in any kind of banking, trust, financial
advisory, underwriting or other business with each of the Credit Parties and
their respective Affiliates as though SMBC were not the Administrative Agent


                                      -65-







hereunder and without notice to or consent of the Lenders. The Lenders
acknowledge that, pursuant to such activities, SMBC or its Affiliates may
receive information regarding any Credit Party or its Affiliates (including
information that may be subject to confidentiality obligations in favor of such
Credit Party or such Affiliate) and that the Administrative Agent shall be under
no obligation to provide such information to them. With respect to its Loan,
SMBC shall have the same rights and powers under this Credit Agreement as any
other Lender and may exercise such rights and powers as though it were not the
Administrative Agent, and the terms "Lender" and "Lenders" include SMBC in its
individual capacity.

     10.9 Successor Agent.

     The Administrative Agent may resign as Administrative Agent upon 30 days'
notice to the Lenders. If the Administrative Agent resigns under this Credit
Agreement, the Required Lenders shall appoint from among the Lenders a successor
administrative agent for the Lenders which successor administrative agent (such
appointment, absent the existence of an Event of Default, to be subject to the
consent of the Borrower, which consent of the Borrower shall not be unreasonably
withheld or delayed). If no successor administrative agent is appointed prior to
the effective date of the resignation of the Administrative Agent, the
Administrative Agent may appoint, after consulting with the Lenders and the
Borrower, a successor administrative agent from among the Lenders. Upon the
acceptance of its appointment as successor administrative agent hereunder, such
successor administrative agent shall succeed to all the rights, powers and
duties of the retiring Administrative Agent and the term "Administrative Agent"
shall mean such successor administrative agent and the retiring Administrative
Agent's appointment, powers and duties as Administrative Agent shall be
terminated. After any retiring Administrative Agent's resignation hereunder as
Administrative Agent, the provisions of this Section 10 and Sections 11.5 and
11.10 shall continue to inure to its benefit as to any actions taken or omitted
to be taken by it while it was Administrative Agent under this Credit Agreement.
If no successor administrative agent has accepted appointment as Administrative
Agent by the date which is 30 days following a retiring Administrative Agent's
notice of resignation, the retiring Administrative Agent's resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the
duties of the Administrative Agent hereunder until such time, if any, as the
Required Lenders appoint a successor agent as provided for above.

                                   SECTION 11

                                  MISCELLANEOUS

     11.1 Notices.

     Except as otherwise expressly provided herein, all notices and other
communications shall have been duly given and shall be effective (a) when
delivered, (b) when transmitted via telecopy (or other facsimile device) to the
number set forth on Schedule 11.1, (c) the Business Day following the day on
which the same has been delivered prepaid (or subject to an invoice arrangement)
to a reputable national overnight air courier service, or (d) the third Business
Day following the day on which the same is sent by certified or registered mail,
postage prepaid, in each case to the respective


                                      -66-







parties at the address or telecopy numbers set forth on Schedule 11.1, or at
such other address as such party may specify by written notice to the other
parties hereto.

     11.2 Right of Set-Off.

          In addition to any rights now or hereafter granted under applicable
     law or otherwise, and not by way of limitation of any such rights, upon the
     occurrence of an Event of Default and the commencement of remedies
     described in Section 9.2, each Lender is authorized at any time and from
     time to time, without presentment, demand, protest or other notice of any
     kind (all of which rights being hereby expressly waived), to set-off and to
     appropriate and apply any and all deposits (general or special) and any
     other indebtedness at any time held or owing by such Lender (including,
     without limitation, branches, agencies or Affiliates of such Lender
     wherever located) to or for the credit or the account of any Credit Party
     against obligations and liabilities of such Credit Party to the Lenders
     hereunder, under the Notes, the other Credit Documents or otherwise,
     irrespective of whether the Administrative Agent or the Lenders shall have
     made any demand hereunder and although such obligations, liabilities or
     claims, or any of them, may be contingent or unmatured, and any such
     set-off shall be deemed to have been made immediately upon the occurrence
     of an Event of Default even though such charge is made or entered on the
     books of such Lender subsequent thereto. The Credit Parties hereby agree
     that any Person purchasing a participation in the Loans and Commitments
     hereunder pursuant to Sections 11.3(e) or 3.8 may exercise all rights of
     set-off with respect to its participation interest as fully as if such
     Person were a Lender hereunder.

     11.3 Benefit of Agreement.

          (a) Generally. This Credit Agreement shall be binding upon and inure
     to the benefit of and be enforceable by the respective successors and
     assigns of the parties hereto; provided that none of the Credit Parties may
     assign and transfer any of its interests (except as permitted by Section
     8.4 or 8.5) without the prior written consent of the Lenders; and provided
     further that the rights of each Lender to transfer, assign or grant
     participations in its rights and/or obligations hereunder shall be limited
     as set forth below in this Section 11.3.

          (b) Assignments. Each Lender may assign to one or more Eligible
     Assignees all or a portion of its rights and obligations under this Credit
     Agreement (including, without limitation, all or a portion of its Loans,
     its Notes and its Commitments); provided, however, that:

               (i) each such assignment shall be to an Eligible Assignee;

               (ii) except (A) in the case of an assignment to another Lender,
          (B) in the case of an assignment of all of a Lender's rights and
          obligations under this Credit Agreement, or (C) with the consent of
          the Administrative Agent and the Borrower, any such partial assignment
          shall be in an amount at least equal to $5,000,000 (or, if less, the
          remaining amount of the outstanding Term Loan, of such assigning
          Lender) or an integral multiple of $500,000 in excess thereof;


                                      -67-







               (iii) each such assignment by a Lender shall be of a constant,
          and not varying, percentage of all of its rights and obligations under
          this Credit Agreement and the Notes; and

               (iv) the parties to such assignment shall execute and deliver to
          the Administrative Agent for its acceptance an Assignment Agreement in
          substantially the form of Exhibit 11.3(b), together with a processing
          fee from the assignor of $3,500.

     Upon execution, delivery, and acceptance of such Assignment Agreement, the
     assignee thereunder shall be a party hereto and, to the extent of such
     assignment, have the obligations, rights, and benefits of a Lender
     hereunder and the assigning Lender shall, to the extent of such assignment,
     relinquish its rights and be released from its obligations under this
     Credit Agreement. Upon the consummation of any assignment pursuant to this
     Section 11.3(b), the assignor, the Administrative Agent and the Borrower
     shall make appropriate arrangements so that, if required or requested, new
     Notes are issued to the assignor and the assignee. If the assignee is a
     foreign corporation, foreign partnership or foreign trust within the
     meaning of the Code, it shall deliver to the Borrower and the
     Administrative Agent certification as to exemption from deduction or
     withholding of taxes in accordance with Section 3.13.

     By executing and delivering an assignment agreement in accordance with this
     Section 11.3(b), the assigning Lender thereunder and the assignee
     thereunder shall be deemed to confirm to and agree with each other and the
     other parties hereto as follows: (A) such assigning Lender warrants that it
     is the legal and beneficial owner of the interest being assigned thereby
     free and clear of any adverse claim and the assignee warrants that it is an
     Eligible Assignee; (B) except as set forth in clause (A) above, such
     assigning Lender makes no representation or warranty and assumes no
     responsibility with respect to any statements, warranties or
     representations made in or in connection with this Credit Agreement, any of
     the other Credit Documents or any other instrument or document furnished
     pursuant hereto or thereto, or the execution, legality, validity,
     enforceability, genuineness, sufficiency or value of this Credit Agreement,
     any of the other Credit Documents or any other instrument or document
     furnished pursuant hereto or thereto or the financial condition of any
     Credit Party or the performance or observance by any Credit Party of any of
     its obligations under this Credit Agreement, any of the other Credit
     Documents or any other instrument or document furnished pursuant hereto or
     thereto; (C) such assignee represents and warrants that it is legally
     authorized to enter into such assignment agreement; (D) such assignee
     confirms that it has received a copy of this Credit Agreement, the other
     Credit Documents and such other documents and information as it has deemed
     appropriate to make its own credit analysis and decision to enter into such
     assignment agreement; (E) such assignee will independently and without
     reliance upon the Administrative Agent, such assigning Lender or any other
     Lender, and based on such documents and information as it shall deem
     appropriate at the time, continue to make its own credit decisions in
     taking or not taking action under this Credit Agreement and the other
     Credit Documents; (F) such assignee appoints and authorizes the
     Administrative Agent to take such action on its behalf and to


                                      -68-







     exercise such powers under this Credit Agreement or any other Credit
     Document as are delegated to the Administrative Agent by the terms hereof
     or thereof, together with such powers as are reasonably incidental thereto;
     and (G) such assignee agrees that it will perform in accordance with their
     terms all the obligations which by the terms of this Credit Agreement and
     the other Credit Documents are required to be performed by it as a Lender.

          (c) Register. The Administrative Agent shall maintain a copy of each
     Assignment Agreement delivered to and accepted by it and a register for the
     recordation of the names and addresses of the Lenders and the Commitment
     of, and principal amount of the Loans owing to, each Lender from time to
     time (the "Register"). The entries in the Register shall be conclusive and
     binding for all purposes, absent manifest error, and the Borrower, the
     Administrative Agent and the Lenders may treat each Person whose name is
     recorded in the Register as a Lender hereunder for all purposes of this
     Credit Agreement. The Register shall be available for inspection by the
     Borrower or any Lender at any reasonable time and from time to time upon
     reasonable prior notice.

          (d) Acceptance. Upon its receipt of an Assignment Agreement executed
     by the parties thereto, together with any Note subject to such assignment
     and payment of the processing fee, the Administrative Agent shall, if such
     Assignment Agreement has been completed and is in substantially the form of
     Exhibit 11.3(b), (i) accept such Assignment Agreement, (ii) record the
     information contained therein in the Register and (iii) give prompt notice
     thereof to the parties thereto.

          (e) Participations. Each Lender may sell participations to one or more
     Persons in all or a portion of its rights, obligations or rights and
     obligations under this Credit Agreement (including all or a portion of its
     Commitment and its Loans); provided, however, that (i) such Lender's
     obligations under this Credit Agreement shall remain unchanged, (ii) such
     Lender shall remain solely responsible to the other parties hereto for the
     performance of such obligations, (iii) the participant shall be entitled to
     the benefit of the yield protection provisions contained in Sections 3.9
     through 3.15, inclusive (but not for a greater amount than the Lender would
     be entitled to), and of the right of set-off contained in Section 11.2,
     (iv) the Borrower shall continue to deal solely and directly with such
     Lender in connection with such Lender's rights and obligations under this
     Credit Agreement, and (v) such Lender shall retain the sole right to
     enforce the obligations of the Borrower relating to its Loans and its Notes
     and to approve any amendment, modification, or waiver of any provision of
     this Credit Agreement (other than amendments, modifications, or waivers
     decreasing the amount of principal of or the rate at which interest is
     payable on such Loans or Notes, extending any scheduled principal payment
     date or date fixed for the payment of interest on such Loans or Notes,
     extending its Commitment or releasing the Borrower or all or substantially
     all of the Guarantors from its or their respective obligations under the
     Credit Documents).

          (f) Unrestricted Assignments. Notwithstanding any other provision set
     forth in this Credit Agreement, any Lender may at any time (i) assign and
     pledge all or any portion of its Loans and its Notes to any Federal Reserve
     Bank as collateral security pursuant to Regulation A and any Operating
     Circular issued by such Federal Reserve


                                      -69-







     Bank or (ii) pledge all or any portion of its rights (but not its
     obligations to make Loans hereunder to any trustee or holders of
     obligations owed, or securities issued, by such Lender as security for such
     obligations or securities or to any other representative of such holders;
     provided that such trustee or holder shall not have the right to become a
     Lender hereunder. No such assignment shall release the assigning Lender
     from its obligations hereunder.

          (g) Information. Any Lender may furnish any information concerning the
     Borrower or any of its Subsidiaries in the possession of such Lender from
     time to time to assignees and participants (including prospective assignees
     and participants), subject, however, to the provisions of Section 11.15.

          (h) CLO's. Notwithstanding anything to the contrary contained herein,
     any Lender, (a "Granting Lender") may grant to a special purpose funding
     vehicle (an "SPC") the option to fund all or any part of any Loan that such
     Granting Lender would otherwise be obligated to fund pursuant to this
     Credit Agreement; provided that (i) nothing herein shall constitute a
     commitment by any SPC to fund any Loan, (ii) if an SPC elects not to
     exercise such option or otherwise fails to fund all or any part of such
     Loan, the Granting Lender shall be obligated to fund such Loan pursuant to
     the terms hereof, (iii) no SPC shall have any voting rights pursuant to
     Section 11.6 and (iv) with respect to notices, payments and other matters
     hereunder, the Credit Parties, the Administrative Agent and the Lenders
     shall not be obligated to deal with an SPC, but may limit their
     communications and other dealings relevant to such SPC to the applicable
     Granting Lender. The funding of a Loan by an SPC hereunder shall utilize
     the Loan Commitment of the Granting Lender to the same extent that, and as
     if, such Loan were funded by such Granting Lender. Each party hereto hereby
     agrees that no SPC shall be liable for any indemnity or payment under this
     Credit Agreement for which a Lender would otherwise be liable for so long
     as, and to the extent, the Granting Lender provides such indemnity or makes
     such payment. Notwithstanding anything to the contrary contained in this
     Credit Agreement, any SPC may disclose on a confidential basis any
     non-public information relating to its funding of Loans to any rating
     agency, commercial paper dealer or provider of any surety or guarantee to
     such SPC. This clause (h) may not be amended without the prior written
     consent of each Granting Lender, all or any part of whose Loan is being
     funded by an SPC at the time of such amendment.

     11.4 No Waiver; Remedies Cumulative.

     No failure or delay on the part of the Administrative Agent or any Lender
in exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Borrower or any Credit Party and
the Administrative Agent or any Lender shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
or under any other Credit Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder or
thereunder. The rights and remedies provided herein are cumulative and not
exclusive of any rights or remedies which the Administrative Agent or any Lender
would otherwise have. No notice to or demand on any Credit Party in any case
shall entitle any Credit Party to any other or further notice or demand in
similar or


                                      -70-







other circumstances or constitute a waiver of the rights of the Administrative
Agent or the Lenders to any other or further action in any circumstances without
notice or demand.

     11.5 Payment of Expenses; Indemnification.

     The Borrower agrees to: (a) pay all reasonable out-of-pocket costs and
expenses of the Administrative Agent and the Lenders in connection with (A)
enforcement of the Credit Documents and the documents and instruments referred
to therein, including, without limitation, in connection with any such
enforcement, the reasonable Attorneys' Costs of the Administrative Agent and
each of the Lenders and (B) any bankruptcy or insolvency proceeding of any
Credit Party, and (b) indemnify the Administrative Agent and each Lender, its
officers, directors, employees, representatives, counsel and agents from and
hold each of them harmless against any and all losses, liabilities, claims,
damages or expenses incurred by any of them as a result of, or arising out of,
or in any way related to, or by reason of, any investigation, litigation or
other proceeding (whether or not the Administrative Agent or any Lender is a
party thereto) related to the entering into and/or performance of any Credit
Document or the use of proceeds of any Loans (including other extensions of
credit) hereunder or the consummation of any other transactions contemplated in
any Credit Document, including, without limitation, reasonable Attorneys' Costs
incurred in connection with any such investigation, litigation or other
proceeding (but excluding any such losses, liabilities, claims, damages or
expenses to the extent incurred by reason of gross negligence or willful
misconduct on the part of the Person to be indemnified), (all of the foregoing,
collectively, "Indemnified Liabilities"). The agreements in this Section 11.5
shall survive the termination of the Commitments and the repayment of the Credit
Party Obligations.

     11.6 Amendments, Waivers and Consents.

     So long as the Initial Lender is the sole Lender under this Agreement and
is party to the 2001 Senior Credit Agreement, any amendment to the covenants of
the 2001 Senior Credit Agreement adopted in accordance with the terms thereof
and to which the Initial Lender shall have consented in its capacity as party to
the 2001 Senior Credit Agreement, shall represent the Initial Lender's consent
to amend this Agreement in a corresponding manner. It is agreed that, if lenders
party to the 2001 Senior Credit Agreement receive any fee in connection with any
such amendment, the Initial Lender shall receive a fee with respect to the
foregoing amendment of this Agreement, which shall be calculated in the same
manner as the fees received by the lenders parties to the 2001 Senior Credit
Agreement in connection with such amendment. If the Initial Lender participates
as a lender in a facility that replaces the 2001 Senior Credit Agreement (a
"Replacement Facility"), such participation shall represent its agreement to
amend this Agreement to conform to the covenants of such Replacement Facility,
and the Initial Lender agrees that it shall not be entitled to fees commensurate
with those paid to lenders in the Replacement Facility in connection with such
conforming amendment to this facility. The Initial Lender (or the Administrative
Agent if the Initial Lender is not the sole Lender under this facility) agrees
to use its best efforts to limit the cost to the Borrower of documenting any and
all amendments hereto, including the use of its internal legal counsel to
prepare documentation when feasible. In all other cases, neither this Credit
Agreement nor any other Credit Document nor any of the terms hereof or thereof
may be amended, changed, waived, discharged or terminated unless such amendment,
change, waiver, discharge or termination is in writing and signed by the
Required Lenders and the then Credit Parties; provided that no such


                                      -71-







amendment, change, waiver, discharge or termination shall without the consent of
each Lender affected thereby:

          (a) extend the Maturity Date or extend or postpone the time for any
     payment or prepayment of principal;

          (b) reduce the rate or extend the time of payment of interest (other
     than as a result of waiving the applicability of any post-default increase
     in interest rates) thereon or fees hereunder;

          (c) reduce or waive the principal amount of any Loan;

          (d) increase or extend the Commitment of a Lender (it being understood
     and agreed that a waiver of any Default or Event of Default shall not
     constitute a change in the terms of any Commitment of any Lender);

          (e) release the Borrower from its obligations or consent to the
     assignment or transfer by the Borrower of any of its rights and obligations
     under (or in respect of) the Credit Documents or release all or
     substantially all of the Guarantors from their respective obligations under
     the Credit Documents;

          (f) amend, modify or waive any provision of this Section 11.6 or
     Sections 3.7, 3.8, 5.2, 9.1(a), 11.2, 11.3 or 11.5; or

          (g) reduce any percentage specified in, or otherwise modify, the
     definition of Required Lenders.

Notwithstanding the above, no provisions of Section 10 or Section 3.4 may be
amended or modified without the consent of the Administrative Agent.

Notwithstanding the fact that the consent of all the Lenders is required in
certain circumstances as set forth above, (x) each Lender is entitled to vote as
such Lender sees fit on any reorganization plan that affects the Loans and each
Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy
Code supersedes the unanimous consent provisions set forth herein and (y) the
Required Lenders may consent to allow a Credit Party to use cash collateral in
the context of a bankruptcy or insolvency proceeding.

     11.7 Counterparts/Telecopy.

     This Credit Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall constitute one and the same instrument. Delivery of executed counterparts
by telecopy shall be as effective as an original and shall constitute a
representation that an original will be delivered.


                                      -72-







     11.8 Headings.

     The headings of the sections and subsections hereof are provided for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Credit Agreement.

     11.9 Defaulting Lender.

     Each Lender understands and agrees that if such Lender is a Defaulting
Lender then notwithstanding the provisions of Section 11.6 it shall not be
entitled to vote on any matter requiring the consent of the Required Lenders or
to object to any matter requiring the consent of all the Lenders; provided,
however, that all other benefits and obligations under the Credit Documents
shall apply to such Defaulting Lender.

     11.10 Survival of Indemnification.

     All indemnities set forth herein shall survive the execution and delivery
of this Credit Agreement, the making of the Loans, the repayment of the Loans
and other obligations and the termination of the Commitments hereunder.

     11.11 Governing Law; Venue; Jurisdiction.

          (a) THIS CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE
     RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE
     GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF
     THE STATE OF NEW YORK. Any legal action or proceeding with respect to this
     Credit Agreement or any other Credit Document may be brought in the courts
     of the State of New York or of the United States sitting in New York City,
     and, by execution and delivery of this Credit Agreement, each Credit Party
     hereby irrevocably accepts for itself and in respect of its Property,
     generally and unconditionally, the jurisdiction of such courts. Each Credit
     Party irrevocably consents to the service of process in any action or
     proceeding with respect to this Credit Agreement or any other Credit
     Document by the mailing of copies thereof by registered or certified mail,
     postage prepaid, to it at the address for notices pursuant to Section 11.1,
     such service to become effective 10 days after such mailing. Nothing herein
     shall affect the right of a Lender to serve process in any other manner
     permitted by law or to commence legal proceedings or otherwise proceed
     against a Credit Party in any other jurisdiction. Each Credit Party agrees
     that a final judgment in any action or proceeding shall be conclusive and
     may be enforced in other jurisdictions by suit on the judgment or in any
     other manner provided by law; provided that nothing in this Section
     11.11(a) is intended to impair a Credit Party's right under applicable law
     to appeal or seek a stay of any judgment.

          (b) Each Credit Party hereby irrevocably waives any objection which it
     may now or hereafter have to the laying of venue of any of the aforesaid
     actions or proceedings arising out of or in connection with this Credit
     Agreement or any other Credit Document in the courts referred to in
     subsection (a) hereof and hereby further irrevocably waives and


                                      -73-







     agrees not to plead or claim in any such court that any such action or
     proceeding brought in any such court has been brought in an inconvenient
     forum.

     11.12 Waiver of Jury Trial; Waiver of Consequential Damages.

     EACH OF THE PARTIES TO THIS CREDIT AGREEMENT HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF
OR RELATING TO THIS CREDIT AGREEMENT, ANY OF THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY. Each Credit Party agrees not to assert any
claim against the Administrative Agent, any Lender, any of their Affiliates, or
any of their respective directors, officers, employees, attorneys or agents, on
any theory of liability, for special, indirect, consequential or punitive
damages arising out of or otherwise relating to any of the transactions
contemplated herein.

     11.13 Severability.

     If any provision of any of the Credit Documents is determined to be
illegal, invalid or unenforceable, such provision shall be fully severable and
the remaining provisions shall remain in full force and effect and shall be
construed without giving effect to the illegal, invalid or unenforceable
provisions.

     11.14 Further Assurances.

     The Credit Parties agree, upon the request of the Administrative Agent, to
promptly take such actions, as reasonably requested, as is necessary to carry
out the intent of this Credit Agreement and the other Credit Documents.

     11.15 Confidentiality.

     Each Lender agrees that it will use its reasonable best efforts to keep
confidential and to cause any representative designated under Section 7.11 to
keep confidential any non-public information from time to time supplied to it
under any Credit Document; provided, however, that nothing herein shall prevent
the disclosure of any such information to (a) the extent a Lender in good faith
believes such disclosure is required by Requirement of Law, (b) counsel for a
Lender or to its accountants, (c) bank examiners or auditors or comparable
Persons, (d) any Affiliate of a Lender, (e) any other Lender, or any assignee,
transferee or participant, or any potential assignee, transferee or participant,
of all or any portion of any Lender's rights under this Credit Agreement who is
notified of the confidential nature of the information or (f) any other Person
in connection with any litigation to which any one or more of the Lenders is a
party if required by a court of law of competent jurisdiction or (g) that a
Lender may disclose (without limitation) the tax treatment and tax structure of
this financing and any materials provided to any Lender relating to such tax
treatment or tax structure. No Lender shall have any obligation under this
Section 11.15 to the extent any such information becomes available on a
non-confidential basis from a source other than a Credit Party or that any
information becomes publicly available other than by a breach of this Section
11.15 by any Lender or representative thereof.


                                      -74-







     11.16 Entirety.

     This Credit Agreement together with the other Credit Documents represents
the entire agreement of the parties hereto and thereto, and supersede all prior
agreements and understandings, oral or written, if any, including any commitment
letters or correspondence relating to the Credit Documents or the transactions
contemplated herein and therein.

     11.17 Binding Effect; Continuing Agreement.

          (a) This Credit Agreement shall become effective at such time when all
     of the conditions set forth in Section 5.1 have been satisfied or waived by
     the Lenders and it shall have been executed by the Borrower, the Guarantors
     and the Administrative Agent, and the Administrative Agent shall have
     received copies hereof (telefaxed or otherwise) which, when taken together,
     bear the signatures of each Lender, and thereafter this Credit Agreement
     shall be binding upon and inure to the benefit of the Borrower, the
     Guarantors, the Administrative Agent and each Lender and their respective
     successors and assigns.

          (b) This Credit Agreement shall be a continuing agreement and shall
     remain in full force and effect until all Loans, interest, fees and other
     Credit Party Obligations have been paid in full and the Commitments have
     been terminated. Upon termination, the Credit Parties shall have no further
     obligations (other than the indemnification provisions that survive) under
     the Credit Documents; provided that should any payment, in whole or in
     part, of the Credit Party Obligations be rescinded or otherwise required to
     be restored or returned by the Administrative Agent or any Lender, whether
     as a result of any proceedings in bankruptcy or reorganization or
     otherwise, then the Credit Documents shall automatically be reinstated and
     all amounts required to be restored or returned and all costs and expenses
     incurred by the Administrative Agent or any Lender in connection therewith
     shall be deemed included as part of the Credit Party Obligations.


                                      -75-







     Each of the parties hereto has caused a counterpart of this Credit
Agreement to be duly executed and delivered as of the date first above written.

BORROWER:

                                  QUEST DIAGNOSTICS INCORPORATED,
                                  a Delaware corporation


                                  By:    /s/ Joseph P. Manory
                                     -------------------------------------------
                                  Name:  Joseph P. Manory
                                  Title: Vice President and Treasurer







GUARANTORS:

                                  QUEST DIAGNOSTICS HOLDINGS
                                  INCORPORATED,
                                  a Delaware corporation

                                  QUEST DIAGNOSTICS CLINICAL
                                  LABORATORIES, INC.,
                                  a Delaware corporation

                                  QUEST DIAGNOSTICS INCORPORATED,
                                  a California corporation

                                  QUEST DIAGNOSTICS INCORPORATED,
                                  a Maryland corporation

                                  QUEST DIAGNOSTICS INCORPORATED,
                                  a Michigan corporation

                                  QUEST DIAGNOSTICS OF PENNSYLVANIA, INC.,
                                  a Delaware corporation

                                  METWEST, INC.,
                                  a Delaware corporation

                                  NICHOLS INSTITUTE DIAGNOSTICS,
                                  a California corporation

                                  DPD HOLDINGS, INC.,
                                  a Delaware corporation

                                  DIAGNOSTICS REFERENCE SERVICES INC.,
                                  a Maryland corporation

                                  AMERICAN MEDICAL LABORATORIES,
                                  INCORPORATED,
                                  a Delaware corporation

                                  AML INC.,
                                  a Delaware corporation

                                  QUEST DIAGNOSTICS INCORPORATED (NV),
                                  a Nevada corporation







                                  QUEST DIAGNOSTICHOLS INSTITUTE, INC.,
                                  f/k/a /MEDICAL LABORATORIES CORPORATION,
                                  a Virginia corporation

                                  QUEST DIAGNOSTICS LLC,
                                  an Illinois limited liability company

                                  QUEST DIAGNOSTICS LLC,
                                  a Connecticut limited liability company

                                  QUEST DIAGNOSTICS LLC,
                                  a Massachusetts limited liability company

                                  APL PROPERTIES LIMITED LIABILITY COMPANY
                                  a Nevada limited liability company

                                  UNILAB ACQUISITION CORPORATION,
                                  A Delaware corporation

                                  UNILAB CORPORATION,
                                  A Delaware corporation


                                  By:    /s/ Joseph P. Manory
                                     -------------------------------------------
                                  Name:  Joseph P. Manory
                                  Title: Vice President and Treasurer

                                  Of each of the Above Guarantors


                                  QUEST DIAGNOSTICS INVESTMENTS
                                  INCORPORATED,
                                  a Delaware corporation


                                  By:    /s/ Stephen A. Calamari
                                     -------------------------------------------
                                  Name:  Stephen A. Calamari
                                  Title: Treasurer


                                  QUEST DIAGNOSTICS FINANCE INCORPORATED,
                                  a Delaware corporation


                                  By:    /s/ Stephen A. Calamari
                                     -------------------------------------------
                                  Name:  Stephen A. Calamari
                                  Title: Treasurer







                                  PATHOLOGY BUILDING PARTNERSHIP,
                                  A Maryland general partnership

                                  By: Quest Diagnostics Incorporated, a Maryland
                                         Corporation, its general partner


                                  By:    /s/ Joseph P. Manory
                                     -------------------------------------------
                                  Name:  Joseph P. Manory
                                  Title: Vice President and Treasurer


ADMINISTRATIVE
AGENT AND
INITIAL LENDER:                   SUMITOMO MITSUI BANKING CORPORATION


                                  By:    /s/ Robert H. Riley III
                                     -------------------------------------------
                                  Name:  Robert H. Riley III
                                  Title: Senior Vice President

EX-10

                                                                   Exhibit 10.33







                              Employment Agreement

                                     Between

                               Surya N. Mohapatra

                                       and

                         Quest Diagnostics Incorporated



                          Dated as of November 9, 2003















                                TABLE OF CONTENTS



                                                                                                                 Page
                                                                                                                 ----

                                                                                                              
1.       Employment...............................................................................................2

2.       Employment Term..........................................................................................2

         (a)      Term............................................................................................2

         (b)      Agreement terminated under certain circumstances on or before December 31, 2003.................3

3.       Duties...................................................................................................3

4.       Place of Performance.....................................................................................4

5.       Cash Compensation........................................................................................4

         (a)      Base Salary.....................................................................................4

         (b)      Annual Bonus....................................................................................5

         (c)      Deferral........................................................................................5

         (d)      Incentive Award Modifications...................................................................5

6.       Equity Awards............................................................................................6

         (a)      Option Grant....................................................................................6

         (b)      Additional Compensation.........................................................................7

         (c)      Restrictions on Option Shares...................................................................8

7.       Employee Benefits........................................................................................9

         (a)      General Provisions..............................................................................9

         (b)      Supplemental Executive Retirement Plan..........................................................9

         (c)      Vacation and Sick Leave........................................................................10

8.       Applicable Taxes........................................................................................10

9.       Miscellaneous Benefits..................................................................................10

         (a)      Business Travel and Expenses...................................................................10

         (b)      Executive Driver...............................................................................10













                                                                                                              
         (c)      Relocation Expenses............................................................................11

         (d)      Non-Exclusivity................................................................................11

10.      Termination of Employment...............................................................................11

         (a)      Termination by the Company for Cause...........................................................11

         (b)      Disability.....................................................................................12

         (c)      Death..........................................................................................13

         (d)      Termination by the Executive for Good Reason...................................................13

         (e)      Other Terminations.............................................................................16

         (f)      Notice of Termination..........................................................................16

         (g)      Resignation....................................................................................17

11.      Compensation upon Termination or During Disability......................................................17

         (a)      Disability.....................................................................................17

         (b)      Death..........................................................................................18

         (c)      Termination for Cause; Termination by the Executive other than for Good Reason or Disability...19

         (d)      Termination Resulting from Non-Renewal of this Agreement.......................................20

         (e)      All Other Terminations.........................................................................21

         (f)      Other Severance Provisions.....................................................................23

         (g)      Change in Control Protections and Excise Tax Gross-Up..........................................23

         (h)      Change in Control..............................................................................25



12.      Non-Solicitation and Non-Competition....................................................................28

         (a)      Term of Non-Compete............................................................................28

         (b)      Term of Non-Solicitation of Customers..........................................................29

         (c)      Term of Non-Solicitation of Employees..........................................................29

         (d)      Term of Non Compete, Non Solicitation Automatically Extended...................................29

         (e)      Definitions Applicable to Section 12...........................................................29


                                       ii











                                                                                                              
         (f)      Expedited Arbitration Applicable to Section 12.................................................30

         (g)      Exclusive Property.............................................................................30

         (h)      Injunctive Relief..............................................................................31

13.      Arbitration.............................................................................................32

14.      Confidentiality.........................................................................................32

15.      Other Matters...........................................................................................33

         (a)      Entire Agreement...............................................................................33

         (b)      Assignment.....................................................................................34

         (c)      Notices........................................................................................34

         (d)      Amendment/Waiver...............................................................................34

         (e)      Applicable Law.................................................................................34

         (f)      Severability...................................................................................34

         (g)      Successor in Interest..........................................................................35

         (h)      No Mitigation/No Offset........................................................................35

         (i)      Joint Participation in Drafting................................................................36

16.      Indemnification.........................................................................................36

17.      Authority...............................................................................................36



                                      iii










                                                                  Execution Copy

                              Employment Agreement

                                     Between

                               Surya N. Mohapatra

                                       and

                         Quest Diagnostics Incorporated

         This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
November 9, 2003 (the "Effective Date"), between QUEST DIAGNOSTICS INCORPORATED
(the "Company"), a Delaware corporation having its principal place of business
at One Malcolm Avenue, Teterboro, NJ 07608, and SURYA N. MOHAPATRA (the
"Executive").

         WHEREAS, the Executive has been heretofore employed by the Company as
President and Chief Operating Officer; and

         WHEREAS, the Company considers the services of the Executive to be
unique and essential to the success of the Company's business; and

         WHEREAS the Company and the Executive had previously entered into a
letter agreement dated January 15, 1999 ("Letter Agreement"); and

         WHEREAS, the Company and the Executive now wish to enter into this
Agreement on the terms and conditions set forth herein, and which, except as
otherwise provided herein, shall constitute the sole and exclusive agreement as
of the Effective Date relating to the employment of the Executive by the
Company.
         NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, terms and conditions set forth herein, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed between the Company and the Executive that his existing
agreement shall be amended and modified in its entirety as follows:

                                       1









1.        Employment. The Company shall continue to employ the Executive in a
     full-time capacity in the positions set forth in this paragraph, and the
     Executive shall accept such employment upon the terms and conditions set
     forth herein. Until the CEO Succession Date (as hereinafter defined), such
     employment shall be in the capacity of President and Chief Operating
     Officer of the Company, and as a member of the Board of Directors of the
     Company (the "Board"). On or immediately following the Effective Date, the
     Company shall announce that the Executive will become President and Chief
     Executive Officer ("CEO") of the Company as the Board may determine,
     provided that the Executive shall become CEO no later than the Company's
     Annual Meeting of Shareholders in 2004 (or May 31, 2004, whichever is
     earlier) (the "CEO Succession Date"). On and following the CEO Succession
     Date, the Executive's employment shall be in the capacity of President and
     CEO, reporting directly to the Board, and it is the intention of the
     parties that he shall serve as a member of the Board throughout the
     Employment Term (as hereinafter defined). The Board shall nominate the
     Executive as a Director of the Company and shall use its best efforts to
     have the Executive elected and re-elected to the Board for the duration of
     the Employment Term.

2.        Employment Term.

     (a)  Term. The term of Executive's employment under this Agreement
          shall commence as of January 1, 2004 and continue until December
          31, 2006 (the "Employment Term"). Subject to 6 (six) months
          written notice of non-renewal by either party to the other, this
          Agreement will be automatically renewed for successive one-year
          terms, after December 31, 2006. For purposes of this Agreement,
          the "Employment Term" shall mean the period from January 1, 2004


                                       2







          to the earlier to occur of (i) the scheduled expiration of the
          Employment Term, including any extension thereof, or (ii) the
          termination of the Executive's employment in accordance herewith.

     (b)  Agreement terminated under certain circumstances on or before December
          31, 2003. If Executive's employment is terminated for any reason on or
          prior to December 31, 2003, the Executive shall have no rights under
          this Agreement which shall be deemed null and void and of no force or
          effect, but Executive shall retain all rights granted to him under the
          Letter Agreement.

3.        Duties. From the CEO Succession Date through the end of the Employment
     Term, the Executive shall, subject to the supervising powers of the Board,
     have those powers and duties consistent with the position of President and
     Chief Executive Officer in a company the size and nature of the Company,
     which powers shall in all cases include, without limitation, the power of
     supervision and control over, and responsibility for, the general
     management and operations of the Company (including the hiring and firing
     of employees and the appointment and termination of senior officers),
     development and implementation of a comprehensive strategic business plan,
     supervision of the day-to-day executive management process, and acting as
     spokesperson for the Company. All senior officers and other officers with
     direct operational responsibilities shall report directly to the Executive
     unless the Executive in his sole discretion delegates such reporting
     responsibilities, in whole or in part, to another executive. It is the
     intention of the parties that the provisions of this Section 3 shall be
     applied in a manner consistent with the Sarbanes-Oxley Act of 2002, as
     amended from time to time. The Executive shall actively participate in the
     selection process but shall not have the power to veto the

                                       3







     Board's appointment, if it decides to make such appointment, of a
     non-executive Chairman from time to time, which non-executive Chairman
     shall be responsible for presiding over the Board and meetings of
     shareholders. Upon the Executive becoming CEO, the Chairman of the Board
     shall not be assigned or delegated duties that are preserved to the
     Executive pursuant to this Section 3. Executive agrees to devote
     substantially all his working time and attention to the business of the
     Company. The Executive shall not, without the prior consent of the
     Company's Board of Directors, be directly or indirectly engaged in any
     other trade, business or occupation for compensation requiring his personal
     services during the Employment Term. Nothing in this Agreement shall
     preclude the Executive from (i) engaging in charitable and community
     activities or from managing his personal investments, or (ii) serving as a
     member of the board of directors of an unaffiliated company not in
     competition with the Company, subject, however, with respect to each such
     board membership, to approval by the Company's Board (not to be
     unreasonably withheld). During the Employment Term, the Executive shall be
     nominated for re-election as a member of the Board of Directors.

4.       Place of Performance. The principal place of employment of the
     Executive shall be at the Company's principal executive offices in
     Teterboro, New Jersey; Lyndhurst, New Jersey; or New York, New York.

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


     (a)  Base Salary. During the Employment Term commencing January 1, 2004,
          Executive shall be compensated at an annual base salary of no less
          than $875,000 (the base salary, at the rate in effect from time to
          time, is hereinafter referred to as

                                       4







          the "Base Salary"). The Board, or a committee thereof, shall review
          and may, if appropriate, at its discretion, increase (but not
          decrease) the annual Base Salary during the Employment Term. Base
          Salary shall be reviewed annually and be adjusted to reflect (among
          other factors) increases generally granted to other senior executives
          of the Company and Executive's performance consistent with Company pay
          practices. The Base Salary shall be payable in equal bi-weekly
          installments.

     (b)  Annual Bonus. In addition to the Base Salary provided for in Section
          5(a) above, the Company will provide annual cash bonus awards to
          Executive under its Management Incentive Plan (MIP) in accordance with
          the plan and any financial performance targets thereunder ("Annual
          Bonus") each year during the Employment Term. During the Employment
          Term commencing January 1, 2004, Executive's target incentive
          opportunity under the Company's MIP will be no less than 120% of Base
          Salary (the target bonus as a percentage of Base Salary, as in effect
          from time to time, is hereinafter referred to as the "Target Bonus").
          The Target Bonus as a percentage of Base Salary shall be reviewed
          annually for increase (but not decrease) by the Board or a committee
          thereof.

     (c)  Deferral. Pursuant to the terms of the Company's Supplemental Deferred
          Compensation Plan ("SDCP"), the Executive may elect to defer from
          payments of Base Salary and Annual Bonus and any other eligible
          compensation amounts as provided for under the SDCP.

     (d)  Incentive Award Modifications. Any equity and option awards made to
          the Executive on or prior to the Effective Date and any equity and
          option awards that


                                       5







          may be made to the Executive during the Employment Term shall be
          subject to, and shall benefit from, any amendments or revisions to the
          terms and conditions of any of the Company's Incentive Compensation
          Programs (including, without limitation, any action resulting in
          extended exercise periods) that may be implemented on or after the
          Effective Date.

6.        Equity Awards.

      (a) Option Grant.


          (i)    On or about the February 19, 2004 meeting of the Company's
                 Board of Directors (the "Option Grant Date"), except as noted
                 below, the Executive shall be awarded options to purchase a
                 total of 170,000 (one hundred seventy thousand) shares of the
                 Company's common stock (the "Option Shares") at an exercise
                 price equal to the average of the quoted high and low price per
                 share of such common stock on the date of the award (the
                 "Option Grant"). Except as otherwise provided herein, such
                 options shall be granted in accordance with those provisions
                 (including exercisability) established by the Board of
                 Directors at the time such option is granted and applicable to
                 other senior executives of the Company.

          (ii)   Subject to Section 6(a)(v), the Option Shares shall vest as to
                 1/3rd thereof on each anniversary of the Option Grant Date,
                 provided, that (A) on the applicable vesting date, the
                 Executive is then still in the employ of the Company, or (B)
                 the provisions of Section 11(g)(i) apply;

          (iii)  If the Executive's employment is terminated by the Company for
                 Cause or by the Executive without Good Reason or upon his death
                 or Disability, in




                                       6






               each case on or prior to the Option Grant Date,
               the Executive shall have no right to any part of the Option Grant
               but shall retain all option rights granted to him under the
               Letter Agreement and other stock options grants. If the
               Executive's employment is terminated by the Company without Cause
               or by the Executive for Good Reason or if there is a Change in
               Control (as hereinafter defined), in each case on or prior to the
               Option Grant Date, the Option Grant and the Option Grant Date
               shall be deemed to occur immediately prior to the Date of
               Termination or the Change in Control, as the case may be, and the
               Option Shares as so granted shall be treated in accordance with
               this Section 6(a), including clause (v) hereof.

          (iv) Except as otherwise provided for in this Agreement, vested Option
               Shares may not be exercised after the expiration of the 10-year
               term of applicable Option Agreement.

          (v)  In the event that the Executive's employment is terminated by the
               Company without Cause or by the Executive for Good Reason or upon
               the Executive's death or Disability, or if the Executive is
               receiving severance pursuant to Section 11(d) hereof (for
               non-renewal of the Employment Term), the Option Shares shall be
               treated in accordance with the applicable termination provision
               of Section 11 relating to the treatment of stock options upon
               such termination.


      (b)  Additional Compensation. Executive may be awarded additional
           compensation pursuant to the present or any future incentive
           compensation or long-term compensation program established for the
           senior executive officers of the




                                       7






           Company, with the exception of any such program established for the
           exclusive benefit of Kenneth W. Freeman (collectively the "Incentive
           Compensation Programs"), in an appropriate manner for the position
           occupied by the Executive and his performance therein relative to
           other Company senior executive officers, with the exception of
           Kenneth W. Freeman, and consistent with Company pay practices,
           provided that in all events the Executive shall be treated on a basis
           no less favorable than other senior executives are treated (with the
           exception of Kenneth W. Freeman). Except as otherwise provided
           herein, compensation granted under such plans will be subject to the
           actual provisions and conditions applicable to such plans.

      (c)  Restrictions on Option Shares. The Executive agrees in respect of the
           Option Shares that he shall not (i) sell, transfer or otherwise
           dispose of any Option Shares or any interest therein other than in
           compliance with the Company's 1999 Employee Equity Participation
           Program, the stock option agreement between the Company and Executive
           relating to such Option Shares, and the Company's Policy for
           Purchasing and Selling Securities, (ii) enter into any transaction
           that is expected to result in a financial benefit arising from a
           decline in the value of the Company's stock or (iii) enter into any
           hedging transactions, including, but not limited to the use of
           financial derivatives, short sales or any other similar transactions,
           without the prior written consent of the Board of Directors, in each
           case with respect to Subsections (i), (ii) and (iii) until the Option
           Shares are vested to the fullest extent provided for under this
           Agreement, and all restrictions against exercise of such Option
           Shares have expired or been terminated.



                                       8






7.         Employee Benefits.

      (a)  General Provisions. Except as expressly provided in this Agreement,
           the Executive shall be eligible to participate in all employee
           benefit and welfare plans offered by the Company to its senior
           executive officers (e.g., Life Insurance, Medical & Dental Insurance,
           Travel, Accident, STD & LTD, Flexible Spending Accounts, Regular and
           Supplemental AD&D, Optional/Supplemental Life Insurance, Profit
           Sharing, the 401(k) Plan and Employee Stock Purchase Plan)
           (collectively referred to as the "Benefit Plans") on a basis that is
           no less favorable to the Executive than that made available to other
           senior executive officers, with the exception of Kenneth W. Freeman,
           of the Company, provided that the Executive shall be reimbursed for
           the costs of his annual participation in a comprehensive executive
           health assessment at a leading medical institution of his choice.

      (b)  Supplemental Executive Retirement Plan. A Supplemental Executive
           Retirement Plan ("SERP") will be developed and made available to the
           Executive prior to the end of 2004. The SERP is intended to provide
           an enhanced benefit to the Executive should he leave the Company
           after 8 full years of service, taking into account the time the
           Executive has heretofore been employed by the Company, provided that
           if the Executive's employment is terminated for any reason (other
           than by the Company for Cause or by the Executive other than for Good
           Reason or Disability) prior to the Executive obtaining 8 full years
           of service, the Executive shall be deemed to have obtained 8 full
           years of services immediately prior to the Date of Termination.
           Details of the SERP will be communicated to



                                       9






           the Executive when the SERP is finalized and approved by the Board of
           Directors. The Board intends to make the SERP reasonable in value and
           expense, and tax efficient.

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

8.         Applicable Taxes. There shall be deducted from any compensation
      payments made under this Agreement any federal, state, and local
      taxes or other amounts required to be withheld under applicable law.

9.         Miscellaneous Benefits. During the Employment Term, the Executive
      shall be entitled to perquisites at least as favorable as those
      provided other senior executives of the Company. In all events, the
      Company shall provide the Executive with the following additional
      benefits:

      (a)  Business Travel and Expenses. Executive shall be reimbursed by
           the Company for reasonable and other business expenses, as
           approved by the Company, that are incurred and accounted for in
           accordance with the Company's normal practices and procedures
           for reimbursement of expenses.

      (b)  Executive Driver. In order to ensure the accessibility and
           safety of the Executive during the Employment Term, the Company
           will reimburse the Executive for the


                                       10






                 costs of an executive driver for business purposes only
                 (including transportation to and from work). The Company shall
                 directly cover the costs of all other business-related
                 transportation.

           (c)   Relocation Expenses. The Company shall reimburse the Executive
                 limited relocation expenses, to include home sale, purchase and
                 moving expenses, but not including third party buy-out of
                 existing residence, in accordance with the Company's relocation
                 policy if the Executive moves within the greater New York/New
                 Jersey area prior to the expiration of the initial Employment
                 Term on December 31, 2006.

           (d)   Non-Exclusivity. Nothing in this Agreement shall prevent the
                 Executive from being entitled to receive any additional
                 compensation or benefits as approved by the Company's Board of
                 Directors; provided, however, that in no event shall the
                 Company make any loans to Executive that are in violation of
                 the Sarbanes-Oxley Act of 2002, as such act may be amended or
                 supplemented from time to time, and the rules and regulations
                 of the Securities and Exchange Commission promulgated
                 thereunder.

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

           (a)   Termination by the Company for Cause. Executive may be
                 terminated for "Cause" by the Company as provided below. As
                 used herein, the term "Cause" shall mean (i) conviction of the
                 Executive for a felony; or (ii) the commission by the Executive
                 of fraud or theft against, or embezzlement from, the Company.
                 For


                                       11






                 purposes of this section, no act or failure to act on
                 Executive's part shall be considered to be reason for
                 termination for Cause if done, or omitted to be done, by
                 Executive in good faith and with the reasonable belief that the
                 action or omission was in the best interests of the Company.
                 Cause shall not exist unless and until there shall have been
                 delivered to the Executive a copy of a resolution, duly adopted
                 by the affirmative vote of not less than two thirds of the
                 entire membership of the Board at a meeting of the Board held
                 for the purpose (after no less than ten (10) days' prior
                 written notice to the Executive of such meeting and the purpose
                 thereof and an opportunity for him, together with his counsel,
                 to be heard before the Board at such meeting), of finding that
                 in the good faith opinion of the Board, the Executive was
                 guilty of the conduct set forth above in this Section 10(a) and
                 specifying the particulars thereof in detail. The Date of
                 Termination shall be the date the Board resolution specified
                 herein is delivered to the Executive. Anything herein to the
                 contrary notwithstanding, if, following a termination of the
                 Executive's employment by the Company for Cause based upon the
                 conviction of the Executive for a felony, such conviction is
                 overturned in a final determination on appeal, the Executive
                 shall be entitled to the payments and the economic equivalent
                 of the benefits the Executive would have received if his
                 employment had been terminated by the Company without Cause.

           (b)   Disability. The Executive's employment may be terminated by the
                 Company or the Executive upon the Executive's Disability. For
                 purposes of this Agreement, "Disability" shall mean the
                 Executive's inability, due to physical or mental incapacity, to
                 substantially perform his duties for the Company for a period


                                       12






                 exceeding 120 consecutive days. Any question as to the
                 existence of the Disability of Executive as to which Executive
                 (or his guardian) and the Company cannot agree shall be
                 determined in writing by a qualified independent physician
                 mutually acceptable to Executive (or his guardian) and the
                 Company. If Executive (or his guardian) and the Company cannot
                 agree as to a qualified independent physician, each shall
                 appoint a physician and those two physicians shall select a
                 third who shall make such determination in writing. The
                 determination of Disability made by such medical doctor in
                 writing to the Company and Executive (or his guardian) shall be
                 final and conclusive for all purposes of the Agreement and the
                 Date of Termination shall be the date the notice of such
                 determination is delivered to the Executive.

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

           (d)   Termination by the Executive for Good Reason. The Executive may
                 terminate his employment hereunder for "Good Reason," provided
                 that the Executive shall have delivered a Notice of Termination
                 within ninety (90) days after the occurrence of the event of
                 Good Reason giving rise to such termination. For purposes of
                 this Agreement, "Good Reason" shall not mean a termination
                 resulting from non-renewal of this Agreement. "Good Reason"
                 shall mean the occurrence of one or more of the following
                 circumstances, without the Executive's express written consent
                 (except in the case of a Change in Control as provided in
                 Section 10(d)(viii) hereof), and which are not remedied by the
                 Company within thirty (30)


                                       13






                 days of receipt of the Executive's Notice of Termination except
                 in the event of a Change in Control or a resignation pursuant
                 to clause (x) herein:

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

                 (ii)    any removal of the Executive from, or any failure to
                         appoint or elect, or re-elect, the Executive to any
                         position specified in Section 1 of this Agreement
                         (subject to the last sentence of Section 1);

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

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

                 (v)     a reduction in the Executive's Base Salary or Annual
                         Bonus target incentive opportunity as in effect from
                         time to time, without his written consent;

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

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

                 (viii)  "Change in Control" as defined in Section 11(h) of this
                         Agreement (whether or not the Executive consents to
                         such Change in Control).



                                       14






                 (ix)    the failure to appoint the Executive as Chief Executive
                         Officer of the Company no later than the 2004 Annual
                         Meeting of Shareholders or May 31, 2004 (whichever is
                         earlier);

                 (x)     the occurrence of an irreconcilable difference with the
                         non-executive Chairman of the Board of Directors
                         (should such position be established) such that the
                         Executive is unable to effectively carry out the duties
                         and responsibilities undertaken by him under this
                         Agreement or as may hereafter be delegated to him by
                         the Company's Board of Directors consistent with his
                         duties as set forth in Section 3 hereof. For purposes
                         of this section, the Executive shall not have Good
                         Reason to resign unless he, in good faith and with the
                         reasonable and good faith belief that the circumstances
                         giving rise to such irreconcilable differences are not
                         capable of resolution, provides written notice to the
                         Board giving full details of the nature and
                         circumstances of the differences and what steps, if
                         any, have been taken to ameliorate such irreconcilable
                         differences and the Board fails to fully cure such
                         irreconcilable differences in a manner reasonably
                         satisfactory to the Executive within 30 days of receipt
                         of such written notice. If the Executive, acting in
                         good faith, is dissatisfied with the manner in which
                         the Board has attempted to cure the differences, a
                         meeting of the Board shall take place within 15 days of
                         the date of the notice from the Executive that he is
                         dissatisfied. At such meeting, the Executive shall,
                         together with his counsel, have an opportunity to be
                         heard before the Board. If following that meeting, the
                         Executive makes a good



                                       15






                         faith determination that the irreconcilable differences
                         still exist and have not been fully cured by the Board,
                         the Executive can terminate for Good Reason if he gives
                         the Board written notice of such intent and the Board
                         fails to fully cure the events giving rise to such
                         irreconcilable differences to the Executive's
                         satisfaction within seven (7) days of receipt of such
                         notice and the Date of Termination shall be the 7th day
                         after such notice is delivered to the Board. In no
                         event shall the Executive be permitted to claim an
                         irreconcilable difference based on any unlawful action
                         proposed or taken by the Executive; and


                 (xi)    a failure of the Company to secure a written assumption
                         by any successor company as provided in Section 15(g)
                         hereof.

            In the event of a termination for Good Reason, except as otherwise
            provided herein, the Date of Termination shall be the date specified
            in the Notice of Termination, and shall not be more than thirty (30)
            days after the Notice of Termination.


            (e)  Other Terminations. Notwithstanding the foregoing, the Company
                 or the Executive may terminate the Executive's employment under
                 this Agreement at any time, subject to the provisions of
                 Section 10(f) hereof. If the Executive's employment is
                 terminated hereunder for any reason other than as set forth in
                 Sections 10(a) through 10(d) hereof, the date on which a Notice
                 of Termination is given or any later date (within 30 days) set
                 forth in such Notice of Termination shall be the Date of
                 Termination.

            (f)  Notice of Termination. Any termination of the Executive's
                 employment hereunder by the Company or by the Executive shall
                 be communicated by written


                                       16






                 Notice of Termination to the other party hereto. For purposes
                 of this Agreement, a "Notice of Termination" shall mean a
                 notice that shall indicate the specific termination provision
                 in this Agreement relied upon and shall set forth in reasonable
                 detail the facts and circumstances claimed to provide a basis
                 for termination of the Executive's employment under the
                 provisions so indicated and a date of termination.

            (g)  Resignation. Upon the Date of Termination for any reason (other
                 than an expiration of the Employment Term), the Executive shall
                 be deemed to have resigned as a director and/or officer of the
                 Company; provided, however, that in the case of a non-renewal
                 by the Company of the initial Employment Term in accordance
                 with Section 2(a) hereof, the Date of Termination shall be
                 December 31, 2006.

11.         Compensation upon Termination or During Disability.

            (a)  Disability. During any period ("Disability Period"), during the
                 Employment Term that the Executive fails to perform his duties
                 hereunder as a result of Disability, the Executive shall
                 continue to (i) receive his full Base Salary and bonus
                 otherwise payable for that period of the Employment Term
                 including the Disability Period and (ii) participate in the
                 Benefit Plans. In the event the Executive's employment is
                 terminated upon Disability (as defined in Section 10(b)
                 hereof), the Executive shall be entitled to: (1) the payments
                 and benefits provided in Section 11(e)(i), (ii) and (iii),
                 provided that the severance (Base Salary and Target Bonus) and
                 benefit continuation period shall be three years, (2) a
                 Pro-Rata Target Bonus (as defined herein) for the year in which
                 termination for



                                       17






                 Disability occurs, payable in a lump-sum within 30 days
                 following the Date of Termination, and any earned and unpaid
                 bonus relating to services performed by the Executive in the
                 year preceding his termination due to Disability, (3) immediate
                 vesting of all outstanding stock options, including the Option
                 Shares, with all vested stock options remaining exercisable for
                 the remainder of their original terms (and in the event there
                 are any restrictions on exercising such options after vesting,
                 the Executive shall be entitled to exercise any vested options
                 as of the earlier of (i) one year after the option shares
                 vested or (ii) one year after the Date of Termination).
                 Notwithstanding the foregoing, any cash payments made to the
                 Executive upon termination due to Disability shall be reduced
                 by the sum of the amounts, if any, payable to the Executive at
                 or prior to the time of any such payment under disability
                 benefit plans of the Company or under the Social Security
                 disability insurance program, where such amounts were not
                 previously applied to reduce any such payment (provided the
                 Company has paid the premiums associated with such plans). For
                 purposes hereof, "Pro-Rata Target Bonus" means the Executive's
                 Target Bonus for the year in which the Date of Termination
                 occurs multiplied by a fraction, the numerator of which is the
                 number of days in the year ending on the Executive's Date of
                 Termination and the denominator of which is 365.

            (b)  Death. If the Executive's employment hereunder is terminated as
                 a result of his death, then: (i) the Company shall pay the
                 Executive's estate or designated beneficiary, as soon as
                 practicable after the Date of Termination, a lump sum payment
                 equal to (1) any Base Salary installments due in the month of
                 death and


                                       18






                 any reimbursable expenses accrued or owing the Executive
                 hereunder as of the Date of Termination, (2) a Pro-Rata Target
                 Bonus (as defined in Section 11(a) hereof), payable in a
                 lump-sum within 30 days following the Date of Termination, and
                 any earned and unpaid bonus relating to services performed by
                 the Executive in the year preceding his death, and (3) the
                 severance benefits set forth in Section 11(e)(i), (ii) and
                 (iii) (provided that the severance (Base Salary and Target
                 Bonus) and benefit continuation period on which such lump-sum
                 payment is determined shall be three years), and (ii) all
                 outstanding stock options, earned shares of incentive stock,
                 and other awards granted to the Executive under the Incentive
                 Compensation Programs shall immediately become fully vested as
                 of the Date of Termination and all transfer restrictions shall
                 lapse and all vested stock options, including the Option
                 Shares, shall remain exercisable for the remainder of their
                 original terms (and in the event there are any restrictions on
                 exercising such options after vesting, the Executive shall be
                 entitled to exercise any vested options as of the earlier of
                 (i) one year after the option shares vested or (ii) one year
                 after the Date of Termination, provided that the Board may,
                 upon the written request of the Executive's personal
                 representative, waive or modify the restrictions on the
                 exercise of any vested stock options).


            (c)  Termination for Cause; Termination by the Executive other than
                 for Good Reason or Disability. If the Executive's employment
                 hereunder is terminated by the Company for Cause or by the
                 Executive (other than for Good Reason or Disability), then (i)
                 the Company shall pay the Executive, as soon as practicable
                 after the Date of Termination, any Base Salary and any
                 reimbursable expenses



                                       19






                 accrued or owing the Executive hereunder for services as of the
                 Date of Termination; and (ii) the Executive shall immediately
                 forfeit any unvested stock options. In the event of termination
                 by the Company for Cause, the Executive shall have the right to
                 exercise the vested unexercised portion of all outstanding
                 stock option and stock awards prior to the Date of Termination,
                 and the unexercised portion of any such award shall be
                 forfeited thereafter and shall remain subject to the terms of
                 each grant. In the event of termination by the Executive other
                 than for Good Reason, the Executive shall have the right to
                 exercise the vested unexercised portion of all outstanding
                 stock options then held by the Executive for such period
                 following the Date of Termination as shall be provided for
                 under the terms of each grant.

            (d)  Termination Resulting from Non-Renewal of this Agreement. If
                 this Agreement is not renewed in accordance with Section 2(a)
                 following the expiration of the initial Employment Term on
                 December 31, 2006, Executive shall be entitled to receive, in
                 addition to the payments due to him through the end of the
                 initial Employment Term (including a bonus for 2006 of no less
                 than the Target Bonus) his Base Salary and Target Bonus, as
                 established pursuant to Sections 5(a) and (b), in equal monthly
                 installments, and benefit continuation in accordance with
                 Section 11(e)(iii) for a period of 18 months following the end
                 of the initial Employment Term. In addition, any outstanding
                 stock options shall continue to vest in accordance with their
                 terms as if the Executive remained employed until the end of
                 this 18-month severance period, with all vested options
                 remaining exercisable for the remainder of their original terms
                 (and in the event there are any restrictions

                                       20






                 on exercising such options after vesting, the Executive shall
                 be entitled to exercise any vested options at the earlier of
                 (i) one year after the option shares vested or (ii) one year
                 after the Date of Termination).


            (e)  All Other Terminations. The Executive's employment may be
                 terminated without Cause by the Board or the Company or by the
                 Executive for Good Reason, provided that in such event:


                 (i)    Executive shall be entitled to receive, in equal monthly
                        installments, his Base Salary and Target Bonus as
                        established pursuant to Sections 5(a) and (b) of this
                        Agreement, for the greater of (x) the remaining period
                        of the Employment Term or (y) for a period of two (2)
                        years, provided that if the Executive terminates
                        pursuant to Section 10(d)(viii) hereof or if the
                        Executive's employment is terminated without Cause or
                        for Good Reason within 90 days prior to a Change in
                        Control or within two (2) years following a Change in
                        Control (as hereinafter defined), the Executive shall be
                        entitled to a lump-sum amount equal to three (3) times
                        Base Salary and Target Bonus, payable within 30 days
                        following the Change in Control.

                 (ii)   Executive shall be entitled to receive, in monthly
                        installments (net of appropriate withholding), for the
                        remaining period of this Agreement or in a lump sum if
                        the proviso in clause (i) of this Section 11(e) applies,
                        his target Annual Bonus Award (including the stock and
                        cash components) earned during the Employment Term of
                        this Agreement and any earned and unpaid bonus relating
                        to services performed by the Executive in the year
                        preceding his termination by the Company without Cause
                        or his


                                       21






                        termination for Good Reason provided that the bonus
                        payment pursuant to this Section 11(e)(ii) shall not
                        duplicate any bonus payments previously paid to the
                        Executive;

                 (iii)  The Executive and his eligible dependents shall be
                        entitled to continue participation in the Company's
                        Benefit Plans at the same cost as other Company senior
                        executives until the second anniversary of the Date of
                        Termination (or the third anniversary of such date if
                        the proviso in clause (i) of this Section 11(e) applies)
                        or until such time as the Executive and his eligible
                        dependents are covered by a successor employer's
                        comparable benefit plans, whichever is sooner; provided
                        that to the extent that any Benefit Plan does not permit
                        continuation of the Executive's or his eligible
                        dependents' participation throughout such period, the
                        Company shall provide the Executive, no less frequently
                        than quarterly in advance, with an amount which is equal
                        to the Company's cost of providing such benefits;

                 (iv)   Any outstanding stock options shall continue to vest
                        until the second anniversary of the Date of Termination
                        (or the third anniversary of such date if the proviso in
                        clause (i) of this Section 11(e) applies), with all
                        vested options remaining exercisable for the remainder
                        of their original terms (and in the event there are any
                        restrictions on exercising such options after vesting,
                        the Executive shall be entitled to exercise any vested
                        options as of the earlier of (i) one year after the
                        option shares vested or (ii) one year after the Date of
                        Termination).


                                       22






                 (f)    Other Severance Provisions. In the event of any
                        termination, the Executive shall be entitled to any
                        other payments, benefits or rights in accordance with
                        this Agreement or any applicable plan, program, policy,
                        arrangement of, or other agreements with, the Company or
                        any affiliate (provided that in no event shall the
                        Executive be entitled to duplication of any payment or
                        benefit).

                 (g)    Change in Control Protections and Excise Tax Gross-Up.

                        (i)   Upon a Change in Control, the Executive's
                              outstanding equity awards (including, but not
                              limited to, stock options) shall immediately vest
                              and all vested stock options shall remain
                              exercisable for the remainder of their original
                              terms (provided that any restrictions on
                              exercising such stock options shall lapse).

                        (ii)  In the event that the Executive receives any
                              payment or benefit (including but not limited to
                              the payment, or benefits pursuant to Section 11 of
                              this Agreement) (a "Payment") that is subject to
                              the excise tax (the "Excise Tax") under Section
                              4999 of the Internal Revenue Code of 1986, as
                              amended (the "Code"), the Company shall pay to the
                              Executive, as soon thereafter as practicable, an
                              additional amount (a "Gross-Up Payment") such that
                              the net amount retained by the Executive, after
                              deduction of any Excise Tax imposed upon the
                              Payment and any federal, state, and local income
                              tax and Excise Tax imposed upon the Gross-Up
                              Payment, shall be equal to the Payment. The
                              determination of whether an Excise Tax is due in
                              respect to any payment or benefit, the amount of
                              the Excise Tax and the amount of the Gross-Up
                              Payment shall be made by an independent auditor



                                       23






                              (the "Auditor") jointly selected by the Company
                              and the Executive and paid by the Company. If the
                              Executive and the Company cannot agree on the firm
                              to serve as the Auditor, then the Executive and
                              the Company shall each select one nationally
                              recognized accounting firm and those two firms
                              shall jointly select one nationally recognized
                              accounting firm to serve as the Auditor.
                              Notwithstanding the Payment, (i) any other
                              payments or benefits received or to be received by
                              the Executive in connection with a Change in
                              Control or the Executive's termination of
                              employment (whether pursuant to the terms of this
                              Agreement or any other plan, arrangement, or
                              agreement with the Company, any person whose
                              actions result in a Change in Control or any
                              person affiliated with the Company or such person)
                              shall be treated as "parachute payments" within
                              the meaning of Section 280G(b)(2) of the Code, and
                              all "excess parachute payments" within the meaning
                              of Section 280G of the Code shall be treated as
                              subject to the Excise Tax, unless in the opinion
                              of the tax counsel selected by the Auditor, such
                              other payments or benefits (in whole or in part)
                              do not constitute parachute payments, or are
                              otherwise not subject to the Excise Tax, and (ii)
                              the Executive shall be deemed to pay federal
                              income tax at the highest marginal rate applicable
                              in the calendar year in which the Gross-Up Payment
                              is made, and state and local income taxes at the
                              highest marginal rate of taxation in the state and
                              locality of the Executive's residence on the Date
                              of Termination, net of the maximum reduction in
                              federal income tax which could be obtained from
                              deduction of such state


                                       24






                              and local taxes. In the event the actual Excise
                              Tax or such income tax is more or less than the
                              amount used to calculate the Gross-Up Payment, the
                              Executive or the Company, as the case may be,
                              shall pay to the other an amount reflecting the
                              actual Excise Tax or such income tax.


                 (h)  Change in Control. For purposes of this Agreement, "Change
                      in Control" of the Company shall be deemed to have
                      occurred if:

                        (i)   the Company's shareholders approve any transaction
                              that is contemplated to result in a "Qualifying
                              Merger or Consolidation," sale or disposition of
                              all or substantially all of the Company's assets
                              or business or a plan of partial or complete
                              liquidation, share exchange, amalgamation,
                              recapitalization or similar transaction and such
                              transaction is completed substantially in
                              accordance with the terms approved by the
                              shareholders; provided that notwithstanding
                              anything to the contrary in this subsection
                              (h)(i), no such merger, consolidation, sale or
                              disposition shall be deemed to constitute a
                              "Change in Control" if such transaction or series
                              of transactions requires the Executive to be
                              identified in any United States securities law
                              filing solely as a result of his being a "person"
                              (as such term is used in Section 3(a)(9) and 13(d)
                              of the Act) or a member of any "group" (as defined
                              in Section 14(d)(2) of the Act) acquiring, holding
                              or disposing of beneficial ownership of the
                              Company's securities and/or assets (but excluding
                              any filing such as a Form 4 required as a result
                              of being an officer or shareholder of the Company)
                              and effecting a "Change in Control" as defined in
                              this subclause (h)(i); or




                                       25






                        (ii)  during any period of not more than two (2)
                              consecutive years (not including any period prior
                              to the date of this Agreement), individuals who at
                              the beginning of such period constitute the Board
                              of Directors of the Company, and any new director
                              (other than a director designated by a "person"
                              (as hereinabove defined) who has entered into an
                              agreement with the Company to effect a transaction
                              described in clause (i), (iii) or (iv) of this
                              Section) whose election was approved in a
                              resolution of the Board by Executive or whose
                              election by the Board or nomination for election
                              by the Company's stockholders was approved by a
                              vote of at least a majority of the directors then
                              still in office who either were directors at the
                              beginning of the period or whose election or
                              nomination for election was previously so approved
                              (including approval by Executive in a resolution
                              of the Board), cease for any reason to constitute
                              at least a majority of the Board; or

                        (iii) any third-party (or any third parties acting as a
                              "group," as defined herein) acquires beneficial
                              ownership (within the meaning of Rule 13d-3
                              promulgated under the Act) of securities
                              representing at least 40% of the Company's Voting
                              Power in a transaction that is not part of a
                              Qualifying Merger or Consolidation (a "Share
                              Acquisition") and subsequent to such Share
                              Acquisition either (1) the Company is no longer a
                              public company for U.S. securities law purposes,
                              or (2) there is a material diminution of the
                              Executive's position, duties or responsibilities
                              (including, without limitation, a termination of
                              the Executive's employment by the Company)



                                       26






                              or any other breach of this Agreement by the
                              Company or event giving rise to a Good Reason
                              termination by the Executive. Notwithstanding the
                              provisions of the immediately preceding sentence,
                              in the event that the Executive ceases to be the
                              CEO within the 90-day period prior to the Share
                              Acquisition as a result of the termination of his
                              employment by the Company without Cause or by the
                              Executive for Good Reason, the provisions of
                              clause (1) and (2) shall not apply.

                        (iv)  For purposes of this Section (h), (x) "Qualifying
                              Merger or Consolidation" shall mean any of the
                              following: (1) any merger or consolidation between
                              the Company or a subsidiary thereof and any entity
                              in which the surviving entity (whether or not the
                              Company) is not a publicly traded entity and the
                              Executive is not CEO of the publicly traded parent
                              (if any) of the surviving entity, (2) any merger
                              or consolidation between the Company or any
                              subsidiary thereof and any entity in which the
                              surviving entity (whether or not the Company) is
                              publicly traded and the Executive is not CEO of
                              such surviving entity, or (3) any merger or
                              consolidation between the Company or a subsidiary
                              thereof and any entity if the shareholders of the
                              Company immediately prior to the merger or
                              consolidation hold, directly or indirectly, less
                              than 50% of the Voting Power of the Company (or
                              the ultimate parent corporation of the Company)
                              (there being excluded from the number of shares
                              held by such shareholders, but not from the Voting
                              Shares of the combined company, any shares
                              received by Affiliates of such other company in
                              exchange for stock of such other company)



                                       27






                              immediately after such merger or consolidation,
                              (x) "Voting Power" means the total voting power of
                              all outstanding securities having general voting
                              power to elect the directors of the specified
                              corporation, (y) "Act" means the Securities
                              Exchange Act of 1934, as amended and (z)
                              "Affiliate" means a person or other entity that
                              directly or indirectly controls, is controlled by,
                              or is under common control with, the company with
                              respect to which the transaction is taking place.

       12.       Non-Solicitation and Non-Competition.

                 (a)    Term of Non-Compete. Subject to Section 12(d), during
                        his employment with the Company and for a period of one
                        (1) year following the Date of Termination, the
                        Executive will not provide services, in any capacity,
                        whether as an employee, consultant, independent
                        contractor, or otherwise, to any person or entity that
                        provides products or services that compete with the
                        Business of the Company, including but not limited to:
                        Laboratory Corporation of America Holdings, Inc.; Mayo
                        Laboratory; ARUP; LabOne; Specialty Labs Inc.; Bio
                        Reference Laboratories; Focus Technologies; ENZO, Inc.;
                        Ameripath; and Esoterix; or their successors or assigns,
                        except that after the termination of Executive's
                        employment this restriction shall only apply to North
                        America. If so requested in writing by Executive, the
                        Company shall advise the Executive promptly in writing
                        in advance (but in no case later than 30 calendar days)
                        as to whether, in the exercise of its reasonable
                        judgment, the Company views any proposed activity
                        contemplated by the Executive as constituting a
                        competing "Business," provided that nothing herein shall
                        prevent the Executive from, after the termination of his

                                       28






                        employment, being a passive owner of not more than five
                        percent (5%) of the outstanding stock of any class of a
                        corporation that is publicly traded.

                 (b)    Term of Non-Solicitation of Customers. Subject to
                        Section 12(d), for a period of one (1) year following
                        the Date of Termination, the Executive will not directly
                        or indirectly solicit the Business of any customer of
                        the Company during the one (1) year period prior to the
                        termination of the employment relationship with the
                        Company for any purpose other than to obtain, maintain
                        and/or service the customer's Business for the Company.

                 (c)    Term of Non-Solicitation of Employees. Subject to
                        Section 12(d), for a period of one (1) year following
                        the Date of Termination, the Executive agrees not to,
                        directly or indirectly, recruit, solicit or hire any
                        employees of the Company to work for the Executive or
                        any other person or entity.

                 (d)    Term of Non Compete, Non Solicitation Automatically
                        Extended. Notwithstanding the provisions of Sections
                        12(a), 12(b), and 12(c), in the event that the term of
                        Executive's employment under this Agreement is not
                        extended beyond the initial Employment Term and the
                        Executive is receiving severance pursuant to Section
                        11(d) hereof, the period of (1) one year referred to in
                        the said Sections shall automatically be deemed to be 18
                        (eighteen) months following the expiration of the
                        initial Term on December 31, 2006.

                 (e)    Definitions Applicable to Section 12. As used in this
                        Section, the following terms shall have their respective
                        definitions:

                        (i)   "Business" shall include (A) clinical laboratory,
                              pathology, toxicology, pharmaceutical testing,
                              clinical trials, (B) Clinical Laboratory Medical



                                       29






                              Information Services, (C) clinical laboratory
                              testing kits; and (D) any other product or service
                              which the Company planned, provided or discussed
                              during the (1) one; year period prior to the
                              termination of Executive's employment.

                        (ii)  "Clinical Laboratory Medical Information Services"
                              shall mean medical information services which
                              contain a substantial clinical laboratory data
                              component.

                        (iii) "Indirectly solicit" shall include, but is not to
                              be limited to, providing any of the Company's
                              proprietary information to another individual, or
                              entity, or allowing the use of Executive's name by
                              any company (or any employees of any other
                              company) other than the Company, in the
                              solicitation of the Business of Company's
                              customers.

                 (f)    Expedited Arbitration Applicable to Section 12. In the
                        event there is a dispute under this Section, the parties
                        agree to hold an expedited hearing in the City of New
                        York, New York, before an arbitrator under American
                        Arbitration Association Rules.

                 (g)    Exclusive Property. Executive confirms that all
                        confidential information is and shall remain the
                        exclusive property of the Company. All business records,
                        papers and documents kept or made by Executive relating
                        to the business of the Company, its affiliates and
                        subsidiaries (other than his personal records) shall be
                        and remain the property of the Company. Upon the
                        termination of his employment with the Company or upon
                        the request of the Company at any time, Executive shall
                        promptly deliver to the Company, and shall not without
                        the



                                       30






                        consent of the Board retain copies of, any written
                        materials not previously made available to the public,
                        or records and documents made by Executive in his
                        possession concerning the business or affairs of the
                        Company or any of its affiliates or subsidiaries (other
                        than his personal records); provided, however, that
                        subsequent to any such termination, the Company shall
                        provide Executive with copies (the cost of which shall
                        be borne by Executive) of any documents that are
                        requested by Executive and that Executive has determined
                        in good faith are (i) required to establish a defense to
                        a claim that Executive has not complied with his duties
                        hereunder or (ii) necessary to Executive in order to
                        comply with applicable law.


                 (h)    Injunctive Relief. Without intending to limit the
                        remedies available to the Company, Executive
                        acknowledges that a breach of any of the covenants
                        contained in this Section 12 may result in material
                        irreparable injury to the Company or its affiliates or
                        subsidiaries for which there is no adequate remedy at
                        law, that it will not be possible to measure damages for
                        such injuries precisely and that, in the event of such a
                        breach or threat thereof, the Company shall be entitled
                        to obtain a temporary restraining order and/or a
                        preliminary or permanent injunction restraining
                        Executive from engaging in activities prohibited by this
                        Section 12 or such other relief as may be required to
                        specifically enforce any of the covenants in this
                        Section 12. Executive hereby agrees that the Company
                        shall not be required to post any bond or other security
                        in connection with any such equitable relief. Without
                        intending to limit the remedies available to Executive,



                                       31






                        Executive shall be entitled to seek specific performance
                        of the Company's obligations under this Agreement.

            13.  Arbitration. In the event of any difference of opinion or
                 dispute between the Executive and the Company with respect to
                 the construction or interpretation of this Agreement or the
                 alleged breach thereof, which cannot be settled amicably by
                 agreement of the parties, then such dispute shall be submitted
                 to and determined by arbitration by a single arbitrator in the
                 city of New York, New York in accordance with the rules then in
                 effect of the Commercial Arbitration Panel of the American
                 Arbitration Association (the "AAA"), and judgment upon the
                 award rendered shall be final, binding and conclusive upon the
                 parties and may be entered in the highest court, state or
                 federal, having jurisdiction. Each party shall bear its own
                 costs and expenses of the arbitration, including its own
                 attorneys' fees, and its allocable share of the costs and
                 expenses of the arbitrator.

            14.  Confidentiality. During the Employment Term, and except as
                 otherwise required by law, the Executive shall not disclose or
                 make accessible to any business, person or entity, or make use
                 of (other than in the course of the business of the Company)
                 any trade secrets, proprietary knowledge or confidential
                 information, which he shall have obtained during his employment
                 by the Company and which shall not be generally known to or
                 recognized by the general public. All information regarding or
                 relating to any aspect of either the Company's business,
                 including but not limited to that relating to existing or
                 contemplated business plans, activities or procedures, current
                 or prospective clients, current or prospective contracts or
                 other business arrangements, current or prospective products,
                 facilities and methods, manuals, intellectual property, price
                 lists, financial information (including the revenues, costs, or
                 profits associated with any of the


                                       32







                 Company's products or services), or any other information
                 acquired because of the Executive's employment by the Company,
                 shall be conclusively presumed to be confidential; provided,
                 however, that: Confidential Information shall not include any
                 information known generally to the public; (other than as a
                 result of unauthorized disclosure by the Executive) or any
                 specific information or type of information generally not
                 considered information disclosed by the Company or any officer
                 thereof to a third party without restrictions on the disclosure
                 of such information. The Executive's obligations under this
                 Section 14 shall be in addition to any other confidentiality or
                 nondisclosure obligations of the Executive of the Company at
                 law or under any other agreements.

       15.       Other Matters.

                 (a)    Entire Agreement. This Agreement constitutes the entire
                        agreement between the Company and the Executive relating
                        to the subject matter hereof, and supersedes any
                        previous agreements, commitments and understandings,
                        written or oral, with respect to the matters provided
                        herein other than any equity award agreements. As used
                        in this Agreement, terms such as "herein," "hereof,"
                        "hereto" and similar language shall be construed to
                        refer to this entire instrument and not merely the
                        paragraph or sentence in which they appear, unless so
                        limited by express language. Notwithstanding the
                        foregoing, if this Agreement is terminated in accordance
                        with Section 2(b) hereof, the Letter Agreement shall
                        remain in full force and effect. In the event of any
                        inconsistency between this Agreement and the provisions
                        of any plan, policy, program, arrangement or other
                        agreement, the provisions most favorable to the
                        Executive shall control.




                                       33






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

                 (c)    Notices. Any and all notices provided for under this
                        Agreement shall be in writing and hand delivered or sent
                        by first class registered or certified mail, postage
                        prepaid, return receipt requested, addressed to the
                        Executive at his residence (with a copy to the Law
                        Offices of Joseph E. Bachelder, 780 Third Avenue, New
                        York, New York 10017, Attn: Joseph E. Bachelder, Esq.)
                        or to the Company at its usual place of business, and
                        all such notices shall be deemed effective at the time
                        of delivery or at the time delivery is refused by the
                        addressee upon presentation.

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

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

                 (f)    Severability. The Executive hereby expressly agrees that
                        all of the covenants in this Agreement are reasonable
                        and necessary in order to protect the Company and



                                       34






                        its business. If any provision or any part of any
                        provision of this Agreement shall be invalid or
                        unenforceable under applicable law, such part shall be
                        ineffective only to the extent of such invalidity or
                        unenforceability and shall not affect in any way the
                        validity or enforceability of the remaining provisions
                        of this Agreement, or the remaining parts of such
                        provision.

                 (g)    Successor in Interest. In the event the Company merges
                        or consolidates with or into any other corporation or
                        corporations, or sells or otherwise transfers
                        substantially all of its assets to another corporation
                        or other entity, the provisions of this Agreement shall
                        be binding upon and inure to the benefit of the entity
                        surviving or resulting from the merger or consolidation
                        or to which the assets are sold or transferred and,
                        prior to the consummation of any such event, the Company
                        shall obtain the express written assumption of this
                        Agreement by the other entity (other than in the case of
                        a merger after which the Company is the surviving
                        entity). All references herein to the Company refer with
                        equal force and effect to any corporate or other
                        successor of the entity that acquires directly or
                        indirectly by merger, consolidation, purchase or
                        otherwise, all or substantially all of the assets of the
                        Company.

                 (h)    No Mitigation/No Offset. In the event of any termination
                        of employment, the Executive shall be under no
                        obligation to seek other employment, and there shall be
                        no offset against entitlements, amounts or benefits due
                        him under this Agreement or otherwise on account of any
                        remuneration attributable to any subsequent employer or
                        claims asserted by the Company or any affiliate.


                                       35






                 (i)    Joint Participation in Drafting. Each party to this
                        Agreement has participated in the negotiation and
                        drafting hereof. As such, the language used herein shall
                        be deemed to be the language chosen by the parties
                        hereto to express their mutual intent, and no rule of
                        strict construction shall be applied against any party
                        to this Agreement.

        16.      Indemnification. The Company shall indemnify the Executive to
                 the full extent permitted by law and the By-laws of the Company
                 for all expenses, costs, liabilities and legal fees
                 (collectively, "Damages") that the Executive may incur in the
                 discharge of all his duties hereunder, including, without
                 limitation, the right to be paid in advance by the Company for
                 his expenses in defending a civil or criminal action,
                 proceeding or investigation prior to the final disposition
                 thereof. The Executive shall be insured under the Company's
                 Directors' and Officers' Liability Insurance Policy as in
                 effect from time to time. Notwithstanding any other provision
                 of this Agreement to the contrary, any termination of the
                 Executive's employment or of this Agreement shall have no
                 effect on the continuing operations of this Section 16.

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

                           [signature page to follow]


                                       36







                      [Employment Agreement Signature Page]

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

                                 QUEST DIAGNOSTICS INCORPORATED

                                 By:
                                    ------------------------------------------
                                    Kenneth W. Freeman
                                    Chairman and Chief Executive Officer
ATTEST:

Secretary

                                 EXECUTIVE

                                 ---------------------------------------------
                                 Surya N. Mohapatra


                                       37

EX-14

                                                                      EXHIBIT 14

                             CODE OF BUSINESS ETHICS

                         "Integrity is the Bottom Line."

This Code of Business Ethics describes the standards of business conduct
required of all Quest Diagnostics employees, executive officers and directors.
This Code reflects our Company's Vision and Values. No code of conduct can
replace the thoughtful behavior of an ethical director, officer or employee, but
this Code serves to help us focus on key areas of ethical risk, provide guidance
on appropriate behavior, and continue to foster the culture of honesty and
accountability which is evident throughout Quest Diagnostics.

Each employee, officer and director has a personal responsibility to ensure that
his or her actions abide by the letter and the spirit of this Code. Management
must instill a culture in which compliance with the Company's policies and all
applicable laws is at the core of all the Company's business activities.

The policies set forth in this Code are supported by the specific and detailed
policies and practices contained in the Company's Employee Handbook, Integrity
Commitment, Compliance Policy Handbook and Standard Operating Procedures (SOPs).

                                 KEY PRINCIPLES

CONFIDENTIALITY     Quest Diagnostics employees, officers and directors must
                    respect and maintain the confidentiality of confidential
                    information regarding the Company, its services, customers
                    and patients.

                    Officers, directors and employees must maintain the
                    confidentiality of information entrusted to them by the
                    Company, customers or patients of the Company, except when
                    disclosure is authorized or legally permitted or mandated.
                    Confidential information includes all non-public information
                    that might be of use to competitors, or harmful to the
                    Company or its customers, if disclosed. Equally important is
                    safeguarding the confidentiality of the personal information
                    entrusted to us by patients. The obligation to safeguard
                    confidential information continues after employment or board
                    service with the Company ends.

NO CONFLICT OF      Quest Diagnostics employees, officers and directors must
INTEREST            avoid any conflicts of interest that could inhibit their
                    ability to act or make decisions in the best interests of
                    the Company.

                    A "conflict of interest" exists when a person's private
                    interest interferes in any way, or even appears to
                    interfere, with the interests of the Company. A conflict
                    situation can arise when an employee, officer or director
                    takes actions or has personal, financial or other interests
                    that may interfere with his or her ability to perform any of
                    his or her work for the Company objectively and effectively.
                    Conflicts of interest also arise when an employee, officer
                    or director, or a member of his or her family, receives
                    improper personal benefits as a result of his or her
                    position in the Company. An employee who is in any doubt as
                    to whether a conflict of interest exists or would exist in a
                    particular situation should check in advance with the Legal
                    and Compliance Department. No person may engage in an
                    activity that involves a conflict of interest, except with
                    the specific prior approval in writing of the Legal and
                    Compliance Department.

                    Every employee, officer and director who is aware of any
                    activity, financial interest or relationship that may
                    present a possible conflict of interest must report the
                    potential conflict of interest as described in the
                    compliance policy "Duty to Report."









                                             [INTEGRITY IS THE BOTTOM LINE LOGO]


  CORPORATE         Quest Diagnostics employees, officers and directors may not
OPPORTUNITIES       use corporate  property, information or position for
                    personal gain.

                    Employees, officers and directors are prohibited from
                    competing with Quest Diagnostics and owe a duty to the
                    Company to advance the Company's interests to the best of
                    their abilities. Employees, officers and directors who are
                    aware of an opportunity that is generally in the scope of
                    the Company's business must present that opportunity to the
                    Company.

 PROTECTION OF      Quest Diagnostics employees, officers and directors must
COMPANY ASSETS      protect the Company's assets and ensure they are used only
                    for legitimate business purposes.

                    Theft, carelessness and waste have a direct impact on the
                    Company's profitability. Employees, officers and directors
                    are responsible for ensuring that the Company's assets are
                    utilized efficiently and appropriately.

  FAIR DEALING      Quest Diagnostics employees, officers and directors must
                    deal fairly with other employees, customers, patients,
                    vendors and competitors.

                    No person may take unfair advantage of anyone through
                    manipulation, concealment, abuse of privileged or
                    confidential information, misrepresentation of
                    facts or any other unfair-dealing practice.

COMPLIANCE WITH     Quest Diagnostics employees, officers and directors must
LAWS, RULES AND     abide by all applicable laws, rules and regulations.
  REGULATIONS
                    The Company actively promotes compliance with all laws,
                    rules and regulations, including insider-trading laws.
                    Employees must comply with the applicable laws of the
                    country in which they operate. Noncompliance is unethical,
                    illegal and in conflict with the Company's values and
                    commitment to integrity. Violations will be dealt with
                    decisively.

 FAIR AND TIMELY    The Company's Chief Executive Officer and Senior
  DISCLOSURE IN     Financial Officers are responsible for ensuring
 PUBLIC REPORTING   that the Company's financial statements, public reports or
AND COMMUNICATIONS  communications contain disclosure that is full, fair,
                    accurate, timely and understandable

                    The Company's Chief Executive Officer and Senior Financial
                    Officers, together with certain other employees designated
                    by the Chief Financial Officer, are responsible for
                    establishing and maintaining effective disclosure controls
                    and procedures and internal controls and procedures for
                    financial reporting. Every employee who is aware of any
                    potential inaccuracy in the Company's disclosures must
                    report the potential inaccuracy as described in the Company
                    policy "Duty to Report."







                                             [INTEGRITY IS THE BOTTOM LINE LOGO]


DUTY TO REPORT      Quest Diagnostics employees, officers and directors who have
                    knowledge that an applicable law, regulation, policy or
                    ethical guideline has been, or may be violated must promptly
                    report such information to an appropriate person within the
                    Company.

                    The Company actively promotes honest and ethical behavior in
                    all its business activities. The Company has an "open-door"
                    policy and employees are encouraged to report potential
                    violations to their supervisors, any member of management, a
                    Compliance Officer, the Legal and Compliance Department, the
                    Human Resources Department, the local or Corporate
                    Compliance Team or through the Company Hotline (CHEQline) at
                    1.800.650.9502. Employees are also encouraged to speak to
                    their supervisors or other appropriate personnel, including
                    the Legal and Compliance Department, at any time if there is
                    any doubt about the best course of action in a particular
                    situation. No employee will suffer any penalty or
                    retribution for reporting suspected misconduct or
                    noncompliance or will be subject to adverse consequences as
                    a result of making the report.

                    Potential violations of this Code may also be reported to
                    the Board of Directors through the Company's web site:
                    www.questdiagnostics.com.

o   Violations of this Code

    The values and principles set forth in this Code are critically important to
    the Company and must be taken seriously by all of us. Accordingly,
    violations will lead to disciplinary action in accordance with the Company's
    policies. Such disciplinary action may include reprimand, reimbursement of
    any loss or damage suffered by the Company or termination of employment.
    Under certain circumstances, violation of this Code may also result in
    referral for civil action or criminal prosecution, or any other disciplinary
    action deemed appropriate by the Company.

o   Waivers of this Code

    Any waiver of this Code for executive officers (including Senior Financial
    Officers) or directors may be made only by the Board of Directors or a Board
    Committee and must be disclosed to shareholders as required by applicable
    law or stock exchange regulations.



                                                    [LOGO OF QUEST DIAGNOSTICS]

EX-21

                                                                      Exhibit 21
                                                          As of January 20, 2004

                       Quest Diagnostics Incorporated (DE)

                         Subsidiaries and Joint Ventures

                  
         100%  Quest Diagnostics Holdings Incorporated  (f/k/a SBCL, Inc.) (DE)
               100%  Quest Diagnostics Clinical Laboratories, Inc. (f/k/a SmithKline Beecham Clinical
                     Laboratories, Inc.) (DE)
                      (33-l/3%) Compunet Clinical Laboratories (OH)
                      (44%) Mid America Clinical Laboratories (IN)
                      (51%) Diagnostic Laboratory of Oklahoma LLC (OK)

         100%  Quest Diagnostics Incorporated  (CA)

         100%  Quest Diagnostics Incorporated  (MD)
               50%   Pathology Building Partnership (MD) (gen. ptnrshp.)
               100%  Diagnostic Reference Services Inc. (MD)
                     50%  Pathology Building Partnership (MD) (gen. ptnrshp.)

         100%  Quest Diagnostics Incorporated  (MI)

         100%  Quest Diagnostics Investments Incorporated  (DE)
                100% Quest Diagnostics Finance Incorporated (DE)

         100%  Quest Diagnostics LLC (IL)
         100%  Quest Diagnostics LLC (MA)
         100%  Quest Diagnostics LLC (CT)

         100%  Unilab Corporation (DE)
               100%  Unilab Acquisition Corporation, d/b/a FNA Clinics of America (DE)

         100%  Quest Diagnostics of Pennsylvania Inc. (DE)
               51%   Quest Diagnostics Venture LLC (PA)
               53.5% Associated Clinical Laboratories (PA) (gen. ptnrshp.)

         100%  Quest Diagnostics of Puerto Rico, Inc.

         100%  Quest Diagnostics Receivables Inc. (DE)

         100%  Quest Diagnostics Ventures LLC (DE)

         100%  DPD Holdings, Inc. (DE)
                100% MetWest Inc. (DE)
                      100% Diagnostic Path Lab, Inc. (TX)
                      49%  Sonora Quest Laboratories LLC (AZ)










                 
         100%    American Medical Laboratories, Incorporated (DE)
                 100%  AML Inc. (DE)
                       100% Quest Diagnostics Nichols Institute, Inc. (f/k/a Medical Laboratories Corporation,
                               Inc.) (VA)
                       100% Quest Diagnostics Incorporated (NV)
                            100% APL Properties Limited Liability Company (NV)

         100%    Lab Portal, Inc. (DE)

         100%    LifePoint Medical Corporation (DE)
                 100%  C&S Clinical Laboratory, Inc. (NJ) (dba Clinical Diagnostic Services)

         100%    MedPlus, Inc. (OH)
                 100%  Worktiviti, Inc. (fka Universal Document Management Systems, Inc.) (OH)
                 100%  Valcor Associates Inc. (PA)

         100%    Nichols Institute Diagnostics (CA)
                 100%  Nichols Institute Sales Corporation (U.S.V.I.)

         100%    Nichols Institute Diagnostics Limited (UK)

         100%    Nichols Institute Diagnostics Trading AG (Switzerland)

         100%    Nichols Institute Diagnostika GmbH (Germany)
                 100%  Nichols Institute Diagnostika GmbH  (Austria)

         100%    Nichols Institute International Holding B.V. (Netherlands)
                 100%  Nichols Institute Diagnostics B.V. (Netherlands)
                 100%  Nichols Institute Diagnostics SARL (France)

         100%    Nomad Massachusetts, Inc. (MA)
                 100%  Quest Diagnostics, S.A. de C.V. (Mexico)
                 100%  Analisis, S.A. (Mexico)
                 100%  Laboratorios Clinicos de Mexico, S.A. de C.V. (Mexico)
                       100% Servicios de Laboratorio, S.A. de C.V. (Mexico)
                 100%  Laboratorios de Frontera Polanco, S.A. de C.V. (Mexico)
                 100%  Laboratorio de Analisis Biomedicos, S.A. (Mexico)

         100%    Quest Diagnostics do Brasil Ltda. (Brazil)

         100%    Quest Diagnostics Limited (UK)
                 100%  The Pathology Partnership plc (UK)





                                       2

EX-23

                                                                   EXHIBIT 23.1


                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-109062, 333-54310, 333-64806 and 333-74114) and
Form S-8 (Nos. 333-10355, 333-17077, 333-17079, 333-17083, 333-60477, 333-66177,
333-74103, 333-60758 and 333-85713) of Quest Diagnostics Incorporated of our
report dated January 23, 2004, relating to the financial statements and
financial statement schedule, which appears in this Form 10-K.




/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 26, 2004

EX-31

                                                                    Exhibit 31.1

              CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
                 SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth W. Freeman, certify that:

1. I have reviewed this annual report on Form 10-K of Quest Diagnostics
   Incorporated;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

   a) designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

   b) evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

   c) disclosed in this annual report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter (the registrant's fourth fiscal quarter in the
      case of an annual report) that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our
   most recent evaluation of internal control over financial reporting, to the
   registrant's auditors and the audit committee of registrant's board of
   directors (or persons performing the equivalent functions):

   a) all significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

   b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

February 26, 2004

By /s/ Kenneth W. Freeman
   ----------------------
       Kenneth W. Freeman
       Chairman of the Board and
       Chief Executive Officer

EX-31

                                                                    Exhibit 31.2

              CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
                 SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert A. Hagemann, certify that:

1. I have reviewed this annual report on Form 10-K of Quest Diagnostics
   Incorporated;

2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report;

3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of the
   registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
   establishing and maintaining disclosure controls and procedures (as defined
   in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

  a) designed such disclosure controls and procedures, or caused such disclosure
     controls and procedures to be designed under our supervision, to ensure
     that material information relating to the registrant, including its
     consolidated subsidiaries, is made known to us by others within those
     entities, particularly during the period in which this annual report is
     being prepared;

  b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures and presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures, as of the end of
     the period covered by this report based on such evaluation; and

  c) disclosed in this annual report any change in the registrant's internal
     control over financial reporting that occurred during the registrant's most
     recent fiscal quarter (the registrant's fourth fiscal quarter in the case
     of an annual report) that has materially affected, or is reasonably likely
     to materially affect, the registrant's internal control over financial
     reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our
   most recent evaluation of internal control over financial reporting, to the
   registrant's auditors and the audit committee of registrant's board of
   directors (or persons performing the equivalent functions):

  a) all significant deficiencies and material weaknesses in the design or
     operation of internal control over financial reporting which are reasonably
     likely to adversely affect the registrant's ability to record, process,
     summarize and report financial information; and

  b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal control
     over financial reporting.

February 26, 2004

By /s/ Robert A. Hagemann
   ----------------------
       Robert A. Hagemann
       Senior Vice President and
       Chief Financial Officer

EX-32

                                                                    Exhibit 32.1

   CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 'SS' 1350,
      AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

    Pursuant to 18 U.S.C. 'SS' 1350, the undersigned certifies that, to the best
of my knowledge, the Annual Report on Form 10-K for the period ended
December 31, 2003 of Quest Diagnostics Incorporated, as being filed with the
Securities and Exchange Commission concurrently herewith, fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 'SS' 78m or 78o(d)) and that the information contained in the
Annual Report fairly presents, in all material respects, the financial condition
and results of operations of Quest Diagnostics Incorporated.


Dated: February 26, 2004                      /s/ Kenneth W. Freeman
                                              ----------------------------------
                                                  Kenneth W. Freeman
                                                  Chairman of the Board and
                                                  Chief Executive Officer

EX-32

                                                                    Exhibit 32.2

   CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 'SS' 1350,
      AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

    Pursuant to 18 U.S.C. 'SS' 1350, the undersigned certifies that, to the best
of my knowledge, the Annual Report on Form 10-K for the period ended December
31, 2003 of Quest Diagnostics Incorporated, as being filed with the Securities
and Exchange Commission concurrently herewith, fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 'SS' 78m or 78o(d)) and that the information contained in the Annual
Report fairly presents, in all material respects, the financial condition and
results of operations of Quest Diagnostics Incorporated.


Dated: February 26, 2004                      /s/ Robert A. Hagemann
                                              ----------------------------------
                                                  Robert A. Hagemann
                                                  Senior Vice President and
                                                  Chief Financial Officer