10-K

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-K

[LOGO] Quest Diagnostics

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000
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

10 3/4% Senior Subordinated Notes due 2006      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.  | |

As of February 28, 2001, the aggregate market value of the approximately 33.7
million shares of voting and non-voting common equity held by non-affiliates of
the registrant was approximately $3.6 billion, based on the closing price on
such date of the Company's Common Stock on the New York Stock Exchange.

As of February 28, 2001, there were outstanding 46,669,365 shares of Common
Stock, $.01 par value.

Documents Incorporated by Reference



                                                                                         Part of Form 10-K into
Document                                                                                   which incorporated
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Portions of the Registrant's Proxy Statement to be filed by April 30, 2001..........            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.

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                                     PART I

Item 1. Business

Overview

      We are the nation's leading provider of diagnostic testing and related
services for the healthcare industry, with annual net revenues of approximately
$3.4 billion. We offer a broad range of clinical laboratory testing services
used by physicians in the detection, diagnosis, evaluation, monitoring and
treatment of diseases and other medical conditions. We have a more extensive
national network of laboratories and patient service centers than our
competitors and revenues nearly double that of our nearest competitor. We have
the leading market share in clinical laboratory testing and esoteric testing,
including molecular diagnostics, as well as anatomic pathology services and
testing for drugs of abuse.

      We currently process over 100 million requisitions each year. 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 independent clinical laboratories.

      We have a network of principal laboratories located in approximately 30
major metropolitan areas throughout the United States, several joint venture
laboratories, approximately 150 smaller "rapid response" laboratories and
approximately 1,300 patient service centers. We also operate a leading esoteric
testing laboratory and development facility known as Nichols Institute located
in San Juan Capistrano, California as well as laboratory facilities in Mexico
City, Mexico and near London, England.

      In addition to our laboratory testing business, our clinical trials
business is one of the leading providers of testing to support clinical trials
of new pharmaceuticals worldwide. We also collect and analyze laboratory,
pharmaceutical and other data through our Quest Informatics division in order to
help pharmaceutical companies with their marketing and disease management
efforts, as well as to help large healthcare customers better manage the health
of their patients.

      On August 16, 1999, we completed the acquisition of SmithKline Beecham
Clinical Laboratories, Inc. ("SBCL"). We estimate that the successful execution
of our business strategy, along with the expected benefits of the SBCL
acquisition, will yield an annual earnings growth rate greater than 30% over the
next several years, before special charges.

      We are a Delaware corporation. We sometimes refer to ourselves and our
subsidiaries 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 ("Corning"). On December 31, 1996, Corning distributed
all of the outstanding shares of our common stock to the stockholders of
Corning. Our principal executive offices are located at One Malcolm Avenue,
Teterboro, New Jersey 07608, telephone number: (201) 393-5000.

The United States Clinical Laboratory Testing Market

      Clinical laboratory testing is an essential element in the delivery of
quality 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 anatomical pathology testing. Clinical testing is performed
on body fluids, such as blood and urine. Anatomical 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 independent
clinical laboratories. Tests that are not routine and that require more
sophisticated equipment and personnel are considered esoteric tests. Esoteric
tests are generally referred to laboratories that specialize in performing those
tests.

      We believe that the United States diagnostics testing industry had over
$30 billion in annual revenues in 2000 and is expected to grow at a rate of
approximately three percent per year through 2002. Most laboratory tests are
performed by one of three types of laboratories: independent clinical
laboratories; hospital-affiliated laboratories; and physician-office
laboratories. We believe that in 2000 hospital-affiliated laboratories performed
over one-half of the clinical laboratory tests in the United States, independent
clinical laboratories performed approximately one-third of those tests, and
physician-office laboratories performed the balance.

      Over the last several years, the underlying fundamentals of the
diagnostics testing industry have been improving. 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


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healthcare costs, led to revenue and profit declines within the laboratory
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, new
and rigorous programs designed to assure compliance with government billing
regulations and other laws, and a more disciplined approach to pricing services.
These changes, principally led by us, 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 testing by providers has
led to renewed growth in testing volumes and further improvements in
profitability during 2000.

We believe that during the next several years, the industry will continue to
experience growth in testing volume due to the following factors:

      o     general aging of the United States population;

      o     increasing focus on early detection and prevention as a means to
            reduce the overall cost of healthcare and development of more
            sophisticated and specialized tests for early detection of disease
            and disease management;

      o     increasing volume of tests for diagnosis and monitoring of
            infectious diseases such as AIDS and hepatitis C;

      o     research and development in the area of genomics, which is expected
            to yield new genetic tests and techniques;

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

      o     increasing volume of tests as part of employer sponsored
            comprehensive wellness programs;

      o     increasing awareness by consumers of the value of clinical
            laboratory testing and increasing willingness of consumers to pay
            for tests that may not be covered by third party payers; and

      o     a slowdown in the growth of managed care and decreasing influence by
            managed care organizations on the ordering of clinical testing by
            providers as managed care organizations impose fewer controls on
            providers and patients.

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     Capitalize on Our Leading Position Within the Laboratory Testing
            Market: We are the leader in our core clinical laboratory testing
            business and the only truly national provider of clinical laboratory
            testing services. Our network of approximately 1,300 patient service
            centers, 150 rapid response laboratories and principal laboratories
            in approximately 30 major metropolitan areas enable us to serve
            managed care organizations, hospitals, physicians, employers and
            other healthcare providers and their patients throughout the United
            States. We believe that customers will increasingly seek to utilize
            laboratory testing companies 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.

      o     Become a Leading Provider of Medical Information: We believe that we
            have the largest private clinical laboratory results database in the
            world. This database continues to grow as we perform tests related
            to over 100 million requisitions involving approximately 80 million
            patients each year. We believe that this database has substantial
            value since a significant portion of all healthcare decisions and
            spending are impacted by laboratory testing results. Large customers
            of clinical laboratories are increasingly interested in integrating
            our clinical laboratory data with other healthcare information to
            answer quality, marketing and financial related questions. In
            addition, pharmaceutical manufacturers are increasing their use of
            the data to expand their marketing efforts, as well as to promote
            disease management. In order to meet these emerging needs for
            medical information, our Quest Informatics division has developed a
            portfolio of information products including Internet-based health
            and information services that provide customers secure access to our
            extensive database, along with medical and analytical expertise. We
            also provide customized services for


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            pharmaceutical and health product companies to support the
            development and implementation of their business strategies. We
            intend to maintain the trust of patients and providers by ensuring
            the security and confidentiality of individual patient results.

      o     Compete Through Providing the Highest Quality Services: We intend to
            become recognized as the quality leader in the healthcare services
            industry. We are implementing a Six Sigma initiative throughout our
            organization. Six Sigma is an approach to managing that requires a
            thorough understanding of customer needs and requirements, rigorous
            tracking and measuring of services, and training of employees in
            methodologies so that they can be held accountable for improving
            results. During 2000, we provided training to our employees in the
            Six Sigma methodology and introduced high-impact quality improvement
            projects throughout our organization. Two of our laboratories and
            our diagnostics kits facility have achieved ISO-9001 certification
            and three of our laboratories have achieved ISO-9002 certification,
            international standards for quality management systems. Our Nichols
            Institute was the first clinical laboratory in North America to
            achieve ISO-9001 certification. Several additional regional
            laboratories are currently pursuing ISO-9002 certification.

      o     Continue to Lead Innovation: We intend to remain 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, we believe we are the best channel for
            developers of new equipment and tests to introduce their products to
            the marketplace. Through our relationship with the academic
            community and pharmaceutical and biotechnology firms, we believe
            that we are one of the leaders in transferring technical innovation
            to the market. For example, we recently developed and introduced a
            HIV-genotyping test which predicts the drug resistance of
            HIV-infected patients and will help commercialize HIV-phenotyping
            tests developed by third parties, which tests help select the most
            appropriate combination therapy for HIV-infected patients. We intend
            to continue to collaborate with and invest in emerging medical
            technology companies that develop and commercialize novel
            diagnostics, pharmaceutical and device technologies, such as our
            recent investment in and collaboration with GMP Companies, Inc. We
            also intend to continue to introduce new tests that we develop at
            Nichols Institute, one of the leading esoteric testing laboratories
            in the world and the largest provider of molecular diagnostics
            testing in the United States. We believe that, with the unveiling of
            the human genome, new genes and the association of these genes with
            disease will continue to be discovered at an accelerating pace,
            leading to research that will result in ever more complex and
            thorough diagnostic testing. We believe that we are well positioned
            to capture this growth.

      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 laboratory
            testing business. These opportunities are more fully described under
            "Strategic Growth Opportunities" and include continuing to make
            selective regional acquisitions, capturing the growth in the areas
            of genomics and specialty testing, expanding into the
            direct-to-consumer market by providing testing and medical
            information services directly to consumers, leveraging our leading
            anatomic pathology business into higher margin areas and
            expanding our clinical trials testing and other services to the
            pharmaceutical and biotechnology industries.

      o     Leverage Our Satisfaction Model: Our business philosophy is 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. Most importantly, we are committed to
            treating each employee with dignity and respect and trust them to
            treat our customers the same way. We believe that our treatment of
            employees, together with our competitive pay and benefits, helps
            increase employee satisfaction and performance, thereby enabling us
            to provide the best services to our customers.

Acquisition and Integration of SBCL

      On August 16, 1999, we completed the acquisition of SBCL, which operated
the clinical laboratory business of SmithKline Beecham plc, or SmithKline
Beecham. The original purchase price consisted of $1.025 billion in cash and
approximately 12.6 million shares of our common stock, which represented
approximately 29% of our then outstanding common stock. However, the SBCL
acquisition agreements included a provision for a reduction in the purchase
price paid by us in the event that the combined balance sheet of SBCL indicated
that the net assets acquired, as of the acquisition date, were below a
prescribed level. On October 11, 2000, the purchase price adjustment was
finalized with the result that SmithKline Beecham owed us $98.6 million. This
amount was offset by $3.6 million separately owed by us to SmithKline Beecham,
resulting in a net payment to us by SmithKline Beecham of $95.0 million. The
purchase price adjustment was recorded in the fourth quarter of 2000 as a
reduction in the amount of goodwill recorded in conjunction with the SBCL
acquisition. The remaining components of the purchase price allocation relating
to the SBCL acquisition


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were finalized in conjunction with the preparation of our quarterly report on
Form 10-Q for the fiscal quarter ended September 30, 2000.

      We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SBCL. As part of an integration plan
finalized at the end of 1999, we are in the process of reducing redundant
facilities and infrastructure and redirecting testing volume to provide more
local testing and improve customer service. We do not intend to abandon any
geographic areas. As of December 31, 2000, we had completed the transition of
approximately 85% of our business affected by integration throughout our
national laboratory network. We expect the transition of the remaining business
affected by integration will be substantially completed early in the second
quarter of 2001. Other integration activities, including standardization of
information systems, will continue beyond 2001. Overall, given the large size of
SBCL's operations and the complexity of the clinical laboratory testing
business, we expect that the integration process may not be fully completed
until 2003.

      During and after the integration process, we are committed to providing
the highest levels of customer service. Through a corporate project office, we
track and monitor key service and quality metrics and slow down the integration
process in the event that we experience significant declines in these metrics.
We have not experienced any significant service disruptions to date. However,
the integration process requires the dedication of significant management
resources, which may cause an interruption of or deterioration in our services,
which could result in a loss of momentum in the activities of our business.
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 the SBCL integration plan 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.

      While we expect to realize a number of significant benefits from the
acquisition of SBCL, we also expect to incur a number of costs as a result of
the integration process. Overall, we expect that the integration will result in
approximately $150 million in annual synergies, to be achieved over the next
several years. During 2000, we estimated that we achieved approximately $50
million of these synergies. However, we cannot assure investors that we will
continue to realize these synergies or that we will realize any of the
additional anticipated benefits, either at all or in a timely manner, or that we
will not incur significant additional costs during the integration process.

Our Services

      Our laboratory testing business consists of routine testing, esoteric
testing, and clinical trials testing. Routine testing generates approximately
83% of our net revenues, esoteric testing generates approximately 12% of our net
revenues and clinical trials testing generates less than 3% of our net revenues.
We derive the balance of our net revenues primarily from the manufacture and
sale of diagnostic test systems, and from fees charged to customers, such as
managed care organizations and pharmaceutical companies, for information
products derived from clinical laboratory data. We derive approximately 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 smears;

      o     HIV-related tests;

      o     urinalyses;

      o     pregnancy and other prenatal tests; and


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      o     alcohol and other substance-abuse tests.

      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
line of routine tests for customers that require rapid turnaround. Patient
service centers are facilities at which specimens are collected. These centers
are typically located in or near a building for 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 are performed less frequently than
routine tests and require more sophisticated equipment and materials,
professional "hands-on" attention and more highly skilled personnel. Because it
is not cost-effective for most clinical laboratories to perform the low volume
of esoteric tests in-house, they generally refer many esoteric tests to an
esoteric clinical testing laboratory. Esoteric tests are generally priced higher
than routine tests.

      Our Nichols Institute is one of the leading esoteric clinical testing
laboratories in the world. In 1998, Nichols Institute, located in San Juan
Capistrano, California, became the first clinical laboratory in North America to
achieve ISO-9001 certification. As a result of the SBCL acquisition, we acquired
SBCL's National Esoteric Testing Center, located in Van Nuys, California. We
have transferred esoteric testing performed at the Van Nuys facility to Nichols
Institute.

      Nichols Institute performs hundreds of types of esoteric tests that are
not routinely performed by our regional laboratories. These esoteric tests are
generally in the following fields:

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

      o     microbiology (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).

      Through our relationship with the academic community and pharmaceutical
and biotechnology firms, we believe that we are one of the leaders in
transferring technical innovation to the market. Nichols Institute was the first
private reference laboratory to introduce a number of new tests, including tests
to measure circulating hormone levels and tests to predict breast cancer. We
continue to develop new and more sophisticated testing to monitor the success of
therapy for cancer, AIDS and hepatitis C, and to detect other diseases and
disorders. In 2000, we introduced automatic reflex high-risk DNA human
papillomavirus testing for borderline ThinPrep(R) Pap Tests(TM), using the
original specimen. In addition, we introduced HCV DupliType(TM) testing to
provide subtyping for a broader range of hepatitis C viral isolates than was
previously available using other technologies.

      We use complex technologies such as branched DNA and polymerase chain
reaction (PCR) to detect lower levels of HIV than can be measured using other
technologies. The concentration of HIV, also referred to as viral load, can
also be measured. The ability to measure the viral load permits healthcare
providers to better tailor drug therapies for HIV-infected patients.


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      We maintain a relationship with the academic community through our
Academic Associates program, under which academia and biotechnology firms work
directly with our staff scientists to monitor and consult on existing test
procedures and develop new esoteric test methods. In addition, we have entered
into licensing arrangements and co-development agreements with biotechnology
companies and academic medical centers.

Clinical Trials Testing

      We believe that, as a result of the acquisition of SBCL's clinical trials
business, we are one of the world's three largest providers of clinical
laboratory testing performed in connection with clinical research trials on new
drugs. Clinical research trials are required by the FDA 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 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 40% of our net revenues from clinical trials testing
represents testing for SmithKline Beecham. Under a ten-year agreement, we are
the primary provider of clinical trials testing services for SmithKline Beecham
worldwide. We believe that this business will not be negatively impacted by the
merger of SmithKline Beecham with Glaxo Welcome which was completed in December
2000.

Medical Information

      The demand for comprehensive medical information continues to grow. Using
our extensive database as well as our core medical and analytical expertise, our
Quest Informatics division has developed a portfolio of information products
that enable customers to access a wide range of information critical to
healthcare and patient care decision making. These products can be used by
managed care organizations and other payers as well as large pharmaceutical
companies. These products maintain patient confidentiality and require patient
consent if patient identified information is provided to a third party.

      We continue to explore ways to capitalize on the enormous potential of
providing healthcare information through opportunities ranging from
Internet-based health and information services to direct-to-consumer services.
During the second quarter of 2000, we began to provide laboratory results and
testing information directly to consumers who request it over the Internet
through Caresoft's consumer web site, TheDailyApple.com, enabling consumers,
without payment of any fee, to download these results into a secured personal
medical record. We believe that by providing customers with an easy-to-use and
rapid way to comprehensively analyze medical information, our customers will
increasingly want to use our services as both a testing company and information
provider. As more and more clinical laboratory customers continue to use
comprehensive medical information in their decision making, we are not only
positioned to become the information provider of choice, but to do so through
the most technologically advanced and customer friendly means.

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 hospital and clinical laboratories, both domestically and
internationally.

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. 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 generally consider a "customer" to be the party who refers tests to us. We
also consider a managed care organization that contracts with us on an exclusive
or semi-exclusive basis on behalf of its patients as both our customer and
payer.

      During 2000, no single customer or affiliated group of customers accounted
for more than 5% 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 flow.


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Payers

      The following table shows current estimates of the breakdown of the
percentage of our total volume of requisitions and total clinical laboratory
revenues during 2000 applicable to each payer group:



                                                                                            Revenue
                                                                                            as % of
                                                        Requisition Volume                   Total
                                                             as % of                  Clinical Laboratory
                                                           Total Volume                     Revenues
                                                           ------------                     --------
                                                                                     
         Patient.................................            3%-- 5%                        5%-- 10%
         Medicare and Medicaid...................           10%-- 15%                      10%-- 15%
         Physicians, Hospitals, Employers and
         Other Monthly-Billed Payers.............           30%-- 35%                      25%-- 30%
         Third Party Fee-for-Service.............           25%-- 30%                      40%-- 45%
         Managed Care-Capitated..................           20%-- 25%                       5%-- 10%


Customers

Physicians

      Physicians requiring testing for patients whose tests are not covered by a
managed care contract are one of the primary sources 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 third parties are based on
the laboratory's patient fee schedule, which may be subject to limitations on
fees imposed by third-party payers and negotiation by physicians on behalf of
their patients. Medicare and Medicaid reimbursements are based on fee schedules
set by governmental authorities.

Managed Care Organizations

      Managed care organizations, which typically contract with a limited number
of clinical laboratories for their members, represent a substantial portion of
our business. Larger managed care organizations typically prefer to use large
independent clinical laboratories because they can provide services on a
national or regional basis and can manage networks of local or regional
laboratories. In addition, larger laboratories are better able to achieve the
low-cost structures necessary to profitably service large managed care
organizations and can provide test utilization data across their various plans.

      Over the last decade, the number of patients participating in managed care
plans had grown significantly. In addition, the managed care industry has been
consolidating, resulting in fewer but larger managed care organizations with
significant bargaining power in negotiating fee arrangements with healthcare
providers, including clinical laboratories. Managed care organizations
frequently negotiate capitated payment contracts for a portion of their
business, which shift the risk and cost of testing from the managed care
organization to the clinical laboratory. Under a capitated payment contract, the
clinical laboratory and the managed care organization agree to a per member, per
month payment to cover all laboratory tests during the month, regardless of the
number or cost of the tests actually performed. Some services, such as various
esoteric tests, new technologies and anatomic pathology services, may be carved
out from a capitated rate and, if carved out, are charged on a fee-for-service
basis. Some capitated payment contracts include retroactive or future fee
adjustments if the number of tests performed for the managed care organization
exceeds or is less than the negotiated threshold levels. For their
fee-for-service testing, managed care organizations also typically negotiate
substantial discounts.

      Capitated agreements with managed care organizations have historically
been priced aggressively, particularly for exclusive or semi-exclusive
arrangements. This practice was due to competitive pressures and the expectation
that a laboratory could capture not only the testing covered under the contract,
but also additional higher priced fee-for-service business from participating
physicians. However, as the number of patients covered under managed care
organizations increased, more patients were covered by capitated agreements and
there was less fee-for-service business, and therefore less profitable business
to offset the lower margin capitated managed care business. Furthermore,
physicians became increasingly affiliated with more than one managed care
organization, and, therefore, a clinical laboratory received little, if any,
additional fee-for-service testing from participating physicians.


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      Recently, there has been a shift in the way major managed care
organizations contract with clinical laboratories. Managed care organizations
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, several agreements with major managed care organizations
have been renegotiated from exclusive contracts to 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. As a result of this
emphasis on greater freedom of choice as well as our enhanced service network
and capabilities, and our focus on ensuring that overall arrangements are
profitable, pricing of managed care agreements has improved. Also, managed care
organizations have recently been giving patients greater freedom of choice and
patients have increasingly been selecting plans (such as preferred provider
organizations) 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. We cannot assure investors that these trends will
continue, that we will be successful in obtaining business under non exclusive
arrangements or that we will continue to be successful in renegotiating our
contracts with managed care organizations. If managed care organizations resume
the pattern of negotiating for exclusive contracts that involve aggressively
priced capitated payments, it could have a material adverse effect on our
financial condition, results of operations and cash flow.

      During 2000, we renegotiated several arrangements with managed care
organizations under which we are no longer responsible for all the costs of
clinical laboratory services provided to the members of the managed care
organizations, including the charges for tests performed by other laboratory
providers. As a result, net revenues and cost of services will no longer include
the cost of testing performed by third parties under these network management
arrangements. While this has the immediate effect of reducing our net revenues,
it reduces our risks associated with being financially responsible for the costs
of tests performed by other laboratories. In addition, we still have some
arrangements under which we are responsible for forming and managing for the
benefit of a managed care organization a network of subcontracted laboratories.
Under these arrangements we receive fees for the clinical laboratory services
that we perform as well as a fee for managing the laboratory network.

Hospitals

      We provide services to hospitals throughout the United States that vary
from esoteric testing to laboratory management. We believe that we are the
industry's market leader in servicing hospitals. Testing for hospitals accounts
for approximately 11% of our net revenues. 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 95% to 97% of their
patients' clinical laboratory tests. Many hospitals compete with independent
clinical laboratories by encouraging community physicians to send their testing
to the hospital's laboratory. In addition, hospitals that have purchased
physicians' practices generally require their physicians to send their tests to
the hospital's affiliated laboratory. As a result, hospital-affiliated
laboratories can be both customers and competitors for independent clinical
laboratories.

      We have joint venture arrangements with leading integrated health delivery
networks in several metropolitan areas. These joint venture arrangements, which
provide testing for these 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.

Employers, Governmental Institutions and Other Clinical Laboratories

      We provide testing services to governmental agencies, including the
Department of Defense and state and federal prison systems, and to large
employers. We believe we are the leader in the clinical laboratory industry in
providing testing to employers for substance abuse, occupational exposures, and
comprehensive wellness programs. Wellness programs enable employers to take an
active role in lowering their overall healthcare costs. Testing services for
employers account for approximately 6% of our net revenues. We also perform
esoteric testing services for other independent clinical laboratories that do
not have the full range of our testing capabilities. All of these customers are
charged on a fee-for-service basis.


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Sales and Marketing

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

      Since 1996, we have focused our sales efforts on pursuing and keeping
profitable accounts that generate an acceptable return. 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.

      Most sales representatives market routine laboratory services primarily to
physicians and hospitals. The remaining sales representatives focus on
particular market segments or on testing niches. For example, some
representatives concentrate on market segments such as hospitals or managed care
organizations, and others concentrate on testing niches such as substance-abuse
testing.

      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.

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.

      o     Selective Regional Acquisitions: The clinical laboratory industry is
            still fragmented. Historically, regional acquisitions fueled our
            growth. We expect to focus future clinical laboratory acquisition
            efforts on laboratories that can be integrated into our existing
            laboratories without impeding the integration of SBCL's operations
            such as our acquisition of the assets of Clinical Laboratories of
            Colorado in February 2001. This strategy will enable us to reduce
            costs and gain other benefits from the elimination of redundant
            facilities and equipment, and reductions in personnel. We may also
            consider acquisitions of ancillary businesses as part of our overall
            growth strategy.

      o     Genomics and Specialty Testing: 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 gene based testing is approximately
            $1 billion per year. We believe that we have the largest gene based
            testing business in the United States, with more than $225 million
            in annual revenues, and that this business will grow by at least 25%
            per year over the next several years. We believe that, with the
            unveiling of the human genome, the discovery of new genes and the
            association of these genes with disease will result in more complex
            and thorough diagnostic testing. We believe that we are well
            positioned to capture this growth. We intend to focus on
            commercializing diagnostic applications of discoveries in the areas
            of functional genomics, or the analysis of genes and their
            functions, and proteomics, or the discovery of new proteins made
            possible by the human genome project.

      o     Medical Information: We believe that we have the largest private
            clinical laboratory results database in the world. This database
            continues to grow as we perform tests related to over 100 million
            requisitions involving approximately 80 million patients each year.
            We believe that this database has substantial value since a
            significant portion of all healthcare decisions and spending are
            impacted by laboratory testing results. Large customers of clinical
            laboratories are increasingly interested in integrating our clinical
            laboratory data with other healthcare information to answer quality,
            marketing and financial related questions. In addition,
            pharmaceutical manufacturers are increasing their use of the data to
            expand their marketing efforts as well as to promote disease
            management. In order to meet these emerging needs for medical
            information, our Quest Informatics division has developed a
            portfolio of information products including Internet-based health
            and information services that provide customers secure access to our
            extensive database, along with medical and analytical expertise. We
            also provide customized services for pharmaceutical and health
            product companies to support the development and implementation of
            their business strategies. We intend to maintain the trust of
            patients and providers by ensuring the security and confidentiality
            of individual patient results.


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      o     Consumer Health: Currently, almost all the testing we perform is
            ordered directly by a physician, who then receives the test results.
            However, consumers are becoming increasingly interested in managing
            their own health and health records. We believe that consumers will
            increasingly want to order clinical laboratory tests themselves,
            particularly for tests that measure levels of cholesterol, PSA
            (prostate specific antigen), glucose, hemoglobin A1c (diabetes
            monitoring), and TSH (thyroid disorders), even if they are
            responsible for paying for the tests themselves. Instead of first
            having to go to their treating physician to order a test, consumers
            could order testing services directly through the Internet or our
            network of patient service centers, which already services over
            100,000 patients each day. We have initiated a pilot program
            providing direct testing access to consumers in several test markets
            and plan to expand this program in 2001 into additional test
            markets. A consumer-focused web site will be integral to the
            awareness and delivery of information content surrounding the
            testing services provided in our facilities. Laws in a number of
            states restrict the ability of consumers to order tests directly and
            permit test results to be provided only to the ordering physician.
            In order to serve consumers in these states and comply with
            applicable law, we are utilizing a physician network to facilitate
            the ordering of tests and reporting of results. We believe that
            consumer demand may result, over time, in the re-examination of
            regulatory restrictions on consumers' ability to order clinical
            tests and to receive test results directly.

      o     Anatomic Pathology: While we are the leading provider of anatomic
            pathology services in the United States, we have traditionally been
            strongest in the less profitable segments of the business, such as
            pap smears. During the last several years we have converted more
            than 35% of our pap smear business to ThinPrep(TM), a higher
            quality, higher margin product offering. We intend to continue to
            expand our anatomic pathology business into higher profit margin
            areas. We believe that the current United States market for anatomic
            pathology services is approximately $5 billion per year and that we
            perform approximately $300 million of such services each year,
            representing a market position significantly less than our share of
            the entire clinical laboratory market.

      o     Pharmaceutical and Biotechnology Services: Among our strengths are
            our service relationships with more than half of the physicians in
            the United States, our 100 million requisitions involving
            approximately 80 million patients each year, and our clinical
            laboratory results database, which we believe to be the largest
            private database of its kind in the world. We believe that we can
            leverage these strengths to assist the pharmaceutical and
            biotechnology industries in the development and commercialization of
            their products. Recently, the global pharmaceutical industry has
            invested approximately $50 billion annually in research and
            development of new products and an even greater amount in support of
            their commercialization, of which approximately 50% is spent in the
            United States. This spending is expected to grow in excess of 10%
            per annum in support of the increasing need for new, innovative
            pharmaceutical products. Beyond our existing clinical trials
            business, profitable growth opportunities exist in the following
            areas: post-marketing (Phase IV) research, patient recruitment,
            genomics (drug discovery), over-the-counter drug testing and
            pharmaceutical sales and product detailing.

Information Systems

      Information systems are used in laboratory testing, billing, customer
service, logistics, management of medical data, and other aspects of our
business. We believe that the efficient handling of information involving
patients, payers, customers, and other parties will be critical to our future
success. Sustained or repeated system failures that interrupt our ability to
process test orders, deliver test results or perform tests in a timely manner
would adversely affect our reputation and result in a loss of customers.

      During the 1980s and early 1990s when we acquired many of our laboratory
facilities, regional laboratories were operated as local, decentralized units.
When the laboratories were acquired, we did not make significant changes in
their method of operations 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 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.

      Prior to the acquisition of SBCL, we had chosen our proprietary SYS system
as our standard billing system and our QuestLab system (which is licensed from a
third party) as our standard laboratory information system, and had begun to
convert our laboratories to these standard systems. SBCL had standardized
billing and laboratory information systems (which are different from our
existing systems) throughout its laboratory network. During 2001 we plan to
begin implementing a new laboratory information system and a new billing system
that combine the functionality of the existing systems of Quest Diagnostics and
SBCL. We expect that this standardization process will take several years to


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complete and 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 is temporarily interrupted, which may cause
backlogs. In addition, the implementation process, including the transferring of
databases and master files to a new data center, presents significant conversion
risks which could have a material adverse impact on our business.

      We continue to invest in the development and improvement of our
connectivity products for customers and providers by developing differentiated
products that will provide friendlier, easier access to information. During the
second quarter of 2000 we introduced a new service offering physicians secure
access to their patients' confidential laboratory results via the Internet
through our own web site. During the fourth quarter of 2000 we introduced a new
service enabling physicians to order tests (as well as receive results) through
our web site. This new service will allow us to replace desktop products that we
currently provide to most physicians. During the second quarter of 2000, we
entered into an agreement with MedPlus to market MedPlus' ChartMaxx and E. Maxx
patient record systems, which support the creation and management of an
electronic patient record, by bringing together in one patient-centric view
information from various sources, including the physician's records and
laboratory and hospital data. MedPlus has agreed not to market these systems
with other laboratories. We intend to consider other strategic arrangements
that will enhance our ability to introduce electronic services to a broader
variety of customers across all spectrums.

Billing

      Billing for laboratory services is complicated. Laboratories 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 complexity to the
billing process.

      Most of our bad debt expense is the result of issues that are not
credit-related, primarily missing or incorrect billing information on
requisitions. 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 obtain any missing information and rectify incorrect
billing information received from the healthcare provider. 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.

      Among many other factors that complicate billing are (1) pricing
differences between our fee schedules and those of the payers, (2) disputes with
payers as to which party is responsible for payment and (3) disparity in
coverage among various payers. Adjustments impacting receivables as a result of
these billing related matters are generally accounted for as revenue adjustments
and not 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 5.5% immediately
prior to the acquisition of SBCL. These initiatives, together with progress in
dealing with Medicare medical necessity documentation requirements and
standardizing billing systems, have significantly reduced bad debt expense since
1996. During the twelve months ended July 31, 1999 (immediately prior to the
acquisition of SBCL), our bad debt expense was about 6% of net revenues
(adjusted to exclude the effect of testing performed by third parties under our
laboratory network management arrangements), while SBCL, which had not
implemented procedures similar to ours, had bad debt expense of about 10% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under SBCL's laboratory network management arrangements). Since the acquisition,
we have begun to implement our pre-acquisition billing practices at the former
SBCL facilities, which we believe should enable us to lower overall bad debt
expense (including that of SBCL) to or below the levels immediately prior to the
acquisition. As a result of implementing these billing practices, bad debt
expense improved to about 7% of net revenues during 2000, from about 8% of net
revenues (adjusted to exclude the effect of testing performed by third parties
under our laboratory network management arrangements) just after completion of
the SBCL acquisition.

      Changes in laws and regulations could negatively impact our ability to
bill our clients. Currently the Health Care Financing Administration (HCFA) is
considering the adoption of a HCFA-approved advance beneficiary notice, or ABN,
which would require Medicare beneficiaries to read and sign a lengthy two-page
form in order to make an informed decision whether to personally assume
financial liability for laboratory tests which are likely to be not covered by
Medicare because they are deemed to not be medically necessary. We are generally
permitted to bill Medicare patients for clinical laboratory tests which Medicare
does not pay because of lack of "medical necessity" only if the patient signs an
ABN in advance of the testing being performed. We do not have any direct contact
with most of these


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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 completed 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.
Adoption of the new separate two-page ABN form could result in even fewer valid
ABNs and consequently prevent us from billing additional beneficiaries for
services denied by Medicare for lack of medical necessity.

Competition

      The clinical laboratory testing business is fragmented and highly
competitive. We compete with three types of providers: hospital-affiliated
laboratories, other independent clinical laboratories, and physician-office
laboratories. We are the leading clinical laboratory provider in the United
States, with net revenues of approximately $3.4 billion during 2000 and
facilities in substantially all of the country's major metropolitan areas. Our
largest competitor is Laboratory Corporation of America Holdings, or LabCorp,
which had net revenues of approximately $1.9 billion during 2000. In addition,
we compete with many smaller regional and local independent clinical
laboratories, as well as with laboratories owned by physicians and hospitals.

      We believe that healthcare providers often consider the following factors,
among others, in selecting a laboratory:

      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 independent 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 managed care
organizations and more effectively deal with Medicare reimbursement reductions
and utilization controls. In addition, we believe that consolidation in the
clinical laboratory testing business will continue.

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 are
implementing a Six Sigma process to help achieve our goal of becoming recognized
as the undisputed quality leader in the healthcare services industry.

      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 then monitored to identify
drift, shift or imprecision in the analytical processes. In addition, we
administer an internal proficiency testing program, where proficiency testing
samples are processed through our systems as routine patient samples and
reported. We also perform internal process audits as part of our comprehensive
quality assurance program.

      External Proficiency Testing and Accreditation. All our laboratories
participate in various quality surveillance programs conducted externally. These
programs supplement all other quality assurance procedures. They include
proficiency testing programs administered by the College of American
Pathologists ("CAP"), as well as some state agencies.


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

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
enforcement actions to enforce laws and regulations, including revoking a
clinical laboratory's right to conduct business. Changes in regulation may
increase the costs of performing clinical laboratory tests or increase the
administrative requirements of claims.

      CLIA. All of our laboratories and patient service centers are licensed and
accredited by applicable federal and state agencies. The Clinical Laboratory
Improvement Amendments of 1988 ("CLIA") regulates virtually all clinical
laboratories by requiring they be certified by the federal government to ensure
that all clinical laboratory testing services are uniformly accurate, reliable
and timely. CLIA permits states to adopt regulations that are more stringent
than federal law. For example, state laws may require additional personnel
qualifications, quality control, record maintenance and proficiency testing.

      Drug Testing. The Substance Abuse and Mental Health Services
Administration ("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 federal employees and contractors and other regulated
entities. All laboratories that perform such testing must be certified as
meeting SAMHSA standards.

      Controlled Substances. The federal Drug Enforcement Administration (the
"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 suppliers for specimen disposal.

      FDA. The Food and Drug Administration (the "FDA") has regulatory
responsibility over instruments, test kits, reagents and other devices used by
clinical laboratories. The FDA recently issued a final rule clarifying that
certain reagents used in many tests internally developed and performed by
clinical laboratories will not require FDA clearance or approval. The FDA is
also evaluating new criteria for certain tests that would not be subject to
comprehensive CLIA requirements ("waived tests") and is studying whether it
should adopt standards for regulation of genetic testing.

      Occupational Safety. The federal Occupational Safety and Health
Administration ("OSHA") has established extensive requirements relating
specifically to workplace safety for healthcare employers. This includes
protecting workers from exposure to blood-borne pathogens, such as HIV and
hepatitis B and C. OSHA recently amended its regulations to require employers to
develop a program to reduce or eliminate needlestick injuries. During the fourth
quarter of 2000, we began to provide safety needles to our employees, which are
more expensive than regular needles, throughout our patient service center
network.

      Specimen Transportation. Transportation of infectious substances such as
clinical laboratory specimens is subject to regulation by the Department of
Transportation, the Public Health Service ("PHS"), the United States Postal
Service and the International Civil Aviation Organization.

      Corporate Practice of Medicine. Several states, including Colorado and
Texas, in which several of our principal laboratories are located, prohibit
corporations from the practice of medicine, including the provision of anatomic
pathology services. These restrictions may affect our ability to provide
services directly to consumers.


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Confidentiality of Health Information

      Pursuant to the Health Insurance Portability and Accountability Act of
1996 ("HIPAA"), on December 28, 2000, the Secretary of the Department of Health
and Human Services ("HHS") issued final regulations that would establish
comprehensive federal standards with respect to the use and disclosure of
protected health information by a health plan, healthcare provider or healthcare
data clearinghouse. The regulations establish a complex regulatory framework on
a variety of subjects, including (a) the circumstances under which disclosures
and uses of protected health information require a general patient consent,
specific authorization by the patient, or no patient consent or authorization,
(b) the content of notices of privacy practices for protected health
information, (c) patients' rights to access, amend and receive an accounting of
the disclosures and uses of protected health information and (d) administrative,
technical and physical safeguards required of entities that use or receive
protected health information. The regulations establish a "floor" and would not
supersede state laws that are more stringent. Therefore, we will be required to
comply with both federal privacy standards and certain varying state privacy
laws. In addition, for healthcare data transfers relating to citizens of other
countries, we will need to comply with the privacy and security requirements of
individual countries or, where applicable, the European Data Protection
Directive (through adherence to the Safe Harbor Agreement between the European
Union and the United States). The comment period was reopened for the federal
privacy regulations, but they are anticipated to become effective in April 2003
for healthcare providers and most other covered entities. In addition, final
standards for electronic transactions were issued in August 2000 and will become
effective in October 2002. These regulations provide uniform standards for code
sets and electronic claims, remittance advice, enrollment, eligibility and other
electronic transactions. Finally, the proposed security and electronic signature
regulations issued by the Secretary of HHS in August, 1998 pursuant to HIPAA are
expected to be finalized this year. HIPAA provides for significant fines and
other penalties for wrongful disclosure of protected health information.
Compliance with the HIPAA requirements, when finalized, will require significant
capital and personnel resources from all healthcare organizations, including us.
However, we will not be able to estimate the cost of complying with all of these
regulations until after they all are finalized. The regulations, when finalized
and effective, could adversely affect us.

Regulation of Reimbursement for Clinical Laboratory Services

      Overview. The healthcare industry has been undergoing significant changes
in the past several years. Governmental payers, such as Medicare (which
principally serves patients aged 65 years and older) and Medicaid (which
principally services indigent patients), as well as private insurers and large
employers have taken steps to control the cost, utilization and delivery of
healthcare services. Principally as a result of recent reimbursement reductions
and measures adopted by the Health Care Financing Administration ("HCFA") to
reduce utilization described below, the percentage of our aggregate net revenues
derived from Medicare programs declined from 20% in 1995 to 13% in 2000. We
believe that our other business may significantly depend on continued
participation in the Medicare and Medicaid programs, because many clients may
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
penalties and fines; 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 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 and in 1998 to 74% of the 1984
national median. In addition, Congress also eliminated the provision for annual
fee schedule increases based on the consumer price index through 2002. The
Clinton Administration's original proposed budget for fiscal year 2001 sought to
reduce by 1% the scheduled annual fee schedule increases based on the consumer
price index for 2003, 2004 and 2005; and to reduce by 30% the reimbursement for
four commonly ordered tests. However, no fee reductions were included in the
final budget that was passed for fiscal year 2001. We cannot predict if future
legislation will reduce reimbursement for clinical laboratory testing. During
the 2000 presidential campaign, President Bush proposed changes to the Medicare
program, particularly regarding payment for


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pharmaceutical products. However, President Bush has not announced any details
regarding reimbursement of clinical laboratories.

      There have been several recent developments favorably impacting
reimbursement by Medicare of clinical laboratory testing. As part of the 1999
Balanced Budget Refinement Act, the reimbursement by Medicare for Pap smear
tests was increased by almost 100%. As part of Medicare/Medicaid "giveback"
legislation finalized in December 2000, Medicare will begin to cover screening
Pap smears on a biennial basis (previously Medicare covered one screening Pap
smear every three years) effective in July 2001. As part of this same
legislation, Congress directed the Secretary of HHS to obtain public input on
coding and payment determinations for new clinical diagnostic laboratory tests
and to set the national limitation amount for new clinical laboratory tests at
100% (rather than 74%) of the national median for such tests. Finally, this
legislation also required the Secretary to study whether Medicare should cover
routine thyroid screenings.

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

      o     "Client" fees charged to physicians, hospitals, and institutions to
            which a laboratory supplies 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 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 higher
than our fees actually charged to many clients. During 1992, the Office of the
Inspector General (the "OIG") of the Department of Health and Human Services
("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 authorize the OIG to
exclude from participation in the Medicare program providers, 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.
However, the 1997 Balanced Budget Act permits HCFA to adjust statutorily
prescribed fees for some medical services, including clinical laboratory
services, if the fees are "grossly excessive." In January 1998, HCFA issued an
interim final rule setting forth criteria to be used by HCFA in determining
whether to exercise this power. Among the factors listed in the rule are whether
the statutorily prescribed fees are "grossly higher or lower than the payment
made for the. . . services by other purchasers in the same locality." In
November 1999, the OIG issued an advisory opinion which indicated that a
clinical laboratory that offers 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 payors." The OIG subsequently issued a letter clarifying that
the usual charges regulation is not a blanket prohibition on discounts to
private pay customers. 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 apply this rule retroactively.

      Currently, there are no co-insurance or co-payments required for clinical
laboratory testing. However, The Clinton Administration's original proposed
budget for fiscal year 2001 called for reinstatement of 20% co-insurance for
clinical laboratories. However, no co-insurance was included in the final budget
approved for fiscal year 2001. When co-insurance was last in effect 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 enacted, a coinsurance proposal 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-insurance payments are not established and followed.

      Reduced Utilization of Clinical Laboratory Testing. In recent years, HCFA
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 diagnostic code


                                       15
   17

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, there is no penalty prescribed for violations of
this law.

      In March 1996, HCFA eliminated its prior policy under which Medicare paid
for all tests contained in an automated chemistry panel when at least one of the
tests in the panel is medically necessary. HCFA indicated that under the new
policy, Medicare will only pay for those individual tests in a chemistry panel
that are medically necessary. Subsequently the American Medical Association
("AMA"), in conjunction with HCFA, eliminated the existing automated chemistry
panel series (CPT Codes 80002-80019) and designated four new panels of
"clinically relevant" automated chemistry panels. HCFA adopted these panels in
1998, and in 1999 and 2000 amended these new panels or created additional
panels.

      We are generally permitted to bill patients directly for some statutorily
excluded clinical laboratory services. We are also generally permitted to bill
patients for clinical laboratory tests that Medicare does not pay for due to
"medical necessity" limitations (these tests include limited coverage tests for
which a carrier-approved diagnosis code is not provided by the ordering
physician) if the patient signs an advance beneficiary notice (ABN). See
"Billing".

      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 limitations).
Inconsistent regulation has 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 policies, it has not taken any final
action to replace the local carriers with five regional carriers. However, in
November 2000, HCFA published a solicitation in the Commerce Business Daily
seeking two contractors to process Part B clinical laboratory claims. In the
solicitation, HCFA 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 Proposal (RFP)
would be released on or before December 31, 2000 but as of March 14, 2001, it
had not been issued; the solicitation did not indicate the effective date for a
final transition to the regional carrier model.

      HCFA plans to achieve standardization through the help of a single claims
processing system for all carriers. This initiative, however, was suspended due
to HCFA's Year 2000 compliance priorities.

      Competitive Bidding. The 1997 Balanced Budget Act requires HCFA to conduct
five Medicare bidding demonstrations involving various types of medical services
and complete them by 2002. HCFA is expected to include a clinical laboratory
demonstration project in a metropolitan statistical area as part of the
legislative mandate. 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.

      Various federal enforcement agencies, including the Federal Bureau of
Investigations ("FBI") and the OIG, liberally interpret and aggressively enforce
statutory fraud and abuse provisions. According to public statements by the
Department of Justice ("DOJ"), during the last several years healthcare fraud
has been elevated to one of the highest priorities of the DOJ, and substantial
prosecutorial and other law enforcement resources have been committed to
investigating healthcare provider fraud. The OIG also is involved in
investigations of healthcare fraud and has, according to recent workplans,
targeted certain laboratory practices for study, investigation and prosecution.
As noted above, the penalties for violation of these laws may include criminal
and civil fines and penalties and 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.


                                       16
   18

      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 also affect investment and compensation arrangements with
physicians who refer other than government-reimbursed laboratory testing to us.
We cannot predict if some of the state laws will be interpreted contrary to our
practices.

Government Investigations and Related Claims

      Quest Diagnostics and SBCL have each settled government claims that
primarily involved industry-wide billing and marketing practices that were
substantially discontinued by the mid-1990s. The most recent settlement was
finalized in December 2000, when we entered into a civil settlement under which
we paid a total of approximately $13 million to settle similar claims with
respect to Nichols Institutes' former regional laboratories. This settlement was
covered by the indemnification from Corning Incorporated as described in Note 17
to the Consolidated Financial Statements. However, there remain pending against
Quest Diagnostics and SBCL private claims arising out of the settlement of the
governmental claims, including several class actions brought against SBCL.

      Our aggregate reserves with respect to billing-related claims (including
pre-acquisition claims of SBCL) were about $88 million at December 31, 2000. The
reserves represent amounts for future government and private settlements of
pending matters or matters deemed probable as a result of the government and
private settlements and self-reporting. Most of the claims are generally subject
to indemnification from SmithKline Beecham as described in Note 17 to the
Consolidated Financial Statements. SmithKline Beecham has also agreed to
indemnify us with respect to pending actions relating to a former SBCL employee
that at times reused certain needles when drawing blood from patients. Although
management believes that established reserves for both indemnified and
non-indemnified claims are sufficient, 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 began 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. Government
officials have publicly cited this program as a model for the industry.


                                       17
   19

      In October 1996, we signed a five-year corporate integrity agreement with
the OIG. Under the agreement, we agreed to take steps to demonstrate our
integrity as a provider of services to federally sponsored healthcare programs.
These include steps to:

      o     maintain our corporate compliance program;

      o     adopt pricing guidelines;

      o     audit laboratory operations; and

      o     investigate and report instances of noncompliance, including any
            corrective actions and disciplinary steps.

      This agreement also gives us the opportunity to seek clearer guidance on
matters of compliance and to resolve compliance issues directly with the OIG.
SBCL also entered into a five-year corporate integrity agreement with the OIG
that became effective in 1997. As a result of our acquisition of SBCL, SBCL is
now covered under our corporate integrity agreement.

      None of the undertakings included in our corporate integrity agreement are
expected to have any material adverse effect on our business, financial
condition, results of operations, cash flow, and prospects. We believe we comply
in all material respects with all applicable statutes and regulations. However,
we cannot assure you that no statutes or regulations will 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.

Insurance

      We maintain various liability and property insurance programs (subject to
maximum limits and self-insured retentions) for claims that could result from
providing or failing to provide clinical laboratory testing services, including
inaccurate testing results and other exposures. Management believes that present
insurance coverage and reserves are sufficient to cover currently estimated
exposures, but we cannot assure you that we will not incur liabilities in excess
of the policy limits. 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 both December 31, 2000 and 1999, we employed approximately 27,000
people. Approximately 25,000 of our employees were full-time at December 31,
2000. These totals exclude employees of the joint ventures in which we do not
have a majority interest. We have no collective bargaining agreements with any
unions, and we believe that our overall relations with our employees are good.


                                       18
   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 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 and
            competition from hospitals for testing for non-patients. See
            "Business - Competition."

      (b)   Impact of changes in payer mix, including any shift from
            traditional, fee-for-service medicine to capitated managed-cost
            healthcare. See "Business - Payers and Customers - Customers -
            Managed Care Organizations."

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

      (d)   The impact upon our 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 likelihood that
                  third-party payers will increasingly adopt similar
                  requirements;

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

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

            (4)   Proposed changes by HCFA to the ABN form.

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

      (e)   Adverse results from pending or future government investigations or
            private actions. These include, in particular:

            (1)   significant monetary damages and/or exclusion from the
                  Medicare and Medicaid programs and/or other significant
                  litigation matters;

            (2)   the absence of indemnification from Corning for private claims
                  unrelated to the indemnified government claims or
                  investigations and for private claims that are not settled by
                  December 31, 2001. See "Business--Government Investigations
                  and Related Claims;"

            (3)   the absence of indemnification from SmithKline Beecham for:

                  (a)   governmental claims against SBCL that arise after August
                        16, 1999; and


                                       19
   21

                  (b)   private claims unrelated to the indemnified governmental
                        claims or investigations; and

            (4)   the absence of indemnification for consequential damages from
                  either SmithKline Beecham or Corning.

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

      (g)   Failure to efficiently integrate acquired clinical laboratory
            businesses, particularly SBCL's, or to efficiently integrate
            clinical laboratory businesses from joint ventures and alliances
            with hospitals, and the costs related to any such integration, or to
            retain key technical and management personnel. See
            "Business - Aquisition and Integration of SBCL Operations."

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

      (i)   Denial of CLIA certification or other license for any of Quest
            Diagnostics' clinical laboratories under the CLIA standards, by HCFA
            for Medicare and Medicaid programs or other federal, state and local
            agencies. See "Business - Regulation of Clinical Laboratory
            Operations."

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

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

      (l)   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.

      (m)   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. See
            "Business--The United States Clinical Laboratory Testing Market."

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

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

      (p)   The impact of the privacy and security regulations issued under
            HIPAA on our operations (including its medical information services)
            as well as the cost to comply with the regulations. See
            "Business - Confidentiality of Health Information."

      (q)   Changes in interest rates causing a substantial increase in our
            effective borrowing rate.

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


                                       20
   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 the acquisition of SBCL.
Except in the case of the Chicago area, we intend to close or reduce in size one
of the duplicate facilities.



                         Location                                  Leased or Owned
                         --------                                  ---------------
                                                            
Phoenix, Arizona                                               Leased by Joint Venture
Los Angeles, California                                                 Owned
San Diego, California                                                   Leased
San Francisco, California                                               Owned
San Juan Capistrano, California                                         Owned
Denver, Colorado                                                        Leased
New Haven, Connecticut                                                  Owned
Miami, Florida (2)                                                      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
Lincoln, Nebraska                                                       Leased
New York, New York (Teterboro, New Jersey)                              Owned
Long Island, New York                                                   Leased
Oklahoma City, Oklahoma                                        Leased by Joint Venture
Portland, Oregon                                                        Leased
Philadelphia, Pennsylvania (2)                                  One owned, one leased
Pittsburgh, Pennsylvania                                                Leased
Nashville, Tennessee                                                    Leased
Dallas, Texas (2)                                                       Leased
Houston, Texas                                                          Leased
Seattle, Washington                                                     Leased


      Our executive offices are located in Teterboro, New Jersey, in the
facility that also serves as our regional laboratory in the New York City
metropolitan area. We also lease under a capital lease an administrative office
(which served as the executive office of SBCL) in Collegeville, Pennsylvania. We
also lease a facility near Collegeville that will serve as our national revenue
service center. We own our laboratory facility in Mexico City and lease a
laboratory facility near London, England. We are currently assessing our need
for additional space near the Teterboro facility. 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.

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 liability of such proceedings or claims will have a material
adverse effect on our financial position or results of operations as they
primarily relate to professional liability for which we believe we have adequate
insurance coverage. See "Business-Insurance."

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

      None.


                                       21
   23

                                     PART II

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

      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
                                                  ----          ---
                                                       
       1998
       First Quarter                            $  17.13     $  15.06
       Second Quarter                              23.06        16.13
       Third Quarter                               22.00        16.00
       Fourth Quarter                              18.63        14.50

       1999

       First Quarter                               22.81        17.75
       Second Quarter                              27.50        21.50
       Third Quarter                               28.13        23.75
       Fourth Quarter                              32.94        22.56

       2000

       First Quarter                               40.38        29.13
       Second Quarter                              74.75        37.00
       Third Quarter                              141.00        73.25
       Fourth Quarter                             146.25        82.75


      As of February 28, 2001, we had approximately 6,800 record holders of our
common stock.

      We have not paid dividends in 2000 and 1999, and do not expect to pay
dividends on our common stock in the foreseeable future. Our bank credit
facility prohibits us from paying cash dividends on our common stock. The
Indenture relating to our 10 3/4% senior subordinated notes due 2006 restrict
our ability to pay cash dividends based primarily on a percentage of our
earnings, as defined.

Item 6. Selected Financial Data

      See page 29.

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

      See pages 32.

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 14 (a) 1 and 2.

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

      None.


                                       22
   24

                                    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 30, 2001 (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 (50) 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. (51) is President and Chief Operating Officer.
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.

      Richard L. Bevan (41) is Corporate Vice President for Human Resources.
From 1982 until August 1999, Mr. Bevan served in a variety of human resources
positions for SmithKline Beecham's pharmaceutical and clinical laboratory
businesses, most recently serving as Vice President and Director of Human
Resources-Operations for SBCL. Mr. Bevan was appointed Corporate Vice President
for Human Resource Strategy and Development in August 1999, and to his present
position in January 2001.

      Julie A. Clarkson (40) is Corporate Vice President for Communications and
Public Affairs. Ms. Clarkson has overall responsibility for internal and
external communications and government affairs. Ms. Clarkson has more than 12
years of experience in sales and operations with the Company, most recently
serving as Vice President for Business Development in Europe. She assumed her
current responsibilities in August 1999.

      Kenneth R. Finnegan (41) is Corporate Vice President for Business
Development. Mr. Finnegan has overall responsibility for business development
activities, including strategy development, acquisitions and investments. Mr.
Finnegan joined the Company in July 1997 as Vice President and Treasurer and
assumed his current responsibilities in July 2000. Prior to joining the Company,
Mr. Finnegan served as Assistant Treasurer at General Signal Corporation.

      Robert A. Hagemann (44) is Corporate 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 (58) is Senior Vice President, Administration and Chief
Information Officer. Prior to joining the Company in November 1997 as Chief
Information Officer, Mr. Marrone was with Citibank, N.A. for 12 years. During
his tenure he was most recently Vice President, Division Executive for
Citibank's Global Production Support Division. While at Citibank, he was also
the Chief Information Officer of Citibank's Global Cash Management business.
Prior to joining Citibank, he was the Chief Information Officer for Memorial
Sloan-Kettering Cancer Center in New York for five years.


                                       23
   25

      Michael E. Prevoznik (39) is Corporate Vice President for Legal and
Compliance 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 assumed
his current responsibilities with the Company in August 1999.

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

      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.

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.


                                       24
   26

                                     PART IV

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

      (a)   Documents filed as part of this report:

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

                                Item                                        Page

            Report of Independent Accountants.............................  F-1
            Consolidated Balance Sheets...................................  F-2
            Consolidated Statements of Operations.........................  F-3
            Consolidated Statements of Cash Flows.........................  F-4
            Consolidated Statements of Stockholders' Equity...............  F-5
            Notes to Consolidated Financial Statements....................  F-6
            Supplementary Data: Quarterly Operating Results (unaudited)...  F-33

      2.    Financial Statement Schedule:

                                Item                                        Page

            Schedule II - Valuation Accounts and Reserves.................  F-34

      3.    Exhibits filed as part of this report:

            See (c) below.

      (b)   Reports on Form 8-K filed during the last quarter of 2000:

            On October 31, 2000, the Company filed a current report on Form 8-K
            with respect to the acquisition of SBCL.

      (c)   Exhibits filed as part of this report:

Exhibit
Number   Description

   2.1   Form of Transaction Agreement among Corning Incorporated, Corning Life
         Sciences Inc., Corning Clinical Laboratories Inc. (Delaware), Covance
         Inc. and Corning Clinical Laboratories Inc. (Michigan), dated as of
         November 22, 1996 (filed as an exhibit to the Company's Registration
         Statement on Form 10 (File No. 1-12215) and incorporated herein by
         reference)
   3.1   Certificate of Incorporation of the Registrant (filed as an exhibit to
         the Company's Registration Statement on Form 10 (File No. 1-12215) and
         incorporated herein by reference)
   3.2   Amendment of the Certificate of Incorporation of the Registrant (filed
         as an Exhibit to the Company's proxy statement for the 2000 annual
         meeting of shareholders and incorporated herein by reference)
   3.3   Amended and Restated By-Laws of the Registrant
   4.1   Form of Rights Agreement dated December 31, 1996 (the "Rights
         Agreement") between


                                       25
   27

         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
   10.1  Form of Tax Sharing Agreement among Corning Incorporated, Corning
         Clinical Laboratories Inc. and Covance Inc. (filed as an Exhibit to the
         Company's Registration Statement on Form 10 (File No. 1-12215) and
         incorporated herein by reference)
   10.2  Form of Spin-Off Distribution Tax Indemnification Agreement between
         Corning Incorporated and Corning Clinical Laboratories Inc. (filed as
         an Exhibit to the Company's Registration Statement on Form 10 (File No.
         1-12215) and incorporated herein by reference)
   10.3  Form of Spin-Off Distribution Tax Indemnification Agreement between
         Corning Clinical Laboratories Inc. and Covance Inc. (filed as an
         Exhibit to the Company's Registration Statement on Form 10 (File No.
         1-12215) and incorporated herein by reference)
   10.4  Form of Spin-Off Distribution Tax Indemnification Agreement between
         Covance Inc. and Corning Clinical Laboratories Inc. (filed as an
         Exhibit to the Company's Registration Statement on Form 10 (File No.
         1-12215) and incorporated herein by reference)
   10.5  Form of Executive Retirement Supplemental Plan (filed as an Exhibit to
         the Company's Registration Statement on Form 10 (File No. 1-12215) and
         incorporated herein by reference)
   10.6  Form of Variable Compensation Plan (filed as an Exhibit to the
         Company's Registration Statement on Form 10 (File No. 1-12215) and
         incorporated herein by reference)
   10.7  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 by reference)
   10.8  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)
   10.9  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)
   10.10 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)
   10.11 Category One Data Access 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)
   10.12 Global Clinical Trials 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)
   10.13 Credit Agreement dated as of August 16, 1999 among the Company, as
         Borrower, the Guarantors party thereto, Merrill Lynch & Co., Merrill
         Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arranger and
         Syndication Agent, Banc of America Securities LLC, as Joint Lead
         Arranger, Bank of America, N.A., as Administrative Agent, Wachovia Bank
         N.A., as Co-Documentation Agent, The Bank of New York, as
         Co-Documentation Agent and the Lenders party thereto (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)
   10.14 Amendment No. 1 to the Credit Agreement (filed as an exhibit to the
         Company's 1999 annual report on Form 10-K and incorporated herein by
         reference)
   10.15 Amendment No. 2 to the Credit Agreement (filed as an exhibit to the
         Company's quarterly report on Form 10-Q for the quarter ended September
         30, 2000 and incorporated herein by reference)
   10.16 Security Agreement dated as of August 16, 1999 among the Company, each
         of the Guarantors party thereto and Bank of America, N.A., as
         Administrative Agent (filed as an


                                       26
   28

         exhibit to the Company's current report on Form 8-K (Date of Report:
         August 16, 1999) and incorporated herein by reference)
   10.17 Credit and Security Agreement dated as of July 21, 2000 among Quest
         Diagnostics Receivables Inc., as Borrower, the Company as Initial
         Servicer, each of the Lenders party thereto and Wachovia Bank, N.A., as
         Administrative Agent (filed as an exhibit to the Company's quarterly
         report on Form 10-Q for the quarter ended June 30, 2000 and
         incorporated herein by reference)
   10.18 Receivables Sale Agreement dated as of July 21, 2000 between the
         Company, each of the subsidiary sellers party thereto and Quest
         Diagnostics Receivables Inc. (filed as an exhibit to the Company's
         quarterly report on Form 10-Q for the quarter ended June 30, 2000 and
         incorporated herein by reference)
   10.19 Form of 10 3/4% Senior Subordinated Notes due 2006 (filed as an Exhibit
         to the Company's Registration Statement on Form S-1 (File No.
         333-15867) and incorporated herein by reference)
   10.20 Form of Indenture between Corning Clinical Laboratories Inc. and The
         Bank of New York, as Trustee, dated December 16, 1996 (filed as an
         Exhibit to the Company's Registration Statement on Form S-1 (File
         No.333-15867) and incorporated herein by reference)
   10.21 Form of Supplemental Indenture dated as of July 21, 2000 between the
         Company and The Bank of New York, as Trustee (filed as an exhibit to
         the Company's quarterly report on Form 10-Q for the quarter ended June
         30, 2000 and incorporated herein by reference)
   10.22 Form of Employees Stock Purchase Plan (filed as an Exhibit to the
         Company's Registration Statement on Form 10 (File No. 1-12215) and
         incorporated herein by reference)
   10.23 Form of 1996 Employee Equity Participation Program (filed as an Exhibit
         to the Company's Registration Statement on Form 10 (File No. 1-12215)
         and incorporated herein by reference)
   10.24 Form of 1999 Employee Equity Participation Program (filed as an Exhibit
         to the Company's proxy statement for the 1999 annual meeting of
         shareholders and incorporated herein by reference)
   10.25 Form of Stock Option Plan for Non-Employee Directors (filed as an
         exhibit to the Company's proxy statement for the 1998 annual meeting of
         shareholders and incorporated herein by reference)
   10.26 Employment Agreement between the Company and Kenneth W. Freeman (filed
         as an exhibit to the Company's 1999 annual report on Form 10-K and
         incorporated herein by reference)
   10.27 Amendment to the Employment Agreement between the Company and Kenneth
         W. Freeman (filed as an exhibit to the Company's quarterly report on
         Form 10-Q for the quarter ended June 30, 2000 and incorporated herein
         by reference)
   10.28 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)
   21    Subsidiaries of Quest Diagnostics Incorporated
   23    Consent of PricewaterhouseCoopers LLP


                                       27
   29

                                   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
                Kenneth W. Freeman   Chief Executive Officer      March 14, 2001


         By  /s/Robert A. Hagemann
             ----------------------- Corporate Vice President
                Robert A. Hagemann   and Chief Financial Officer  March 14, 2001


         By  /s/Thomas F. Bongiorno
             ----------------------- Controller and Chief
                Thomas F. Bongiorno  Accounting Officer           March 14, 2001

      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
               Kenneth W. Freeman    Chief Executive Officer      March 14, 2001


            /s/Kenneth D. Brody
             ----------------------- Director                     March 14, 2001
               Kenneth D. Brody


            /s/William F. Buehler
             ----------------------- Director                     March 14, 2001
               William F. Buehler


            /s/Van C. Campbell
             ----------------------- Director                     March 14, 2001
               Van C. Campbell


            /s/Mary A. Cirillo
             ----------------------- Director                     March 14, 2001
               Mary A. Cirillo


            /s/William R. Grant
             ----------------------- Director                     March 14, 2001
               William R. Grant


            /s/Dan C. Stanzione
             ----------------------- Director                     March 14, 2001
               Dan C. Stanzione


            /s/Gail R. Wilensky
             ----------------------- Director                     March 14, 2001
               Gail R. Wilensky


            /s/John B. Ziegler
             ----------------------- Director                     March 14, 2001
               John B. Ziegler


                                       28
   30

                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 1996 through
2000 from the audited consolidated financial statements of our company. 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.


                                       29
   31



                                                                            Year Ended December 31,
                                                 ------------------------------------------------------------------------------
                                                     2000             1999 (a)        1998           1997              1996
                                                 -----------        -----------   -----------    -----------       -----------
                                                                       (in thousands, except per share data)
                                                                                                    
Operations Data:
Net revenues .................................   $ 3,421,162      $ 2,205,243     $ 1,458,607    $ 1,528,695       $ 1,616,296
Provisions for restructuring and other special
   charges ...................................         2,100 (b)       73,385 (c)          --         48,688 (d)       668,544 (e)
Income (loss) before extraordinary loss ......       104,948 (f)       (1,274)(g)      26,885        (22,260)         (625,960)
Net income (loss) ............................       102,052 (f)       (3,413)(g)      26,885        (22,260)         (625,960)

Basic net income (loss) per common share: (h)
Income (loss) before extraordinary loss ......   $      2.34      $     (0.04)    $      0.90    $     (0.77)      $    (21.72)
Net income (loss) ............................          2.28            (0.10)           0.90          (0.77)           (21.72)

Diluted net income (loss) per common
  share: (h),(i)
Income (loss) before extraordinary loss ......   $      2.22      $     (0.04)    $      0.89    $     (0.77)      $    (21.72)
Net income (loss) ............................          2.16            (0.10)           0.89          (0.77)           (21.72)

Balance Sheet Data (at end of year):

Accounts receivable, net .....................   $   485,573      $   539,256     $   220,861    $   238,369       $   297,743
Total assets .................................     2,864,536        2,878,481       1,360,240      1,400,928         1,395,066
Long-term debt ...............................       760,705        1,171,442         413,426        482,161           515,008
Preferred stock ..............................         1,000            1,000           1,000          1,000             1,000
Common stockholders' equity ..................     1,030,795          862,062         566,930        540,660           537,719

Other Data:
Net cash provided by (used in) operating
activities ...................................   $   369,455      $   249,535     $   141,382    $   176,267       $   (88,486)(j)
Net cash used in investing activities ........       (48,015)      (1,107,990)        (39,720)       (35,101)          (63,674)
Net cash provided by (used in) financing
activities ...................................      (117,247)         682,831         (60,415)       (21,465)          157,674
Bad debt expense .............................       234,694          142,333          89,428        118,223 (k)       111,238
Rent expense .................................        76,515           59,073          46,259         47,940            49,713
Capital expenditures .........................       116,450           76,029          39,575         30,836            70,396
Adjusted EBITDA (l) ..........................       459,380          237,038         158,609        153,800           166,358


(a)   On August 16, 1999, we completed the acquisition of SBCL. Consolidated
      operating results for 1999 include the results of operations of SBCL
      subsequent to the closing of the acquisition. See Note 3 to the
      Consolidated Financial Statements.
(b)   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.
(c)   Represents charges principally incurred in conjunction with the
      acquisition and planned integration of SBCL as discussed in Note 7 to the
      Consolidated Financial Statements.
(d)   Includes a charge of $16 million to write-down goodwill reflecting the
      estimated impairment related to our consolidation plan announced in the
      fourth quarter of 1997.
(e)   Includes a charge of $445 million to reflect the impairment of goodwill
      upon the adoption of a new accounting policy in 1996 for evaluating the
      recoverability of goodwill and measuring possible impairment under a fair
      value method. See Note 2 to the Consolidated Financial Statements.
      Includes charges totaling $188 million to increase reserves related to
      claims by the Department of Justice for certain payments received by Damon
      Corporation, prior to its acquisition by the Company, and other similar
      claims.
(f)   During the fourth quarter of 2000, we prepaid $155.0 million of debt under
      our Credit Agreement. The extraordinary loss represented $4.8 million
      ($2.9 million, net of tax) of deferred financing costs which were
      written-off in connection with the prepayment of the related debt.
(g)   In conjunction with the acquisition of SBCL, we repaid the entire amount
      outstanding under our then existing credit agreement. The extraordinary
      loss recorded in the third quarter of 1999 represented $3.6 million ($2.1
      million, net of tax) of deferred financing costs which were written-off in
      connection with the extinguishment of the credit agreement.
(h)   Historical earnings per share data for periods prior to 1997 have been
      restated to reflect common shares outstanding as a result of the Company's
      recapitalization in 1996. In December 1996, 28.8 million common shares
      were issued to effectuate the Spin-Off Distribution and establish the
      Company's employee stock ownership plan.
(i)   Potentially dilutive common shares primarily include stock options and
      restricted common shares granted under our Employee Equity Participation
      Program. During periods in which net income available for common
      stockholders is a loss, diluted weighted


                                       30
   32

      average common shares outstanding will equal basic weighted average common
      shares outstanding, since under these circumstances, the incremental
      shares would have an anti-dilutive effect.
(j)   Includes the payment of Damon and other billing related settlements
      totaling approximately $144 million and the settlement of amounts owed to
      Corning Incorporated of $45 million.
(k)   Includes a fourth quarter charge of $5.3 million, which was part of the
      $6.8 million charge recorded in the same quarter, to increase the
      provision for doubtful accounts to recognize the reduced recoverability of
      certain receivables from accounts which will no longer be served as a
      result of our consolidation plan announced in the fourth quarter of 1997.
(l)   Adjusted EBITDA represents income (loss) before extraordinary loss, income
      taxes, net interest expense, depreciation, amortization and special items.
      Special items include the provisions for restructuring and other special
      charges reflected in the selected historical financial data above, $8.9
      million of costs related to the integration of SBCL which were included in
      operating costs and expensed as incurred in 2000, a $3.0 million gain
      related to the sale of an investment in 1999 and charges of $2.5 million
      and $6.8 million recorded in selling, general and administrative expenses
      in 1998 and 1997, respectively, related to the Company's consolidation of
      its laboratory network announced in the fourth quarter of 1997. Adjusted
      EBITDA is presented and discussed because management believes that
      Adjusted EBITDA is a useful adjunct to net income and other measurements
      under accounting principles generally accepted in the United States since
      it is a meaningful measure of a company's performance and ability to meet
      its future debt service requirements, fund capital expenditures and meet
      working capital requirements. Adjusted EBITDA is not a measure of
      financial performance under accounting principles generally accepted in
      the United States and should not be considered as an alternative to (i)
      net income (or any other measure of performance under generally accepted
      accounting principles) as a measure of performance or (ii) cash flows from
      operating, investing or financing activities as an indicator of cash flows
      or as a measure of liquidity.


                                       31
   33

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

Overview

      After nearly a decade of pressures to reduce reimbursement and reduce test
utilization, the underlying fundamentals of the diagnostics testing industry are
improving. 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, led to revenue and profit declines
within the laboratory 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, new and 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 testing by physicians has led to renewed growth in testing volumes and
further improvements in profitability during 2000. In addition, the following
factors are expected to continue to fuel growth in testing volume to the
industry:

      o     general aging of the U.S. population;

      o     increasing focus on early detection and prevention as a means to
            reduce the overall cost of healthcare and development of more tests
            for early detection of disease;

      o     increasing volume of tests for diagnosis and monitoring of
            infectious diseases;

      o     research and development in the area of genomics;

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

      o     increasing volume of tests as part of employer sponsored
            comprehensive wellness programs; and

      o     increasing awareness by consumers of the value of clinical
            laboratory testing and an increased willingness of consumers to pay
            for tests that may not be covered by third party payers.

      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 renewed growth expected in the industry.

      Payments for clinical laboratory services are made by the government,
managed care organizations, insurance companies, 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 insurance companies are based on the
laboratory's patient fee schedule, which may be subject to limitations on fees
imposed by insurance companies or by physicians negotiating on behalf of their
patients. Medicare and Medicaid reimbursements are based on fee schedules set by
governmental authorities. Managed care organizations, which typically contract
with a limited number of clinical laboratories for their members, represent a
significant portion of our overall clinical laboratory testing volume. Larger
managed care organizations typically prefer to use large independent clinical
laboratories because they can provide services on a national or regional basis
and can manage networks of local or regional laboratories. While the number of
patients participating in managed care plans has slowed in recent years, over
the last decade, the managed care industry has been consolidating, resulting in
fewer but larger managed care organizations with significant bargaining power to
negotiate fee arrangements with healthcare providers, including clinical
laboratories. Managed care organizations frequently negotiate capitated payment
contracts for a portion of their business, which shift the risk and cost of
testing from the managed care organization to the clinical laboratory. Under
these capitated payment contracts, the Company and managed care organization
agree to a predetermined monthly contractual rate for each member of the managed
care plan regardless of the number or cost of services provided by the Company.
Capitated agreements with managed care organizations have historically been
priced aggressively, particularly for exclusive or semi-exclusive arrangements.
Recently, there has been a shift in the way major managed care organizations
contract with clinical laboratories. Managed care organizations 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, several


                                       32
   34

agreements with major managed care organizations have been renegotiated from
exclusive contracts to 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. As a result of this emphasis on
greater freedom of choice, our enhanced service network and capabilities, and
our focus on ensuring that overall arrangements are profitable, pricing of
managed care agreements has improved. Also, managed care organizations have
recently been giving patients greater freedom of choice and patients have
increasingly been selecting plans (such as preferred provider organizations)
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.

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

      The clinical laboratory industry is labor intensive. Employee compensation
and benefits constitute approximately 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.

Acquisition of SmithKline Beecham's Clinical Laboratory Testing Business

      On August 16, 1999, we completed the acquisition of SmithKline Beecham
Clinical Laboratories, Inc. ("SBCL") which operated the clinical laboratory
business of SmithKline Beecham plc ("SmithKline Beecham"). The original purchase
price of approximately $1.3 billion was paid through the issuance of
approximately 12.6 million shares of our common stock and the payment of $1.025
billion in cash, including $20 million under a non-competition agreement between
the Company and SmithKline Beecham. At the closing of the acquisition, we used
existing cash and borrowings under a new senior secured credit facility (the
"Credit Agreement") to fund the cash purchase price and related transaction
costs of the acquisition, and to repay the entire amount outstanding under our
then existing credit agreement. The acquisition of SBCL was accounted for under
the purchase method of accounting. The historical financial statements of Quest
Diagnostics include the results of operations of SBCL subsequent to the closing
of the acquisition.

      As of December 31, 2000 and 1999, the Company had recorded approximately
$820 million and $950 million, respectively, of goodwill in conjunction with the
SBCL acquisition, representing acquisition cost in excess of the fair value of
net tangible assets acquired, which is amortized on the straight-line basis over
forty years. The amount paid under the non-compete agreement is amortized on the
straight-line basis over five years.

      The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline Beecham
owed Quest Diagnostics $98.6 million. This amount was offset by $3.6 million
separately owed by Quest Diagnostics to SmithKline Beecham, resulting in a net
payment by SmithKline Beecham of $95.0 million. The purchase price adjustment
was recorded in the Company's financial statements in the fourth quarter of 2000
as a reduction in the amount of goodwill recorded in conjunction with the SBCL
acquisition.

      The remaining components of the purchase price allocation relating to the
SBCL acquisition were finalized during the third quarter of 2000. The resulting
adjustments to the SBCL purchase price allocation primarily related to an
increase in deferred tax assets acquired, the sale of certain assets of SBCL at
fair value to unconsolidated joint ventures of Quest Diagnostics and an increase
in accrued liabilities for costs related to pre-acquisition periods. As a result
of these adjustments, the Company reduced the amount of goodwill recorded in
conjunction with the SBCL acquisition by approximately $35 million during the
third quarter of 2000.


                                       33
   35

Integration of SBCL and Quest Diagnostics Businesses

      We expect to continue to realize significant benefits from combining our
existing laboratory network with that of SBCL. As part of an integration plan
finalized in the fourth quarter of 1999, we are in the process of reducing
redundant facilities and infrastructure, including laboratory consolidations in
geographic markets served by more than one of our laboratories, and redirecting
testing volume within our national network to provide more local testing and
improve customer service. We are not exiting any geographic markets as a result
of the plan. Employee groups to be impacted as a result of these actions include
those involved in the collection and testing of specimens, as well as
administrative and other support functions. During the fourth quarter of 1999,
we 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 believes will have no future economic
benefit upon combining the operations. Integration costs related to planned
activities affecting SBCL's operations and employees were recorded as a cost of
the acquisition. Integration costs associated with the planned integration of
SBCL affecting Quest Diagnostics' operations and employees were recorded as a
charge to earnings in the fourth quarter of 1999. These costs are more fully
described under "Provisions for Restructuring and Other Special Charges". A full
discussion and analysis of the reserves related to the SBCL integration is
contained in Note 4 to the Consolidated Financial Statements.

      Through the end of December 2000, we had completed the transition of
approximately 85% of our business affected by integration throughout our
national laboratory network, including laboratory consolidations in a number of
geographic markets. Integration activities, related to laboratory consolidations
in major markets and the redirection of testing volumes to provide more local
testing and improve customer service, are underway in other markets. Management
expects to substantially complete the planned integration of the Company's
principal laboratories early in the second quarter of 2001 in all major markets.
Other activities, including the standardization of information systems, will
continue beyond 2001.

      Management expects that this integration will result in approximately $150
million of annual synergies to be achieved over the next several years. For the
year ended December 31, 2000, the Company estimates it achieved approximately
$50 million of such synergies. For the full year 2001, management expects that
the Company will realize approximately $50 - $70 million of additional synergies
driven by cost reductions.

      Management anticipates that additional charges may be recorded in 2001
associated with further consolidating the operations of SBCL beyond 2000.
Management cannot estimate the amount of these charges at this time, but expects
to fund these charges with cash from operations.

      During and after the integration process, we are committed to providing
the highest levels of customer service. Through a corporate project office, we
track and monitor key service and quality metrics. In the event that these key
service and quality metrics fail to remain at acceptable levels, we will adjust
the pace of the integration activities so that underlying causes are identified
and resolved in order to ensure that the highest levels of customer service are
maintained. While no significant service disruptions have occurred to date, the
process of combining operations could cause an interruption of, or a
deterioration in, services which could result in a customer's decision to stop
using Quest Diagnostics for clinical laboratory testing. We believe that the
successful implementation of the SBCL integration plan and our value proposition
based on expanded patient access, our broad testing capabilities and most
importantly, the quality of the services we provide, will significantly mitigate
customer attrition.


                                       34
   36

Results of Operations

      The following table summarizes our historical consolidated results of
operations for the years 1998 through 2000 and our unaudited pro forma combined
results of operations for the year ended December 31, 1999 (in thousands, except
per share data):



                                                               Year Ended December 31,
                                              -------------------------------------------------------
                                                                                           Pro Forma
                                                             Historical                    Combined
                                              -----------------------------------------   -----------
                                                  2000           1999           1998          1999
                                              -----------    -----------    -----------   -----------
                                                                              
Net revenues ..............................   $ 3,421,162    $ 2,205,243    $ 1,458,607   $ 3,294,810
Costs and expenses:

  Cost of services ........................     2,056,237      1,379,989        896,793     2,132,339
  Selling, general and administrative .....     1,001,443        643,440        445,885       948,178
  Interest, net ...........................       113,092         61,450         33,403       122,647
  Amortization of intangible assets .......        45,665         29,784         21,697        45,247
  Provisions for restructuring and other
   special charges ........................         2,100         73,385             --        89,198
  Minority share of income ................         9,359          5,431          2,017         5,431
  Other, net ..............................        (7,715)        (2,620)         4,951       (13,616)
                                              -----------    -----------    -----------   -----------
   Total ..................................     3,220,181      2,190,859      1,404,746     3,329,424
                                              -----------    -----------    -----------   -----------
Income (loss) before taxes and
  extraordinary loss ......................       200,981         14,384         53,861       (34,614)
Income tax expense (benefit) ..............        96,033         15,658         26,976        (1,075)
                                              -----------    -----------    -----------   -----------
Income (loss) before extraordinary loss ...       104,948         (1,274)        26,885       (33,539)
Extraordinary loss, net of taxes ..........        (2,896)        (2,139)            --        (2,139)
                                              -----------    -----------    -----------   -----------
Net income (loss) .........................   $   102,052    $    (3,413)   $    26,885   $   (35,678)
                                              ===========    ===========    ===========   ===========

Income before extraordinary loss and
  special items ...........................   $   106,218    $    41,150    $    26,885   $    12,581

Basic net income (loss) per common share:

Income (loss) before extraordinary loss ...   $      2.34    $     (0.04)   $      0.90   $     (0.78)
Net income (loss) .........................          2.28          (0.10)          0.90         (0.83)

Income before extraordinary loss and
  special items ...........................          2.37           1.17           0.90          0.29

Weighted average common shares outstanding
  - basic .................................        44,763         35,014         29,684        43,345

Diluted net income (loss) per common share:

Income (loss) before extraordinary loss ...   $      2.22    $     (0.04)   $      0.89   $     (0.78)
Net income (loss) .........................          2.16          (0.10)          0.89         (0.83)

Income before extraordinary loss and
  special items ...........................          2.25           1.15           0.89          0.28

Weighted average common shares outstanding
  - diluted ...............................        47,150         35,827         30,229        44,088

Supplemental Data:

Bad debt expense ..........................   $   234,694    $   142,333    $    89,428   $   258,778
Adjusted EBITDA ...........................       459,380        237,038        158,609       337,378



                                       35
   37

Historical Results of Operations

      Year Ended December 31, 2000 Compared with Year Ended December 31, 1999

      Income before an extraordinary loss for the year ended December 31, 2000
increased to $104.9 million from a loss of $1.3 million for the prior year.
Extraordinary losses, net of taxes, of $2.9 million and $2.1 million were
recorded in 2000 and 1999, respectively, representing the write-off of deferred
financing costs associated with the prepayment of debt. Additionally, a number
of special items were recorded in 2000 and 1999 which consisted of the
provisions for restructuring and other special charges reflected on the face of
the statement of operations of $2.1 million and $73.4 million, respectively, and
a $3.0 million gain related to the sale of an investment in the fourth quarter
of 1999. Excluding the special items and the extraordinary loss, net income for
the year ended December 31, 2000 increased to $106.2 million, compared to $41.2
million for the prior year period. This increase was primarily due to the SBCL
acquisition and improved operating performance of the Company.

      Results for the years ended December 31, 2000 and 1999 included the
effects of testing performed by third parties under our laboratory network
management arrangements. As laboratory network manager, we included in our
consolidated revenues and expenses the cost of testing performed by third
parties. This treatment added $48.8 million and $91.6 million to both reported
revenues and cost of services for the years ended December 31, 2000 and 1999,
respectively. This treatment also serves to increase cost of services as a
percentage of net revenues and decrease selling, general and administrative
expenses as a percentage of net revenues. During the first quarter of 2000, we
terminated a laboratory network management arrangement with Aetna USHealthcare,
and entered into a new non-exclusive contract under which we are no longer
responsible for the cost of testing performed by third parties. In addition,
during the third quarter of 2000, we amended our laboratory network management
contract with Oxford Health to remove the financial risk associated with testing
performed by third parties. As such, we are no longer responsible for the cost
of testing performed by third parties under the contract with Oxford Health. On
a full year basis, these changes to the laboratory network management agreements
will reduce net revenues and cost of services by approximately $150 million.

      Net Revenues

      Net revenues for the year ended December 31, 2000 increased $1.2 billion
over the prior year period, primarily due to the acquisition of SBCL. Also
contributing to the increase were improvements in average revenue per
requisition and requisition volume.

      Operating Costs and Expenses

      Total operating costs for the year ended December 31, 2000 increased from
the prior year period, primarily due to the acquisition of SBCL. Operating costs
and expenses for the year ended December 31, 2000 included $8.9 million of costs
related to the integration of SBCL which were not chargeable against previously
established reserves for integration costs. These costs are primarily related to
equipment and employee relocation costs, professional and consulting fees,
company identification and signage costs and the amortization of stock-based
employee compensation related to the special recognition awards granted in the
fourth quarter of 1999. Management anticipates that during 2001, the Company
will incur similar costs of approximately $2 million to $4 million relative to
the integration plan, which will be expensed as incurred.

      The following discussion and analysis regarding operating costs and
expenses exclude the effect of testing performed by third parties under our
laboratory network management arrangements, which serve to increase cost of
services as a percentage of net revenues and reduce selling, general and
administrative expenses as a percentage of net revenues.

      Cost of services, which includes the costs of obtaining, transporting and
testing specimens, decreased during 2000, as a percentage of net revenues, to
59.5% from 61.0% in the prior year period. This decrease was primarily due to an
improvement in average revenue per requisition and the realization of synergies
associated with the integration of SBCL. These decreases were partially offset
by an increase in employee compensation and training costs.

      Selling, general and administrative expenses, which includes the costs of
the sales force, billing operations, bad debt expense, general management and
administrative support, decreased during 2000, as a percentage of net revenues,
to 29.7% from 30.4% in the prior year period. This decrease was primarily
attributable to improvements in average revenue per requisition and the impact
of the SBCL acquisition which enabled us to leverage certain of our fixed costs
across a larger revenue base, partially offset by increases in employee
compensation and training costs, investments related to our


                                       36
   38

information technology strategy and bad debt expense. For the year ended
December 31, 2000, bad debt expense was 7.0% of net revenues, compared to 6.7%
of net revenues in the prior year period. The increase in bad debt expense was
principally attributable to SBCL's collection experience which is less favorable
than Quest Diagnostics' historical experience. A significant portion of the
difference is due to Quest Diagnostics' processes in the billing area, most
notably the processes around the collection of diagnosis, patient and insurance
information necessary to effectively bill for services performed. We have made
significant progress towards improving the overall bad debt experience of the
combined company with quarter to quarter improvements in bad debt expense
throughout 2000. Based on prior experience as well as the sharing of internal
best practices in the billing functions, we believe that substantial
opportunities continue to exist to improve our overall collection experience.

      Interest, Net

      Net interest expense increased from the prior year by $51.6 million. Net
interest expense for the year ended December 31, 1999 included $1.9 million of
interest income associated with a favorable state tax settlement. The remaining
increase was principally attributable to the amounts borrowed under the Credit
Agreement in conjunction with the SBCL acquisition.

      Amortization of Intangible Assets

      Amortization of intangible assets increased from the prior year by $15.9
million for the year ended December 31, 2000, principally as a result of the
SBCL acquisition.

      Provisions for Restructuring and Other Special Charges

      During the second quarter of 2000, we recorded a net special charge of
$2.1 million. Of the special charge, $13.4 million represented the costs to
cancel certain contracts that we believed were not economically viable as a
result of the SBCL acquisition. These costs were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing services.
These 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.

      During the third quarter of 2000, we reviewed our remaining restructuring
reserves initially recorded in the fourth quarter of 1999 and revised certain
estimates relative to integration activities, which resulted in a $2.1 million
reduction in accruals associated with planned restructuring activities affecting
Quest Diagnostics' operations and employees. These revisions were principally
associated with lower costs for employee severance and reduced costs to exit
certain leased facilities. This reduction in accruals was offset by a charge to
write-off fixed assets used in the operations of Quest Diagnostics which we
believe will have no future economic benefit as a result of combining the
operations of SBCL and Quest Diagnostics.

      The reduction in employee severance costs was primarily attributable
to higher than anticipated volume growth and higher than expected voluntary
turnover, which reduced the number of planned severances, principally in the New
York and Philadelphia metropolitan areas. The greater than anticipated volume
growth in these regions allowed the Company to reassign to other positions
individuals who would have otherwise been severed. The higher than expected
voluntary turnover was a result of delays in the integration process which were
outside our control and stemmed from protracted contract renegotiations with a
major customer, and construction delays. These reductions were partially offset
by the elimination of certain senior management positions, which increased the
average cost of severance benefits per employee.

      The reduction in costs to exit leased facilities is primarily related to
our New York metropolitan area operations to reflect revised assumptions related
to the costs to be paid to exit leased facilities.

      While our original plan anticipated completion by the end of December 31,
2000, certain factors outside our control such as the protracted negotiations
related to contractual obligations and unexpected construction delays at two of
our laboratories have prevented us from completing our plans within a one year
time frame. Management expects to substantially complete the planned
integration of the Company's principal laboratories early in the second quarter
of 2001 in all major markets.

      While certain cost estimates, relative to integration activities, were
revised during 2000, the revisions did not impact our estimate of approximately
$150 million of related annual synergies over the next several years. We
estimate that the Company achieved approximately $50 million of such synergies
in 2000. For the full year 2001, management expects that the Company will
realize approximately $50 - $70 million of additional synergies driven by cost
reductions.

      During the third and fourth quarters of 1999, we recorded provisions for
restructuring and other special charges totaling $30.3 million and $43.1
million, respectively, principally incurred in connection with the acquisition
and planned integration of SBCL.

      Of the total special charge recorded in the third quarter of 1999, $19.8
million represented stock-based employee compensation of which $17.8 million
related to special one-time grants of our common stock to certain individuals of
the combined company, and $2.0 million related to the accelerated vesting, due
to the completion of the SBCL acquisition, of restricted stock grants made in
previous years. In addition, during the third quarter of 1999, we incurred $9.2
million of professional and consulting fees related to integration planning
activities. The remainder of the third quarter charge related to costs incurred
in conjunction with our planned offering of new senior subordinated notes, the
proceeds of which were expected to be used to repay our existing 10 3/4% senior
subordinated notes due 2006, or the Notes. During the third quarter of 1999, we
decided not to proceed with the offering due to unsatisfactory market
conditions.

      Of the total special charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees. Of these costs, $23.4 million
related to employee severance costs, $9.7 million related primarily to lease
obligations for facilities and equipment and $6.7 million was associated with
the write-off of assets that we plan to dispose of in conjunction with the
integration of SBCL. Offsetting these charges was the reversal of $3.4 million
of reserves associated with our consolidation plan announced in the fourth
quarter of 1997. Upon finalizing the initial integration plans for SBCL in the
fourth quarter of 1999, we determined that $3.4 million of the remaining
reserves associated with the December 1997 consolidation plan was no longer
necessary due to changes in the plan as a result of the SBCL integration. In
addition to the net charge of $36.4 million, we recorded $3.5 million of special
recognition awards granted in the fourth quarter of 1999 to certain employees
involved in the transaction and integration planning processes of the SBCL
acquisition. The remainder of the fourth quarter special charge was primarily
attributable to professional and consulting fees incurred in connection with
integration related planning activities.


                                       37
   39

      Minority Share of Income

      Minority share of income for the year ended December 31, 2000 increased
from the prior year period, primarily due to improved performance at our joint
ventures.

      Other, Net

      Other, net for the year ended December 31, 2000 decreased from the prior
year period, primarily due to an increase in equity earnings from unconsolidated
joint ventures, and to a lesser extent, the amortization of deferred gains
associated with certain investments.

      Income Taxes

      Our effective tax rate is significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and has the effect of
increasing the overall tax rate. The reduction in the effective tax rate for
2000 was primarily due to pretax earnings increasing at a faster rate than
goodwill amortization and other non-deductible items.

      Extraordinary Loss

      Extraordinary losses were recorded in 2000 and 1999 representing the
write-off of deferred financing costs associated with debt which was prepaid
during the periods.

      During the fourth quarter of 2000, we prepaid $155 million of term loans
under our Credit Agreement. The extraordinary loss recorded in the fourth
quarter of 2000 in connection with this prepayment was $4.8 million ($2.9
million, net of tax).

      In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in the third quarter of 1999 in connection with this prepayment was
$3.6 million ($2.1 million, net of tax).

      Adjusted EBITDA

      Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items for 2000 and 1999 included the provisions for restructuring and
other special charges reflected on the face of the statements of operations,
$8.9 million of costs related to the integration of SBCL which were included in
operating costs and expensed as incurred in 2000, and a $3.0 million gain
related to the sale of an investment in the fourth quarter of 1999. Adjusted
EBITDA is presented and discussed because management believes that Adjusted
EBITDA is a useful adjunct to net income and other measurements under accounting
principles generally accepted in the United States since it is a meaningful
measure of a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital requirements.
Adjusted EBITDA is not a measure of financial performance under accounting
principles generally accepted in the United States and should not be considered
as an alternative to (i) net income (or any other measure of performance under
accounting principles generally accepted in the United States) as a measure of
performance or (ii) cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity.

      Adjusted EBITDA for 2000 improved to $459.4 million, or 13.4% of net
revenues from $237.0 million, or 11.2% of net revenues, excluding the impact of
testing performed by third parties under our laboratory network management
arrangements, in the prior year period. The dollar increase in Adjusted EBITDA
was principally associated with the SBCL acquisition. The percentage improvement
in Adjusted EBITDA was primarily related to improvements in the operating
performance of the Company and synergies realized from the acquisition of SBCL.

      Year Ended December 31, 1999 Compared with Year Ended December 31, 1998

      Income before an extraordinary loss, and special items incurred in
connection with the SBCL acquisition, increased to $41.2 million in 1999 from
$26.9 million in the prior year. Special items for 1999 consisted of the
provisions for restructuring and other special charges of $73.4 million and a
$3.0 million gain related to the sale of an investment in the fourth quarter of
1999. Special items for 1998 consisted of a $2.5 million charge recorded in
selling, general and administrative expenses that represented the final costs
associated with our consolidation plan announced in December


                                       38
   40

1997. Including these items and an extraordinary loss, net of taxes, of $2.1
million incurred in connection with the acquisition of SBCL, we reported a net
loss for 1999 of $3.4 million, compared to net income of $26.9 million for 1998.

      Results for the year ended December 31, 1999 included the effects of
testing performed by third parties under our laboratory network management
arrangements. As laboratory network manager, we included in our consolidated
revenues and expenses the cost of testing performed by third parties. This
impacts the comparability of revenues and expenses from year to year and served
to increase both reported revenues and cost of services by $91.6 million for the
year ended December 31, 1999. This treatment also serves to increase cost of
services as a percentage of net revenues and decrease selling, general and
administrative expenses as a percentage of net revenues.

      Net Revenues

      Excluding the effect of the testing performed by third parties under our
laboratory network management arrangements, net revenues for the year ended
December 31, 1999 increased $655.0 million over the prior year period. This
increase was primarily due to the acquisition of SBCL. Excluding the impact of
the SBCL acquisition and the third party testing performed under our laboratory
network management arrangements, net revenues for the year ended December 31,
1999 increased 1.2% from the prior year level, principally due to an increase in
average revenue per requisition partially offset by a volume decrease of 3.3%.
Exclusive of the SBCL acquisition, year over year volume comparisons improved
throughout the year, and in the fourth quarter reflected volume gains over the
prior year period.

      Operating Costs and Expenses

      Total operating costs for the year ended December 31, 1999, excluding the
effect of testing performed by third parties under our laboratory network
management arrangements, increased from the prior year period. The increase was
due primarily to the acquisition of SBCL. Operating costs and expenses for 1998
included a first quarter charge of $2.5 million in selling, general and
administrative expenses that represented the final costs associated with our
consolidation plan announced in the fourth quarter of 1997.

      The following discussion and analysis regarding operating costs and
expenses exclude the effect of testing performed by third parties under our
laboratory network management arrangements, which serve to increase cost of
services as a percentage of net revenues and reduce selling, general and
administrative expenses as a percentage of net revenues. Cost of services, which
included the costs of obtaining, transporting and testing specimens, decreased
during 1999 as a percentage of net revenues to 61.0% from 61.5% a year ago. This
decrease was primarily attributable to an increase in average revenue per
requisition.

      Selling, general and administrative expenses, which included the costs of
the sales force, billing operations, bad debt expense, general management and
administrative support, decreased during 1999 as a percentage of net revenues to
30.4% from 30.6% in the prior year. During 1999 bad debt expense increased to
6.7% of net revenues from 6.1% of net revenues in the prior year. The increase
in bad debt expense was principally attributable to SBCL's collection
experience, which is less favorable than Quest Diagnostics' historical
experience. A significant portion of the difference is due to Quest Diagnostics'
processes in the billing area, most notably the processes around the collection
of diagnosis, patient and insurance information necessary to effectively bill
for services performed. While the sharing of internal best practices has begun
in the billing functions, management believes that additional opportunities
exist in order to improve SBCL's historical collection experience. The remaining
overall decrease in selling, general and administrative expenses as a percentage
of net revenues was primarily attributable to the impact of the SBCL acquisition
which enabled us to leverage certain of our fixed costs across a larger revenue
base. While selling, general and administrative expenses decreased as a
percentage of net revenues, we experienced an increase in expenses in 1999 as
compared to 1998 due to the impact of the SBCL acquisition and from additional
investments in information technology and sales and marketing capabilities,
litigation expenses and employee compensation costs.

      Interest, Net

      Net interest expense in 1999 increased from the prior year by $28.0
million. Net interest expense for the year ended December 31, 1999 included $1.9
million of interest income associated with a favorable state tax settlement. The
increase in net interest expense is primarily attributable to the amounts
borrowed under the Credit Agreement in conjunction with the SBCL acquisition and
a decrease in interest income resulting from lower average cash balances in 1999
as compared to 1998.


                                       39
   41

      Amortization of Intangible Assets

      Amortization of intangible assets increased in 1999 from the prior year by
$8.1 million, principally as a result of the SBCL acquisition.

      Provisions for Restructuring & Other Special Charges

      During the third and fourth quarters of 1999, we recorded provisions for
restructuring and other special charges totaling $30.3 million and $43.1
million, respectively, principally incurred in connection with the acquisition
and planned integration of SBCL.

      Of the total special charge recorded in the third quarter of 1999, $19.8
million represented stock-based employee compensation of which $17.8 million
related to special one-time grants of our common stock to certain individuals of
the combined company, and $2.0 million related to the accelerated vesting, due
to the completion of the SBCL acquisition, of restricted stock grants made in
previous years. In addition, during the third quarter of 1999, we incurred $9.2
million of professional and consulting fees related to integration planning
activities. The remainder of the third quarter charge related to costs incurred
in conjunction with our planned offering of new senior subordinated notes, the
proceeds of which were expected to be used to repay our existing Notes. During
the third quarter of 1999, we decided not to proceed with the offering due to
unsatisfactory market conditions.

      Of the total special charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees. Of these costs, $23.4 million
related to employee severance costs, $9.7 million related primarily to lease
obligations for facilities and equipment and $6.7 million was associated with
the write-off of assets that we plan to dispose of in conjunction with the
integration of SBCL. Offsetting these charges was the reversal of $3.4 million
of reserves associated with our consolidation plan announced in the fourth
quarter of 1997. Upon finalizing the initial integration plans for SBCL in the
fourth quarter of 1999, we determined that $3.4 million of the remaining
reserves associated with the December 1997 consolidation plan was no longer
necessary due to changes in the plan as a result of the SBCL integration. In
addition to the net charge of $36.4 million, we recorded $3.5 million of special
recognition awards granted in the fourth quarter of 1999 to certain employees
involved in the transaction and integration planning processes of the SBCL
acquisition. The remainder of the fourth quarter special charge was primarily
attributable to professional and consulting fees incurred in connection with
integration related planning activities.

      Integration costs, including write-offs of fixed assets, totaling $55.5
million which are related to planned integration activities affecting SBCL
assets, liabilities and employees, were recorded in the fourth quarter of 1999
as a cost of the SBCL acquisition. Of these costs, $33.8 million related to
employee severance costs and $13.4 million related to contractual obligations
including those related to facilities and equipment leases. The remaining
portion of the costs were associated with the write-off of assets that we plan
to dispose of in conjunction with the integration of SBCL.

      Minority Share of Income

      Minority share of income for 1999 increased from the prior year level,
primarily due to the contribution of our Pittsburgh, Pennsylvania and St. Louis,
Missouri businesses to two joint ventures formed in the fourth quarter of 1998.
During both 1999 and 1998, we maintained a 51% controlling ownership interest in
both of these affiliated companies.

      Other, Net

      Other, net for 1999 decreased from the prior year level, primarily due to
a gain of $3.0 million associated with the sale of an investment in the fourth
quarter of 1999 and a reduction in equity losses of $4.5 million, primarily
associated with our joint venture in Arizona in which we hold a 49% interest.

      Income Taxes

      Our effective tax rate was significantly impacted by goodwill
amortization, the majority of which is not deductible for tax purposes, and had
the effect of increasing the overall tax rate. The goodwill associated with the
SBCL acquisition further increased the effective tax rate for 1999 compared to
1998.


                                       40
   42

      Extraordinary Loss

      In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in the third quarter of 1999 of $3.6 million ($2.1 million, net of
taxes) represented the write-off of deferred financing costs associated with the
credit agreement.

      Adjusted EBITDA

      Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items.
Special items included the provisions for restructuring and other special
charges for 1999 reflected on the face of the statements of operations, a $3.0
million gain related to the sale of an investment in the fourth quarter of 1999
and a charge of $2.5 million recorded in selling, general and administrative
expenses in 1998 related to the consolidation of our laboratory network
announced in the fourth quarter of 1997. Adjusted EBITDA is presented and
discussed because management believes that Adjusted EBITDA is a useful adjunct
to net income and other measurements under accounting principles generally
accepted in the United States since it is a meaningful measure of a company's
performance and ability to meet its future debt service requirements, fund
capital expenditures and meet working capital requirements. Adjusted EBITDA is
not a measure of financial performance under accounting principles generally
accepted in the United States and should not be considered as an alternative to
(i) net income (or any other measure of performance under accounting principles
generally accepted in the United States) as a measure of performance or (ii)
cash flows from operating, investing or financing activities as an indicator of
cash flows or as a measure of liquidity.

      Adjusted EBITDA for 1999 improved to $237.0 million, or 11.2% of net
revenues, excluding the impact of testing performed by third parties under our
laboratory network management arrangements, from $158.6 million, or 10.9% of net
revenues, in the prior year period. The dollar increase in Adjusted EBITDA was
principally associated with the SBCL acquisition. The percentage improvement in
Adjusted EBITDA was primarily related to improvements in the Company's operating
performance prior to the acquisition of SBCL.

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
includes the use of derivative financial instruments. We do not hold or issue
derivative financial instruments for trading purposes. In accordance with the
terms of the Credit Agreement, we maintain interest rate swap agreements to
mitigate the risk of changes in interest rates associated with our variable rate
bank debt. We do not believe that our foreign exchange exposure and related
hedging program are 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.

      Interest Rates

      At December 31, 2000 and 1999, the fair value of our debt was estimated at
approximately $1.0 billion and $1.2 billion, 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, 2000, the
estimated fair value exceeded the carrying value of the debt by approximately $5
million. At December 31, 1999, the carrying value of the debt exceeded the
estimated fair value by approximately $4 million. An assumed 10% increase in
interest rates (representing approximately 100 basis points) would potentially
reduce the estimated fair value of our debt by approximately $8 million and $10
million, respectively, at December 31, 2000 and 1999.

      At December 31, 2000 and 1999, we had $848 million and $1,036 million,
respectively, of variable interest rate debt outstanding. The Credit Agreement
requires us to mitigate the risk of changes in interest rates associated with
our variable interest rate indebtedness through the use of interest rate swap
agreements. Under such arrangements, we convert a portion of our variable rate
indebtedness to fixed rates based on a notional principal amount. The settlement
dates are correlated to correspond to the interest payment dates of the hedged
debt. During the term of the Credit Agreement, the notional amounts under the
interest rate swap agreements, plus the principal amount outstanding of our
fixed interest rate indebtedness, must be at least 50% of our net funded debt
(as defined in the Credit Agreement). As of December 31, 2000 and 1999, the
aggregate notional principal amount under the interest rate swap agreements
which mature at various dates through November 2002 totaled $410 million and
$450 million, respectively. At December 31, 2000 and 1999, the estimated fair
value of the interest rate swap agreements approximated a liability of $2
million and an asset of $4 million, respectively.


                                       41
   43

      Based on our net exposure to interest rate changes, an assumed 10%
increase in interest rates, (representing approximately 100 basis points) would
result in a $1.8 million reduction in our after-tax earnings and cash flows for
the year ended December 31, 2000 based on debt levels as of December 31, 2000,
after considering the impact of our interest rate swap agreements. The primary
interest rate exposures on the variable interest rate debt are with respect to
interest rates on United States dollars as quoted in the London interbank
market.

Liquidity and Capital Resources

      Cash and cash equivalents at December 31, 2000 totaled $171.5 million, an
increase of $144.2 million from December 31, 1999. Cash flows from operating
activities in 2000 provided cash of $369.5 million, which was partially offset
by investing and financing activities which required cash of $225.3 million. We
maintain zero-balance bank accounts for the majority of our cash disbursements.
Prior to the second quarter of 2000, we maintained our largest disbursement
accounts and primary concentration accounts at the same financial institution,
giving that financial institution the legal right of offset. As such, book
overdrafts related to the disbursement accounts were offset against cash
balances in the concentration accounts for reporting purposes. During the second
quarter of 2000, we moved our primary concentration account to another financial
institution such that no offset exists. As a result, book overdrafts in the
amount of $47.4 million at December 31, 2000, representing outstanding checks,
were classified as liabilities and not reflected as a reduction of cash at
December 31, 2000. Cash and cash equivalents at December 31, 1999 totaled $27.3
million, a decrease of $175.6 million from the prior year-end balance. The
decrease in cash and cash equivalents during 1999 was principally associated
with the acquisition and financing of the SBCL acquisition and the repayment of
the entire amount outstanding under our then existing credit agreement. Cash
flows from operating and financing activities during 1999 provided cash of
$249.5 million and $682.8 million, respectively, and were used to fund investing
activities which required cash of $1.1 billion.

      Net cash from operating activities for 2000 was $119.9 million higher than
the 1999 level. Of the increase, $47.4 million was due to the impact of
accounting for book overdrafts discussed above, and the remaining $72.5 million
increase was primarily due to the impact of the SBCL acquisition and
improvements in the operating performance of the Company, partially offset by an
increase in payments for restructuring, integration and other special charges.
Net cash from operating activities for 1999 was $108.2 million higher than the
1998 level. The increase is primarily due to the impact of the SBCL acquisition.

     Improvements in the billing operations subsequent to the acquisition of
SBCL have led to an improvement in the number of days sales outstanding, a
measure of billing and collection efficiency. Excluding the impact of our
laboratory network management arrangements, days sales outstanding were 56 days
at December 31, 2000, compared to 57 days at December 31, 1999.

      Net cash used in investing activities in 2000 was primarily comprised of
capital expenditures and investments in two companies, one company which is
developing Internet-based disease management solutions for physicians and
managed care organizations, and another company which is developing
Internet-based solutions to provide electronic medical records products. These
investing activities in 2000 were partially offset by the receipt of $95 million
from SmithKline Beecham in conjunction with finalizing the purchase price
adjustment provided for in the SBCL acquisition agreements. Investing activities
for 1999 were principally related to the acquisition of SBCL, including
transaction costs associated with the acquisition. In addition, net cash used in
investing activities for 1999 included capital expenditures, investments to fund
certain employee benefit plans, and contributions to our joint venture in
Arizona, offset by the proceeds from the sale of an investment in the fourth
quarter of 1999.

      Net cash used in financing activities for 2000 was principally associated
with the repayment of debt under our Credit Agreement and distributions to
minority partners, partially offset by proceeds from the completion of a $256
million receivables-backed financing transaction (the "Receivables Financing")
and proceeds from the exercise of stock options. On July 21, 2000, we completed
the Receivables Financing, the proceeds of which were used to pay down loans
outstanding under the Credit Agreement. Approximately $48 million was used to
completely repay amounts outstanding under the capital markets loan, with the
remainder used to repay amounts outstanding under the term loans. In addition,
the repayment of the capital markets loan reduced the borrowing spreads on all
remaining term loans under the Credit Agreement. Management estimates that this
transaction will result in a reduction in annual borrowing costs of
approximately $5 million to $7 million. The borrowings outstanding under the
Receivables Financing are classified as a current liability since the lenders
fund the borrowings through the issuance of commercial paper which matures at
various dates up to ninety days from the date of issuance. During the fourth
quarter of 2000, we prepaid $155 million of bank debt under the Credit
Agreement. Net cash provided by financing activities for 1999 primarily
consisted of borrowings under the Credit Agreement to fund the cash purchase
price and related transaction costs of the SBCL acquisition,


                                       42
   44

repayments of debt, the majority of which related to our then existing credit
agreement at the closing of the SBCL acquisition, and payments of financing
costs associated with our new Credit Agreement.

      In 1998, the Board of Directors authorized a limited share purchase
program which permitted the Company to purchase up to $27 million of its
outstanding common stock through 1999. Cumulative purchases under the program
through December 31, 1999 totaled $14.1 million. Shares purchased under the
program were reissued in connection with certain employee benefit plans. We
suspended purchases of our shares when we reached a preliminary understanding of
the transaction with SmithKline Beecham on January 15, 1999.

      We estimate that we will invest approximately $130 million to $150 million
during 2001 for capital expenditures to support and expand our existing
operations, principally related to investments in information technology,
equipment, and facility upgrades and expansions necessary to accommodate the
integration of the SBCL business. Other than the reduction for outstanding
letters of credit, which approximated $13 million at December 31, 2000, all of
the revolving credit facility under the Credit Agreement was available for
borrowing at December 31, 2000.

      We expect to continue to prepay the term loans outstanding under the
Credit Agreement with excess cash on hand during 2001. In conjunction with these
prepayments, a portion of the deferred financing costs associated with the term
loans are expected to be written-off and charged to earnings as extraordinary
losses, net of applicable taxes.

      We believe that cash from operations and the revolving credit facility
under the Credit Agreement, together with the indemnifications by Corning and
SmithKline Beecham against monetary fines, penalties or losses from outstanding
government and other related claims, will provide sufficient financial
flexibility to integrate the operations of Quest Diagnostics and SBCL, to meet
seasonal working capital requirements and to fund capital expenditures and
additional growth opportunities for the foreseeable future. Additionally, we
believe that our improved financial performance should provide us with access to
additional financing, if necessary, to fund growth opportunities which cannot be
funded from existing sources.

      We do not anticipate paying dividends on our common stock in the
foreseeable future. The Credit Agreement prohibits the payment of cash dividends
on our common stock and the Indenture restricts our ability to pay cash
dividends on all classes of stock. These restrictions are primarily based on a
percentage of the Company's earnings as defined in the Indenture. Additionally,
the Credit Agreement contains various covenants and conditions including the
maintenance of certain financial ratios and tests, and restricts our ability to,
among other things, incur additional indebtedness and repurchase shares of our
outstanding common stock.

      On February 21, 2001, the Board of Directors approved a two-for-one stock
split of the Company's common stock, subject to stockholder approval of an
increase in the number of common shares authorized from 100 million shares to
300 million shares. The stock split will be effected by the issuance on May 31,
2001, 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. All references to
the number of common shares and per common share amounts, including earnings per
common share calculations, have not been restated to reflect this proposed stock
dividend, since the stock dividend is contingent upon stockholder approval.

Outlook

      As discussed in the Overview, we believe that the underlying fundamentals
of the diagnostic testing industry are improving and will fuel growth for the
industry. As the leading national provider with the most extensive network of
laboratories and patient service centers throughout the United States, Quest
Diagnostics will be able to further enhance patient access and customer service.
We provide a broad range of benefits for customers, including: continued
improvements in quality; convenience and accessibility; a broad test menu; and a
broad range of medical information products to help providers and insurers
better manage their patients' health. We plan to pursue profitable growth
opportunities, including: direct contracting with employers for laboratory
services; clinical trials testing for pharmaceutical companies; testing for
hospitals; genetic and other esoteric testing; and testing directly for
consumers.

      Finally, we believe that we have opportunities to achieve significant net
cost savings through the completion of the SBCL integration, which is estimated
to result in annual cost savings of approximately $150 million within three
years from the acquisition date. Management believes that the successful
integration of SBCL, along with the execution of our business strategy, will
enable us to achieve earnings growth, before special charges, in excess of 30%
annually over the next several years.


                                       43
   45

Inflation

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

Impact of Recently Issued Accounting Standards

      In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", under
which SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (2001 for the Company). In June 2000, the FASB
issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of issues causing
implementation difficulties for entities applying SFAS 133. 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 in 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 is disclosed. The adoption of SFAS 133 as amended
will not have a significant effect on the Company's results of operations or its
financial position.

Pro Forma Comparisons

      The pro forma combined financial information assumes that the SBCL
acquisition and borrowings under the Credit Agreement were effected on January
1, 1999. The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline Beecham
owed Quest Diagnostics $98.6 million. This amount was offset by $3.6 million
separately owed by Quest Diagnostics to SmithKline Beecham, resulting in a net
payment by SmithKline Beecham of $95.0 million. The purchase price adjustment
was recorded in the Company's financial statements in the fourth quarter of 2000
as a reduction in the amount of goodwill recorded in conjunction with the SBCL
acquisition.

      The remaining components of the purchase price allocation relating to the
SBCL acquisition were finalized during the third quarter of 2000. The resulting
adjustments to the SBCL purchase price allocation primarily related to an
increase in deferred tax assets acquired, the sale of certain assets of SBCL at
fair value to unconsolidated joint ventures of Quest Diagnostics and an increase
in accrued liabilities for costs related to pre-acquisition periods. As a result
of these adjustments, the Company reduced the amount of goodwill recorded in
conjunction with the SBCL acquisition by approximately $35 million during the
third quarter of 2000.

      In connection with finalizing the purchase price adjustment with
SmithKline Beecham, Quest Diagnostics filed a current report on Form 8-K on
October 31, 2000 with the Securities and Exchange Commission to revise and
update certain pro forma combined financial information previously reported by
the Company (1) to reflect the restated historical financial statements of SBCL
prepared in conjunction with finalizing the purchase price adjustment provided
for in the SBCL acquisition agreements, as described above, (2) to reflect the
reduction in the purchase price of the SBCL acquisition, (3) to reflect the
completion of the purchase price allocation and (4) to revise other adjustments
that had been reflected in the previously reported pro forma combined financial
information. The unaudited pro forma combined financial information included in
this Form 10-K reflects the revised pro forma combined financial information
included in the Form 8-K referred to above.

      None of the adjustments, resulting from the reduction in the SBCL purchase
price or the completion of the purchase price allocation, had any impact on the
Company's previously reported historical financial statements.

      The unaudited pro forma combined financial information is presented for
illustrative purposes only to assist in analyzing the financial implications of
the SBCL acquisition and borrowings under the Credit Agreement. The unaudited
pro forma combined financial information may not be indicative of the combined
financial results of operations that would have been realized had Quest
Diagnostics and SBCL been a single entity during the periods presented. In
addition, the unaudited pro forma combined financial information is not
necessarily indicative of the future results that the combined company will
experience.


                                       44
   46

      Significant pro forma adjustments reflected in the unaudited pro forma
combined financial information include reductions in employee benefit costs and
general corporate overhead allocated to the historical results of SBCL by
SmithKline Beecham, offset by an increase in net interest expense to reflect our
new credit facility which was used to finance the SBCL acquisition. Amortization
of the goodwill, which accounts for a majority of the acquired intangible
assets, is calculated on the straight-line basis over forty years. Income taxes
have been adjusted for the estimated income tax impact of the pro forma
adjustments at the incremental tax rate of 40%. A significant portion of the
intangible assets acquired in the SBCL acquisition is not deductible for tax
purposes, which has the overall impact of increasing the effective tax rate.

      Both basic and diluted weighted average common shares outstanding have
been presented on a pro forma basis giving effect to the shares issued to
SmithKline Beecham and the shares granted at closing to employees. Potentially
dilutive common shares primarily represent stock options. During periods in
which net income available for common stockholders is a loss, diluted weighted
average common shares outstanding will equal basic weighted average common
shares outstanding, since under these circumstances, the incremental shares
would have an anti-dilutive effect.

      Historical Year Ended December 31, 2000 Compared with
      Pro Forma Combined Year Ended December 31, 1999

      The following discussion and analysis compares our historical results of
operations for the year ended December 31, 2000 to the pro forma combined
results of operations for the year ended December 31, 1999, assuming that SBCL
had been acquired by Quest Diagnostics on January 1, 1999. All references in
this section to the year ended December 31, 2000 refer to the historical results
of Quest Diagnostics for such period. All references in this section to the year
ended December 31, 1999 refer to the pro forma combined results of Quest
Diagnostics for such period.

      Income before an extraordinary loss for the year ended December 31, 2000
increased to $104.9 million, compared to a loss of $33.5 million for the prior
year period. Extraordinary losses, net of taxes, of $2.9 million and $2.1
million were recorded in 2000 and 1999, respectively, representing the write-off
of deferred financing costs associated with the prepayment of debt.
Additionally, a number of special items were recorded in 2000 and 1999 which
consisted of the provisions for restructuring and other special charges
reflected on the face of the historical and pro forma combined statement of
operations, respectively, a $9.7 million gain recognized by SBCL on the sale of
its physician office-based teleprinter assets and network in the first quarter
of 1999 and a $3.0 million gain related to the sale of an investment in the
fourth quarter of 1999. Excluding the special items and the extraordinary loss,
net income for the year ended December 31, 2000 increased to $106.2 million,
compared to $12.6 million for the prior year period.

      A special review of the SBCL pre-closing financial statements, called for
in the SBCL acquisition agreements, was conducted to assess the recoverability
of assets and the adequacy of liabilities existing prior to the closing date of
the acquisition. This special review resulted in adjustments, primarily related
to the recoverability of SBCL receivables and accrued liabilities during various
periods prior to the closing of the SBCL acquisition. In addition, SBCL recorded
certain other income and expense items prior to the closing of the SBCL
acquisition. The adjustments resulting from the special review and the other
income and expense items, recorded by SBCL prior to the closing of the
acquisition, served as a basis for the $98.6 million purchase price adjustment
which was discussed earlier. Management believes that the adjustments resulting
from the special review and the other income and expense items, both of which
have not been reflected on the face of the pro forma combined financial
information, are of a non-recurring nature and limit the comparability of
results between the periods presented. In the discussions that follow, these
matters are collectively referred to as discrete income and expense items.

      Discrete expense items for the year ended December 31, 1999, totaled $46.6
million, including bad debt charges of $22.4 million to reflect the reduced
recoverability of SBCL receivables, as a result of the special review of the
SBCL financial statements; $11.5 million of expenses recorded by SBCL prior to
the acquisition, primarily to record liabilities necessary to properly present
the closing balance sheet of SBCL; $7.1 million of losses related to a customer
contract accounted for as a loss contract beginning in the third quarter of
1999; and $5.6 million of costs for which SmithKline Beecham is obligated to
indemnify the Company associated with two incidents, the most significant of
which related to a SBCL employee who allegedly reused certain needles when
drawing blood from patients. Excluding the impact of the discrete expense items,
income before an extraordinary loss and special items for the year ended
December 31, 1999 was $40.5 million.

      Results for the years ended December 31, 2000 and 1999 included the
effects of testing performed by third parties under our laboratory network
management arrangements. As laboratory network manager, we included in our
consolidated revenues and expenses the cost of testing performed by third
parties. This treatment added $48.8 million to both reported revenues and cost
of services for the year ended December 31, 2000. For the year ended December
31,


                                       45
   47

1999, this treatment added $154.0 million to both pro forma revenues and pro
forma cost of services. This treatment also serves to increase cost of services
as a percentage of net revenues and decrease selling, general and administrative
expenses as a percentage of net revenues. During the first quarter of 2000, we
terminated a laboratory network management arrangement with Aetna USHealthcare,
and entered into a new non-exclusive contract under which we will no longer be
responsible for the cost of testing performed by third parties. In addition,
during the third quarter of 2000, we amended our laboratory network management
contract with Oxford Health to remove the financial risk associated with testing
performed by third parties. As such, we will no longer be responsible for the
cost of testing performed by third parties under the contract with Oxford
Health. On a full year basis, these changes to the laboratory network management
agreements will reduce net revenues and cost of services by approximately $150
million.

      Net Revenues

      Net revenues for the year ended December 31, 2000 increased by $126.4
million or 3.8% from the prior year level. Revenue growth for the year ended
December 31, 2000 was partially offset by accounting for a customer contract as
a loss contract beginning in the second half of 1999 and the elimination of the
financial risk associated with testing performed by third parties under the
Aetna USHealthcare and Oxford Health managed care contracts modified during the
period, as discussed above. Adjusted for these changes, net revenues for the
year ended December 31, 2000 increased by 8.6%, compared to pro forma net
revenues in the prior year period. Average revenue per requisition increased by
5.9%, compared to 1999. On a full year basis, clinical testing volumes grew by
approximately 3.0%, after adjusting for the contribution of business to
unconsolidated joint ventures. Reported clinical testing volume growth was 2.5%
above the 1999 pro forma level.

      Volume in the second half of 2000 grew at a slower rate than earlier in
the year, principally due to the intensified pace of integration activities, the
contribution of certain business to unconsolidated joint ventures and the loss
of certain contracts due to aggressive pricing on the part of competitors. In
addition, testing volumes were impacted by severe weather in certain service
areas during the fourth quarter of 2000. Management believes the Company is well
positioned, particularly upon completion of integration activities, to benefit
from improving industry fundamentals as well as its ability to leverage its
value proposition of offering expanded patient access, broad testing
capabilities and superior quality. While our long-standing pricing discipline
continued to favorably impact average revenue per requisition, other factors
that contributed to the increase in average revenue per requisition included
modifications to various managed care contracts, an increase in higher value
testing, and a shift to greater fee-for-service reimbursement.

      Operating Costs and Expenses

      Total operating costs for the year ended December 31, 2000 increased from
the prior year period, principally as a result of increased volume and increased
employee compensation and training costs. Operating costs and expenses for the
year ended December 31, 2000 included $8.9 million of costs related to the
integration of SBCL which were not chargeable against previously established
reserves for integration costs.

      The following discussion and analysis regarding operating costs and
expenses exclude the effect of testing performed by third parties under our
laboratory network management arrangements, and the revenues and expenses
associated with a customer contract treated as a loss contract, beginning in the
third quarter of 1999. As discussed above, losses associated with this contract
amounted to $7.1 million for the year ended December 31, 1999. In addition,
operating costs and expenses for the year ended December 31, 1999 included $39.5
million of discrete expense items, recorded in SBCL's historical financial
statements prior to the closing of the SBCL acquisition.

      Cost of services for the year ended December 31, 2000 decreased to 59.5%
from 62.3% for the prior year period. For the year ended December 31, 1999, cost
of services included $7.8 million of discrete expense items. Excluding discrete
expense items, cost of services as a percentage of net revenues was 62.1%.
Excluding the impact of the discrete expense items, the decrease in cost of
services, as a percentage of net revenues, was primarily due to improvements in
average revenue per requisition and to a lesser extent, the impact of the SBCL
integration to date on the Company's cost structure. These decreases in cost of
services were partially offset by an increase in employee compensation and
training costs.

      Selling, general and administrative expenses, as a percentage of net
revenues, were 29.7% in 2000, compared to 30.5% in the prior year period.
Excluding the impact of discrete expense items of $31.7 million in 1999,
selling, general and administrative expenses, as a percentage of net revenues,
were 29.5%. Excluding the impact of the discrete expense items in 1999, the
increase in selling, general and administrative expenses, as a percentage of net
revenues, was primarily attributable to increases in employee compensation and
training costs and investments related to the Company's information technology
strategy. These increases were in large part offset by improvements in average
revenue per


                                       46
   48

requisition and bad debt expense. As discussed above, for the year ended
December 31, 1999, bad debt expense included discrete expense items of $22.4
million which represented bad debt charges, reflecting the reduced
recoverability of SBCL receivables, as a result of the special review of the
SBCL financial statements. Bad debt expense for 2000 improved to 7.0% of net
revenues, compared to 7.6%, excluding the impact of the discrete expense items
in 1999. This progress was primarily due to process improvements in the SBCL
billing functions, with particular focus in the areas of obtaining missing
information and reducing billing backlogs. We have made significant progress
towards improving the overall bad debt experience of the combined company with
quarter to quarter improvements in bad debt expense throughout 2000. Based on
prior experience as well as the sharing of internal best practices in the
billing functions, we believe that substantial opportunities continue to exist
to improve our overall collection experience.

      Interest, Net

      Excluding $1.9 million of interest income associated with a favorable
state tax settlement in 1999, net interest expense for the year ended December
31, 2000 decreased by $11.5 million compared to the prior year period. This
reduction was primarily due to an overall reduction in debt levels as well as
the favorable impact of the Receivables Financing which has served to lower the
weighted average borrowing rate on our outstanding debt.

      Provisions for Restructuring and Other Special Charges

      During the second quarter of 2000, we recorded a net special charge of
$2.1 million. Of the special charge, $13.4 million represented the costs to
cancel certain contracts that we believed were not economically viable as a
result of the SBCL acquisition. These costs were principally associated with the
cancellation of a co-marketing agreement for clinical trials testing services.
These 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.

      During the second, third and fourth quarters of 1999, we recorded
provisions for restructuring and other special charges totaling $15.8 million,
$30.3 million and $43.1 million, respectively, principally incurred in
connection with the acquisition and planned integration of SBCL.

      The special charge in the second quarter of 1999 of $15.8 million
primarily related to a provision in the results of SBCL to reflect a customer
contract as a loss contract.

      Of the total special charge recorded in the third quarter of 1999, $19.8
million represented stock-based employee compensation of which $17.8 million
related to special one-time grants of our common stock to certain individuals of
the combined company, and $2.0 million related to the accelerated vesting, due
to the completion of the SBCL acquisition, of restricted stock grants made in
previous years. In addition, during the third quarter of 1999, we incurred $9.2
million of professional and consulting fees related to integration planning
activities. The remainder of the third quarter charge related to costs incurred
in conjunction with our planned offering of new senior subordinated notes, the
proceeds of which were expected to be used to repay our existing Notes. During
the third quarter of 1999, we decided not to proceed with the offering due to
unsatisfactory market conditions.

      Of the total special charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees. Of these costs, $23.4 million
related to employee severance costs, $9.7 million related primarily to lease
obligations for facilities and equipment and $6.7 million was associated with
the write-off of assets that we plan to dispose of in conjunction with the
integration of SBCL. Offsetting these charges was the reversal of $3.4 million
of reserves associated with our consolidation plan announced in the fourth
quarter of 1997. Upon finalizing the initial integration plans for SBCL in the
fourth quarter of 1999, we determined that $3.4 million of the remaining
reserves associated with the December 1997 consolidation plan was no longer
necessary due to changes in the plan as a result of the SBCL integration. In
addition to the net charge of $36.4 million, we recorded $3.5 million of special
recognition awards granted in the fourth quarter of 1999 to certain employees
involved in the transaction and integration planning processes of the SBCL
acquisition. The remainder of the fourth quarter special charge was primarily
attributable to professional and consulting fees incurred in connection with
integration related planning activities.

      Minority Share of Income

      Minority share of income for the year ended December 31, 2000 increased
from the prior year periods, primarily due to the improved performance of our
joint ventures.


                                       47
   49

      Other, Net

      Other, net for the year ended December 31, 2000 increased from the prior
year period, primarily due to a $9.7 million gain recognized by SBCL on the sale
of its physician office-based teleprinter assets and network in the first
quarter of 1999 and a gain of $3.0 million associated with the sale of an
investment in the fourth quarter of 1999. These gains in 1999 were partially
offset by an increase in equity earnings from unconsolidated joint ventures, and
to a lesser extent, the amortization of deferred gains associated with certain
investments in 2000.

      Income Taxes

      Our effective tax rate is significantly impacted by goodwill amortization,
the majority of which is not deductible for tax purposes, and has the effect of
increasing the overall tax rate in 2000 or decreasing the overall tax benefit in
1999.

      Extraordinary Loss

      Extraordinary losses were recorded in 2000 and 1999 representing the
write-off of deferred financing costs associated with debt which was prepaid
during the periods.

      During the fourth quarter of 2000, we prepaid $155 million of term loans
under our Credit Agreement. The extraordinary loss recorded in the fourth
quarter of 2000 in connection with this prepayment was $4.8 million ($2.9
million, net of taxes).

      In conjunction with the acquisition of SBCL, we repaid the entire amount
outstanding under our then existing credit agreement. The extraordinary loss
recorded in the third quarter of 1999 in connection with this prepayment was
$3.6 million ($2.1 million, net of taxes).

      Adjusted EBITDA

      Adjusted EBITDA represents income (loss) before extraordinary loss, income
taxes, net interest expense, depreciation, amortization and special items. For
the year ended December 31, 2000, special items included the special charges
reflected on the face of the historical statement of operations and $8.9 million
of costs related to the integration of SBCL which were included in operating
expenses and expensed as incurred in 2000. For the year ended December 31, 1999,
special items included the provisions for restructuring and other special
charges reflected on the face of the pro forma combined statement of operations,
a $9.7 million gain recognized by SBCL on the sale of its physician office-based
teleprinter assets and network during the first quarter of 1999, a $3.0 million
gain related to the sale of an investment in the fourth quarter of 1999 and
$46.6 million of discrete expense items, which are discussed above. Adjusted
EBITDA is presented and discussed because management believes that Adjusted
EBITDA is a useful adjunct to net income and other measurements under accounting
principles generally accepted in the United States since it is a meaningful
measure of a company's performance and ability to meet its future debt service
requirements, fund capital expenditures and meet working capital requirements.
Adjusted EBITDA is not a measure of financial performance under accounting
principles generally accepted in the United States and should not be considered
as an alternative to (i) net income (or any other measure of performance under
accounting principles generally accepted in the United States) as a measure of
performance or (ii) cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity.

      Adjusted EBITDA for the year ended December 31, 2000 improved to $459.4
million, or 13.4% of net revenues, compared to pro forma Adjusted EBITDA of
$337.4 million, or 10.9% of net revenues, excluding the impact of the testing
performed by third parties under our laboratory network management arrangements
and the loss contract, in the prior year period. The increase in Adjusted EBITDA
was primarily related to improvements in the operating performance of the
Company.


                                       48
   50

         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 judgements.

      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 recommending annually the appointment of the
independent accountants. The Audit and Finance Committee is comprised solely of
non-management directors who are, in the opinion of the Board of Directors, free
from any relationship that would interfere with the exercise of independent
judgement. The Audit and Finance Committee meets periodically with management,
the internal auditors and the independent accountants to review and assess the
activities of each. Both the independent accountants and the internal auditors
meet with the Audit and Finance Committee, without management present, to review
the results of their audits and their assessment of the adequacy of the system
of internal accounting controls and the quality of financial reporting.

      The consolidated financial statements have been audited by our independent
accountants, PricewaterhouseCoopers LLP. Their responsibility is to express an
independent, professional 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.


/s/ Kenneth W. Freeman
- ----------------------
Kenneth W. Freeman
Chairman of the Board and
Chief Executive Officer


/s/ Robert A. Hagemann
- ----------------------
Robert A. Hagemann
Corporate Vice President and
Chief Financial Officer

                                       49
   51

Report of Independent Accountants

To the Board of Directors and Stockholders
of Quest Diagnostics Incorporated

      In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Quest Diagnostics Incorporated and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 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 14(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.



/s/ PricewaterhouseCoopers LLP
- ------------------------------

PricewaterhouseCoopers LLP
New York, New York
January 24, 2001, except as to Note 18, which is as of February 21, 2001


                                      F-1
   52

                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2000 and 1999
                      (in thousands, except per share data)



                                                                                       2000           1999
                                                                                  -----------    -----------
                                                                                           
Assets
- ------
Current assets:
     Cash and cash equivalents ................................................   $   171,477    $    27,284
     Accounts receivable, net of allowance of $120,358 and $121,550
       at December 31, 2000 and 1999, respectively ............................       485,573        539,256
     Inventories ..............................................................        44,274         52,302
     Deferred income taxes ....................................................       188,483        192,808
     Prepaid expenses and other current assets ................................        90,882         61,011
                                                                                  -----------    -----------
       Total current assets ...................................................       980,689        872,661
Property, plant and equipment, net ............................................       449,856        427,978
Intangible assets, net ........................................................     1,261,603      1,435,882
Deferred income taxes .........................................................        42,622         36,174
Other assets ..................................................................       129,766        105,786
                                                                                  -----------    -----------
Total assets ..................................................................   $ 2,864,536    $ 2,878,481
                                                                                  ===========    ===========

Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:

     Accounts payable and accrued expenses ....................................   $   689,582    $   655,809
     Short-term borrowings and current portion of long-term debt ..............       265,408         45,435
                                                                                  -----------    -----------
       Total current liabilities ..............................................       954,990        701,244
Long-term debt ................................................................       760,705      1,171,442
Other liabilities .............................................................       117,046        142,733
Commitments and contingencies
Preferred stock ...............................................................         1,000          1,000
Common stockholders' equity:
     Common stock, par value $0.01 per share; 100,000 shares authorized; 46,541
       and 44,353 shares issued at December 31, 2000 and 1999,
       respectively ...........................................................           465            444
     Additional paid-in capital ...............................................     1,591,976      1,502,551
     Accumulated deficit ......................................................      (525,111)      (627,045)
     Unearned compensation ....................................................       (31,077)       (11,438)
     Accumulated other comprehensive loss .....................................        (5,458)        (2,450)
                                                                                  -----------    -----------
       Total common stockholders' equity ......................................     1,030,795        862,062
                                                                                  -----------    -----------
Total liabilities and stockholders' equity ....................................   $ 2,864,536    $ 2,878,481
                                                                                  ===========    ===========


The accompanying notes are an integral part of these statements.


                                      F-2
   53

                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (in thousands, except per share data)



                                                               2000           1999           1998
                                                            -----------    -----------    -----------
                                                                                 
Net revenues ............................................   $ 3,421,162    $ 2,205,243    $ 1,458,607

Costs and expenses:
   Cost of services .....................................     2,056,237      1,379,989        896,793
   Selling, general and administrative ..................     1,001,443        643,440        445,885
   Interest, net ........................................       113,092         61,450         33,403
   Amortization of intangible assets ....................        45,665         29,784         21,697
   Provisions for restructuring and other special charges         2,100         73,385             --
   Minority share of income .............................         9,359          5,431          2,017
   Other, net ...........................................        (7,715)        (2,620)         4,951
                                                            -----------    -----------    -----------
     Total ..............................................     3,220,181      2,190,859      1,404,746
                                                            -----------    -----------    -----------
Income before taxes and extraordinary loss ..............       200,981         14,384         53,861
Income tax expense ......................................        96,033         15,658         26,976
                                                            -----------    -----------    -----------
Income (loss) before extraordinary loss .................       104,948         (1,274)        26,885
Extraordinary loss, net of taxes ........................        (2,896)        (2,139)            --
                                                            -----------    -----------    -----------
Net income (loss) .......................................   $   102,052    $    (3,413)   $    26,885
                                                            ===========    ===========    ===========

Basic net income (loss) per common share:
Income (loss) before extraordinary loss .................   $      2.34    $     (0.04)   $      0.90
Extraordinary loss, net of taxes ........................         (0.06)         (0.06)            --
                                                            -----------    -----------    -----------
Net income (loss) .......................................   $      2.28    $     (0.10)   $      0.90
                                                            ===========    ===========    ===========

Diluted net income (loss) per common share:
Income (loss) before extraordinary loss .................   $      2.22    $     (0.04)   $      0.89
Extraordinary loss, net of taxes ........................         (0.06)         (0.06)            --
                                                            -----------    -----------    -----------
Net income (loss) .......................................   $      2.16    $     (0.10)   $      0.89
                                                            ===========    ===========    ===========


The accompanying notes are an integral part of these statements.


                                       F-3
   54

                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (in thousands)



                                                                2000           1999           1998
                                                             -----------    -----------    -----------
                                                                                  
Cash flows from operating activities:
Net income (loss) ........................................   $   102,052    $    (3,413)   $    26,885
Extraordinary loss, net of taxes .........................         2,896          2,139             --
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
   Depreciation and amortization .........................       134,296         90,835         68,845
   Provision for doubtful accounts .......................       234,694        142,333         89,428
   Provisions for restructuring and other special charges          2,100         73,385             --
   Deferred income tax (benefit) provision ...............        33,837        (29,514)        12,290
   Minority share of income ..............................         9,359          5,431          2,017
   Stock compensation expense ............................        24,592          6,068          2,113
   Other, net ............................................        (4,078)            37          6,902
   Changes in operating assets and liabilities:
      Accounts receivable ................................      (250,255)      (118,693)       (71,920)
      Accounts payable and accrued expenses ..............       100,223        110,929         40,070
      Integration, settlement and special charges ........       (68,150)       (33,326)       (39,518)
      Other assets and liabilities, net ..................        47,889          3,324          4,270
                                                             -----------    -----------    -----------
Net cash provided by operating activities ................       369,455        249,535        141,382
                                                             -----------    -----------    -----------

Cash flows from investing activities:
   Business acquisitions .................................        92,225     (1,025,000)          (948)
   Transaction costs .....................................            --         (9,612)            --
   Capital expenditures ..................................      (116,450)       (76,029)       (39,575)
   Proceeds from disposition of assets ...................         3,625          4,982          3,035
   Increase in investments ...............................       (27,415)        (2,331)        (2,232)
                                                             -----------    -----------    -----------
Net cash used in investing activities ....................       (48,015)    (1,107,990)       (39,720)
                                                             -----------    -----------    -----------

Cash flows from financing activities:
   Proceeds from borrowings ..............................       256,000      1,132,843          4,300
   Repayments of long-term debt ..........................      (446,762)      (412,035)       (54,153)
   Financing costs paid ..................................        (1,732)       (36,822)            --
   Purchase of treasury stock ............................            --         (1,103)       (13,032)
   (Distributions to) contributions from minority partners        (6,871)        (4,363)         2,443
   Proceeds from exercise of stock options ...............        22,147          4,429            145
   Preferred dividends paid ..............................           (29)          (118)          (118)
                                                             -----------    -----------    -----------
Net cash provided by (used in) financing activities ......      (177,247)       682,831        (60,415)
                                                             -----------    -----------    -----------

Net change in cash and cash equivalents ..................       144,193       (175,624)        41,247

Cash and cash equivalents, beginning of year .............        27,284        202,908        161,661
                                                             -----------    -----------    -----------

Cash and cash equivalents, end of year ...................   $   171,477    $    27,284    $   202,908
                                                             ===========    ===========    ===========


The accompanying notes are an integral part of these statements.


                                       F-4
   55

                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (in thousands)


                                                                                                              |
                                                                                           Accumulated                 |   Compre-
                                                Additional                    Unearned         Other                   |   hensive
                                     Common      Paid-In      Accumulated      Compen-     Comprehensive    Treasury   |   Income
                                      Stock      Capital        Deficit        sation      Income (Loss)      Stock    |   (Loss)
                                    -----------------------------------------------------------------------------------|------------
                                                                                                  |
Balance,                                                                                                               |
   December 31, 1997                 $    300  $ 1,198,194   $   (650,281)  $   (5,038)     $    (2,515)    $       -  |
Net income                                                         26,885                                              |  $ 26,885
Other comprehensive loss                                                                           (523)               |      (523)
                                                                                                                       |  --------
Comprehensive income                                                                                                   |    26,362
                                                                                                                       |  ========
Preferred dividends declared                                         (118)                                             |
Purchase of treasury stock (687                                                                                        |
    shares)                                                                                                   (13,032) |
Issuance of common stock under                                                                                         |
    benefit plans (255 common                                                                                          |
    shares and 473 treasury                                                                                            |
    shares)                                 2        3,522                        (970)                         9,101  |
Adjustment to Corning receivable                      (710)                                                            |
Amortization of unearned                                                                                               |
    compensation                                                                 2,113                                 |
- ---------------------------------------------------------------------------------------------------------------------  |
Balance,                                                                                                               |
   December 31, 1998                      302    1,201,006       (623,514)      (3,895)          (3,038)       (3,931) |
                                                                                                                       |
Net loss                                                           (3,413)                                             |    (3,413)
Other comprehensive income                                                                          588                |       588
                                                                                                                       |  --------
Comprehensive loss                                                                                                     |    (2,825)
                                                                                                                       |  ========
Preferred dividends declared                                         (118)                                             |
Shares issued to acquire SBCL                                                                                          |
    (12,564 shares)                       126      260,584                                                             |
Purchase of treasury stock (60                                                                                         |
    common shares)                                                                                             (1,103) |
Issuance of common stock under                                                                                         |
    benefit plans (1,269 common                                                                                        |
    shares and 274 treasury                                                                                            |
    shares)                                13       34,991                     (11,253)                         5,034  |
Exercise of stock options (279                                                                                         |
    common shares)                          3        4,426                                                             |
Tax benefits associated with                                                                                           |
    stock-based compensation plans                   3,529                                                             |
Adjustment to Corning receivable                    (1,985)                                                            |
Amortization of unearned                                                                                               |
    compensation                                                                 3,710                                 |
- ---------------------------------------------------------------------------------------------------------------------  |
Balance,                                                                                                               |
   December 31, 1999                      444    1,502,551       (627,045)     (11,438)          (2,450)            -  |
Net income                                                        102,052                                              |   102,052
Other comprehensive loss                                                                         (3,008)               |    (3,008)
                                                                                                                       |  --------
Comprehensive income                                                                                                   |  $ 99,044
                                                                                                                       |  ========
Preferred dividends declared                                         (118)                                             |
Issuance of common stock under                                                                                         |
    benefit plans (868 common                                                                                          |
    shares)                                 8       58,039                     (45,357)                                |
Exercise of stock options (1,585                                                                                       |
    common shares)                         16       22,131                                                             |
Shares to cover employee payroll                                                                                       |
    tax withholdings on exercised                                                                                      |
    stock options (265 common                                                                                          |
    shares)                                (3)     (22,012)                                                            |
Tax benefits associated with                                                                                           |
    stock-based compensation plans                  37,125                                                             |
Adjustment to Corning receivable                    (5,858)                                                            |
Amortization of unearned                                                                                               |
    compensation                                                                25,718                                 |
                                                                                                                       |
- ---------------------------------------------------------------------------------------------------------------------  |
Balance,                                                                                                               |
   December 31, 2000                 $    465  $ 1,591,976    $  (525,111)  $  (31,077)    $     (5,458)   $        -  |
                                     --------------------------------------------------------------------------------  |


    The accompanying notes are an integral part of these statements.


                                       F-5
   56

                 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 independent
clinical laboratories. Quest Diagnostics has the leading market share in
clinical laboratory testing and esoteric testing, including molecular
diagnostics, as well as anatomic pathology services and testing for drugs of
abuse. Through the Company's national network of laboratories and patient
service centers, and its leading esoteric testing laboratory and development
facility known as Nichols Institute, 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. Quest Diagnostics offers clinical testing
and services to support clinical trials of new pharmaceuticals worldwide. Quest
Informatics collects and analyzes laboratory, pharmaceutical and other data to
develop information products to help pharmaceutical companies with their
marketing and disease management efforts, as well as to help healthcare
customers better manage the health of their patients.

      Quest Diagnostics currently processes over 100 million requisitions each
year 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, and in which the
Company's interest is between 20 and 50 percent. The Company's share of equity
earnings (losses) from investments in affiliates, accounted for under the equity
method, totaled $5.5 million, $(0.7) million and $(5.2) million, respectively,
for 2000, 1999 and 1998. The Company's share of equity earnings (losses) is
included in other, net in the consolidated statements of operations. All
significant intercompany accounts and transactions are eliminated.

      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.

      Revenue Recognition

      The Company generally 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 programs. Adjustments to the estimated receipts, based on final
settlement with the third-party payers, are recorded upon settlement. In 2000,
1999 and 1998, approximately 13%, 14% and 16%, respectively, of net revenues
were generated by Medicare and Medicaid programs. Under capitated agreements
with managed care customers, the Company recognizes revenue based on a
predetermined monthly contractual rate for each member of the managed care plan
regardless of the number or cost of services provided by the Company.


                                       F-6
   57

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

      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

      Basic net income (loss) per common share is calculated by dividing net
income (loss), less preferred stock dividends, by the weighted average number of
common shares outstanding. Diluted net income (loss) per common share is
calculated by dividing net income (loss), less preferred stock dividends, by the
weighted average number of common shares outstanding after giving effect to all
potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares include outstanding stock options and restricted common
shares granted under the Company's Employee Equity Participation Program. During
periods in which net income available for common stockholders is a loss, diluted
weighted average common shares outstanding will equal basic weighted average
common shares outstanding, since under these circumstances, the incremental
shares would have an anti-dilutive effect.

      The computation of basic and diluted net income (loss) per common share
was as follows (in thousands except per share data):



                                                                       2000       1999        1998
                                                                     --------   --------    --------
                                                                                   
Income (loss) before extraordinary loss ..........................   $104,948   $ (1,274)   $ 26,885
Less: Preferred stock dividends ..................................        118        118         118
                                                                     --------   --------    --------

Income (loss) available to common stockholders - basic and diluted   $104,830   $ (1,392)   $ 26,767
                                                                     ========   ========    ========

Weighted average number of common shares outstanding - basic .....     44,763     35,014      29,684

Effect of dilutive securities:
Stock options ....................................................      2,095         --         401
Restricted common stock ..........................................        292         --         144
                                                                     --------   --------    --------

Weighted average number of common shares outstanding - diluted ...     47,150     35,014      30,229
                                                                     ========   ========    ========

Basic net income (loss) per common share:
Income (loss) before extraordinary loss ..........................   $   2.34   $  (0.04)   $   0.90
                                                                     ========   ========    ========

Diluted net income (loss) per common share:
Income (loss) before extraordinary loss ..........................   $   2.22   $  (0.04)   $   0.89
                                                                     ========   ========    ========


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



                                                                       2000       1999        1998
                                                                     --------   --------    --------
                                                                                        
Stock options ....................................................         63      5,741         107
Restricted common stock ..........................................         11        568          --



                                       F-7
   58

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

      Stock-Based Compensation

      Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations.

      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 in consolidated income. 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.

      Inventories

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

      Property, Plant and Equipment

      Property, plant and equipment are recorded at cost. 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 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.


                                       F-8
   59

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

      Accounting for Intangible Assets

      The cost of acquired businesses in excess of the fair value of net assets
acquired is recorded as goodwill and amortized on the straight-line method over
periods not exceeding forty years. Other intangible assets are recorded at cost
and amortized on the straight-line method over periods not exceeding fifteen
years.

      Impairment of Long-Lived Assets

      The Company reviews the recoverability of its long-lived assets, including
goodwill and other intangible 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, including any
goodwill associated with the asset, an impairment loss is recognized for the
difference between the estimated fair value and carrying amount of the asset.

      The Company also evaluates the recoverability and measures the possible
impairment of goodwill under Accounting Principles Board Opinion No. 17,
"Intangible Assets" based on a fair value methodology. Management believes that
a valuation of goodwill based on the amount for which each regional laboratory
could be sold in an arm's-length transaction is preferable to using projected
undiscounted pretax cash flows. The Company believes fair value is a better
indicator of the extent to which goodwill may be recoverable and, therefore, may
be impaired.

      The fair value method is applied to each of the regional laboratories.
Management's estimate of fair value is primarily based on multiples of
forecasted revenue or multiples of forecasted earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The multiples are primarily determined
based upon publicly available information regarding comparable publicly-traded
companies in the industry, but also consider (i) the financial projections of
each regional laboratory, (ii) the future prospects of each regional laboratory,
including its growth opportunities, managed care concentration and likely
operational improvements, and (iii) comparable sales prices, if available.
Multiples of revenues are used to estimate fair value in cases where the Company
believes that the likely acquirer of a regional laboratory would be a strategic
buyer within the industry which would realize synergies from such an
acquisition. In regions where management does not believe there is a potential
strategic buyer within the industry, and, accordingly, believes the likely buyer
would not have synergy opportunities, multiples of EBITDA are used for
estimating fair value. Regional laboratories with lower levels of profitability
valued using revenue multiples would generally be ascribed a higher value than
if multiples of EBITDA were used, due to assumed synergy opportunities.
Management's estimate of fair value is currently based on multiples of revenue
primarily ranging from 0.8 to 1.1 times revenue and on multiples of EBITDA
primarily ranging from 7 to 9 times EBITDA. While management believes the
estimation methods are reasonable and reflective of common valuation practices,
there can be no assurance that a sale to a buyer for the estimated value
ascribed to a regional laboratory could be completed. Changes to the method of
valuing regional laboratories will be made only when there is a significant and
fundamental change in facts and circumstances, such as significant changes in
market position or the entrance or exit of a significant competitor from a
regional market. No changes were made to the method of valuing regional
laboratories in 2000 or 1999.

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


                                       F-9
   60

                 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 Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), which requires the use of fair value accounting for
trading or available-for-sale securities. 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. Other, net for the year
ended December 31, 1999 included a fourth quarter gain of $3.0 million
associated with the sale of an investment. The proceeds from the sale of $7.7
million were classified as a component within the change in investments in the
statement of cash flows for 1999. Investments in equity securities have not been
material to the Company.

      Financial Instruments

      The Company's policy is to use financial instruments only to manage
exposure to market risks. 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.

      The Company defers the impact of changes in the market value of these
contracts until such time as the hedged transaction is completed. The Company
may also, from time to time, enter into interest rate and foreign currency swaps
to manage interest rates and foreign currency risk. Income and expense related
to interest rate swaps is accrued as interest rates change and is recognized in
earnings over the life of the agreement. Gains or losses realized and premiums
paid on foreign currency contracts are deferred and are recognized as payments
are made on the related foreign currency denominated debt, or immediately if the
obligation instrument is settled.

      During 2000 and 1999, the Company entered into interest rate swap
agreements to mitigate the risk of changes in interest rates associated with its
variable rate bank debt in accordance with the terms of the Company's credit
agreement (see Note 12).

      In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). In June 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", under
which SFAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (2001 for the Company). In June 2000, the FASB
issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which addresses a limited number of issues causing
implementation difficulties for entities applying SFAS 133. 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 is disclosed. The adoption of SFAS 133 as amended
will not have a significant effect on the Company's results of operations or its
financial position.

      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, 2000 and 1999, the fair value of
the Company's debt was estimated at approximately $1.0 billion and $1.2 billion,
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, 2000, the estimated fair value exceeded the
carrying value of the debt by approximately $5 million. At December 31, 1999,
the carrying value of the debt exceeded the estimated fair value by
approximately $4 million. At December 31, 2000 and 1999, the estimated fair
value of the interest rate swap agreements approximated a liability of $2
million and an asset of $4 million, respectively.


                                      F-10
   61

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

      Comprehensive Income

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

      Segment Reporting

      In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which became effective for fiscal years beginning after December
15, 1997. This statement establishes standards for reporting information about
operating segments in annual and interim financial statements. 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 sales in 2000, 1999 or 1998.

3. ACQUISITION OF SMITHKLINE BEECHAM'S 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"). The
original purchase price of approximately $1.3 billion was paid through the
issuance of 12,564,336 shares of common stock of the Company (valued at $260.7
million), representing approximately 29% of the Company's then outstanding
common stock, and the payment of $1.025 billion in cash, including $20 million
under a non-competition agreement between the Company and SmithKline Beecham. At
the closing of the acquisition, the Company used existing cash and borrowings
under a new senior secured credit facility (the "Credit Agreement") to fund the
cash purchase price and related transaction costs of the acquisition, and to
repay the entire amount outstanding under its then existing credit agreement.
The acquisition of SBCL was accounted for under the purchase method of
accounting. The historical financial statements of Quest Diagnostics include the
results of operations of SBCL subsequent to the closing of the acquisition.

      Under the terms of the acquisition agreements, Quest Diagnostics acquired
SmithKline Beecham's clinical laboratory testing business including its domestic
and foreign clinical testing operations, clinical trials testing, corporate
health services, and laboratory information products businesses. SmithKline
Beecham's national testing and service network consisted of regional
laboratories, specialty testing operations and its National Esoteric Testing
Center, as well as a number of rapid-turnaround or "stat" laboratories, and
patient service centers. In addition, SmithKline Beecham and Quest Diagnostics
entered into a long-term contract under which Quest Diagnostics is the primary
provider of testing to support SmithKline Beecham's clinical trials testing
requirements worldwide. As part of the acquisition agreements, Quest Diagnostics
granted SmithKline Beecham certain non-exclusive rights and access to use Quest
Diagnostics' proprietary clinical laboratory information database. Under the
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.

      Under the terms of a stockholder agreement, SmithKline Beecham has the
right to designate two nominees to Quest Diagnostics' Board of Directors as long
as SmithKline Beecham owns at least 20% of the outstanding common stock. As long
as SmithKline Beecham owns at least 10% but less than 20% of the outstanding
common stock, it will have the right to designate one nominee. Quest
Diagnostics' Board of Directors was expanded to nine directors following the
closing of the acquisition. The stockholder agreement also imposes limitations
on the right of SmithKline Beecham to sell or vote its shares and prohibits
SmithKline Beecham from purchasing in excess of 29.5% of the outstanding common
stock of Quest Diagnostics.

      As of December 31, 2000 and 1999, the Company had recorded approximately
$820 million and $950 million, respectively, of goodwill in conjunction with the
SBCL acquisition, representing acquisition cost in excess of the fair value of
net tangible assets acquired, which is amortized on the straight-line basis over
forty years. The amount paid under the non-compete agreement is amortized on the
straight-line basis over five years.


                                      F-11
   62

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

      The SBCL acquisition agreements included a provision for a reduction in
the purchase price paid by Quest Diagnostics in the event that the combined
balance sheet of SBCL indicated that the net assets acquired, as of the
acquisition date, were below a prescribed level. On October 11, 2000, the
purchase price adjustment was finalized with the result that SmithKline Beecham
owed Quest Diagnostics $98.6 million. This amount was offset by $3.6 million
separately owed by Quest Diagnostics to SmithKline Beecham, resulting in a net
payment by SmithKline Beecham of $95.0 million. The purchase price adjustment
was recorded in the Company's financial statements in the fourth quarter of 2000
as a reduction in the amount of goodwill recorded in conjunction with the SBCL
acquisition.

      The remaining components of the purchase price allocation relating to the
SBCL acquisition were finalized during the third quarter of 2000. The resulting
adjustments to the SBCL purchase price allocation primarily related to an
increase in deferred tax assets acquired, the sale of certain assets of SBCL at
fair value to unconsolidated joint ventures of Quest Diagnostics and an increase
in accrued liabilities for costs related to pre-acquisition periods. As a result
of these adjustments, the Company reduced the amount of goodwill recorded in
conjunction with the SBCL acquisition by approximately $35 million during the
third quarter of 2000.

      Pro Forma Combined Financial Information (Unaudited)

      The following pro forma combined financial information for the years ended
December 31, 1999 and 1998 assumes that the SBCL acquisition and borrowings
under the new credit facility were effected on January 1, 1998. In connection
with finalizing the purchase price adjustment with SmithKline Beecham, Quest
Diagnostics filed a current report on Form 8-K on October 31, 2000 with the
Securities and Exchange Commission to revise and update certain pro forma
combined financial information previously reported by the Company (1) to reflect
the restated historical financial statements of SBCL prepared in conjunction
with finalizing the purchase price adjustment provided for in the SBCL
acquisition agreements, as described above, (2) to reflect the reduction in the
purchase price of the SBCL acquisition, (3) to reflect the completion of the
purchase price allocation and (4) to revise other adjustments that had been
reflected in the previously reported pro forma combined financial information.
The unaudited pro forma combined financial information included in this Form
10-K reflects the revised pro forma combined financial information included in
the Form 8-K referred to above.

      None of the adjustments, resulting from the reduction in the SBCL purchase
price or the completion of the purchase price allocation, had any impact on the
Company's previously reported historical financial statements.

      The unaudited pro forma combined financial information is presented for
illustrative purposes only to assist in analyzing the financial implications of
the SBCL acquisition and borrowings under the Credit Agreement. The unaudited
pro forma combined financial information may not be indicative of the combined
financial results of operations that would have been realized had Quest
Diagnostics and SBCL been a single entity during the periods presented. In
addition, the unaudited pro forma combined financial information is not
necessarily indicative of the future results that the combined company will
experience.

      Significant pro forma adjustments reflected in the unaudited pro forma
combined financial information include reductions in employee benefit costs and
general corporate overhead allocated to the historical results of SBCL by
SmithKline Beecham, offset by an increase in net interest expense to reflect the
Company's new credit facility which was used to finance the SBCL acquisition.
Amortization of the goodwill, which accounts for a majority of the acquired
intangible assets, is calculated on the straight-line basis over forty years.
Income taxes have been adjusted for the estimated income tax impact of the pro
forma adjustments at the incremental tax rate of 40%. A significant portion of
the intangible assets acquired in the SBCL acquisition is not deductible for tax
purposes, which has the overall impact of increasing the effective tax rate.

      Both basic and diluted weighted average common shares outstanding have
been presented on a pro forma basis giving effect to the shares issued to
SmithKline Beecham and the shares granted at closing to employees. Potentially
dilutive common shares primarily represent stock options. During periods in
which net income available for common stockholders is a loss, diluted weighted
average common shares outstanding will equal basic weighted average common
shares outstanding, since under these circumstances, the incremental shares
would have an anti-dilutive effect.


                                      F-12
   63

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

         Unaudited pro forma combined financial information for the years ended
December 31, 1999 and 1998 was as follows (in thousands, except per share data):



                                                            1999           1998
                                                       -----------    -----------
                                                                
Net revenues .......................................   $ 3,294,810    $ 3,021,631
Income (loss) before extraordinary loss ............       (33,539)        50,209
Net income (loss)...................................       (35,678)        50,209

=================================================================================

Basic earnings (loss) per common share:

Income (loss) before extraordinary loss ............   $     (0.78)   $      1.16
Net income (loss)...................................   $     (0.83)   $      1.16
Weighted average common shares outstanding - basic .        43,345         43,031

=================================================================================

Diluted earnings (loss) per common share:

Income (loss) before extraordinary loss ............   $     (0.78)   $      1.15
Net income (loss)...................................   $     (0.83)   $      1.15
Weighted average common shares outstanding - diluted        43,345         43,440


4. INTEGRATION OF SBCL AND QUEST DIAGNOSTICS BUSINESSES

      During the fourth quarter of 1999, Quest Diagnostics finalized its plan to
integrate SBCL into Quest Diagnostics' laboratory network. The plan focuses
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. While the Company is not exiting any geographic markets as a
result of the plan, laboratories that will be closed or reduced in size are
located in the following metropolitan areas: Boston, Baltimore, Cleveland,
Dallas, Detroit, Miami, New York and Philadelphia. The Company is also
transferring esoteric testing performed at SBCL's National Esoteric Testing
Center in Van Nuys, California to Nichols Institute. Employee groups to be
impacted as a result of these actions include those involved in the collection
and testing of specimens, as well as administrative and other support functions.
During the fourth quarter of 1999, the Company 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 believes will have no future economic benefit upon
combining the operations. Integration costs related to planned activities
affecting SBCL's operations and employees were recorded as a cost of the
acquisition. Integration costs associated with the planned integration of SBCL
affecting Quest Diagnostics' operations and employees were recorded as a charge
to earnings in the fourth quarter of 1999.

      Integration costs, including write-offs of fixed assets, totaling $55.5
million which related to planned activities affecting SBCL assets, liabilities
and employees, were recorded in the fourth quarter of 1999 as a cost of the SBCL
acquisition. Of these costs, $33.8 million related to employee severance costs
for approximately 1,250 employees, and $13.4 million related to contractual
obligations including those related to facilities and equipment leases. The
remaining portion of the costs were associated with the write-off of assets that
management plans to dispose of in conjunction with the integration of SBCL.

      During the fourth quarter of 1999, the Company recorded a $36.4 million
net charge to earnings that represented the costs related to planned integration
activities affecting Quest Diagnostics' operations and employees. Of these
costs, $23.4 million related to employee severance costs for approximately 1,050
employees, $9.7 million related primarily to lease obligations for facilities
and equipment and $6.7 million was associated with the write-off of assets that
management plans to dispose of in conjunction with the integration of SBCL.
Offsetting these charges was the reversal of $3.4 million of reserves associated
with the Company's consolidation plan announced in the fourth quarter of 1997.
Upon finalizing the initial integration plan for SBCL in the fourth quarter of
1999, the Company determined that $3.4 million of the remaining reserves
associated with the 1997 consolidation plan were no longer necessary due to
changes in the plan as a result of the SBCL integration.


                                      F-13
   64

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

      During the third quarter of 2000, the Company reviewed its remaining
reserves initially recorded in the fourth quarter of 1999 and revised certain
estimates relative to integration activities. As a result of this review, the
Company recorded a $2.1 million increase to goodwill to reflect an increase in
the estimated costs associated with planned integration activities affecting
SBCL's operations and employees. This $2.1 million adjustment which was recorded
in conjunction with finalizing the SBCL purchase price allocation during the
third quarter of 2000, included a $3.9 million increase in accruals for employee
severance benefits, partially offset by a reduction in accruals primarily
related to facility lease obligations.

      In addition, during the third quarter of 2000, the Company recorded a
reduction of approximately $2 million in accruals associated with planned
integration activities affecting Quest Diagnostics' operations and employees.
The adjustment was principally comprised of reductions in accruals for employee
severance benefits and costs to exit leased facilities. This reduction in
accruals was offset by a charge to write-off fixed assets used in the operations
of Quest Diagnostics.

      During 2000, the Company determined that the total number of employees
expected to be severed during the initial phase of the SBCL integration was
lower than originally estimated in the fourth quarter of 1999. The total number
of SBCL employees expected to be severed was reduced to approximately 1,000
employees. The total number of Quest Diagnostics employees expected to be
severed was reduced to approximately 500 employees. While the number of
employees expected to be severed during the initial phase of the SBCL
integration has decreased, the average cost of severance benefits per employee
has increased primarily due to the elimination of certain senior management
positions.

      The following table summarizes the Company's accruals for integration
costs affecting the acquired operations and employees of SBCL (in millions):



                                                                        Costs of
                                                       Employee          Exiting
                                                      Severance          Leased
                                                         Costs         Facilities          Other             Total
                                                         -----         ----------          -----             -----
                                                                                                 
Amounts recognized as a cost of the SBCL
   acquisition.................................         $ 33.8            $  5.6           $  7.8            $ 47.2
Amounts utilized in 1999.......................           (1.4)             (0.1)              -               (1.5)
                                                        ------            ------           ------            ------
   Balance at December 31, 1999................           32.4               5.5              7.8              45.7
Amounts utilized in 2000.......................          (16.4)             (2.0)            (5.8)            (24.2)
Adjustment to accruals.........................            3.9              (1.6)            (0.2)              2.1
                                                        ------            ------           ------            ------
   Balance at December 31, 2000................         $ 19.9            $  1.9           $  1.8            $ 23.6
                                                        ======            ======           ======            ======


      Of the revised 1,000 SBCL employees expected to be severed during the
initial phase of the SBCL integration, approximately 700 employees had been
severed in connection with integration activities through December 31, 2000,
including approximately 630 employees severed during 2000.

      The following table summarizes the Company's accruals for restructuring
costs associated with the planned integration of SBCL affecting Quest
Diagnostics' operations and employees (in millions):



                                                                        Costs of
                                                       Employee          Exiting
                                                      Severance          Leased
                                                         Costs         Facilities          Other             Total
                                                         -----         ----------          -----             -----
                                                                                                 
1999 Provision.................................         $ 23.4            $  8.9           $  0.8            $ 33.1
Amounts utilized in 1999.......................           (2.5)               -                -               (2.5)
                                                        ------            ------           ------            ------
   Balance at December 31, 1999................           20.9               8.9              0.8              30.6
Amounts utilized in 2000.......................          (10.5)             (1.5)            (0.4)            (12.4)
Adjustment to accruals.........................           (1.6)             (0.8)             0.3              (2.1)
                                                        ------            ------           ------            ------
   Balance at December 31, 2000................         $  8.8            $  6.6           $  0.7            $ 16.1
                                                        ======            ======           ======            ======



                                      F-14
   65

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

      Of the revised 500 Quest Diagnostics employees expected to be severed
during the initial phase of the SBCL integration, approximately 350 employees
had been severed in connection with integration activities through December 31,
2000, including approximately 285 employees severed during 2000.

      While a significant portion of the remaining accruals associated with the
SBCL integration plan are expected to be paid in 2001, there are certain
severance and facility related exit costs, principally lease obligations, that
have payment terms extending beyond 2001.

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, which
allocates among them responsibility for federal, state and local taxes relating
to taxable periods before and after the Spin-Off Distribution and provides for
computing and apportioning tax liabilities and tax benefits for such periods
among the parties. The Company also entered into tax indemnification agreements
with the same entities that provide the parties with certain rights of
indemnification against each other.

      The Company's pretax income (loss) consisted of approximately $202.6
million, $17.7 million and $52.7 million from U.S. operations and approximately
$(1.6) million, $(3.3) million and $1.2 million from foreign operations for the
years ended December 31, 2000, 1999 and 1998, respectively.

      The components of income tax expense for 2000, 1999 and 1998 were as
follows:



                                                                 2000             1999             1998
                                                            ---------        ---------        ---------
                                                                                     
Current:
   Federal .............................................    $  52,852        $  34,314        $   8,754
   State and local .....................................        8,506           10,073            4,861
   Foreign .............................................          838              785            1,071

Deferred:
   Federal .............................................       21,776          (22,336)          14,728
   State and local .....................................       12,061           (7,178)          (2,438)
                                                            ---------        ---------        ---------
     Total .............................................    $  96,033        $  15,658        $  26,976
                                                            =========        =========        =========


      A reconciliation of the federal statutory rate to the Company's effective
tax rate for 2000, 1999 and 1998 was as follows:



                                                               2000             1999             1998
                                                            ---------        ---------        ---------
                                                                                          
Tax provision (benefit) at statutory rate ..............         35.0%            35.0%            35.0%
State and local income taxes, net of federal benefit ...          5.6              4.3              3.4
Non-deductible goodwill amortization ...................          6.7             55.7              9.3
Impact of foreign operations ...........................          0.4             11.6              1.2
Non-deductible meals and entertainment expense .........          0.7              5.1              1.2
Other, net .............................................         (0.6)            (2.8)              --
                                                            ---------        ---------        ---------
   Effective tax rate ..................................         47.8%           108.9%            50.1%
                                                            =========        =========        =========



                                      F-15
   66

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

      The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000 and
1999 were as follows:



                                                           2000          1999
                                                        ---------     ---------
                                                                
Current deferred tax asset:
   Accounts receivable reserve ....................     $  46,266     $  11,459
   Liabilities not currently deductible ...........        94,107       134,206
   Accrued settlement reserves ....................        34,430        19,542
   Accrued restructuring and integration costs ....        13,205        17,784
   Net operating losses ...........................            --         8,830
   Other ..........................................           475           987
                                                        ---------     ---------
     Total ........................................     $ 188,483     $ 192,808
                                                        =========     =========
Non-current deferred tax asset (liability):
   Liabilities not currently deductible ...........     $  34,062     $  27,581
   Accrued settlement reserves ....................           600        13,351
   Accrued restructuring and integration costs ....         2,763        12,886
   Depreciation and amortization ..................         1,062       (17,644)
   Net operating losses ...........................         4,135            --
                                                        ---------     ---------
     Total ........................................     $  42,622     $  36,174
                                                        =========     =========


      As of December 31, 2000, $4.1 million of deferred tax assets had been
recorded to reflect the benefit associated with approximately $86 million of net
operating losses for state income tax purposes with expiration dates through
2020.

      Income taxes payable at December 31, 2000 and 1999 were $18.5 million and
$29.3 million, respectively, and consisted primarily of federal income taxes
payable of $20.6 million and $24.9 million, respectively.

6. SUPPLEMENTAL CASH FLOW DATA



                                        2000            1999            1998
                                      ---------       ---------       ---------
                                                             
Depreciation expense ...........      $  88,631       $  61,051       $  47,148

Interest expense ...............      $ 119,681       $  69,842       $  43,977
Interest income ................         (6,589)         (8,392)        (10,574)
                                      ---------       ---------        ---------
Interest, net ..................        113,092       $  61,450       $  33,403

Interest paid ..................      $ 110,227       $  62,662       $  41,243

Income taxes paid ..............      $  21,821       $  24,545       $  16,269


      During 2000, the Company terminated one of its laboratory network
management agreements with a customer which resulted in a reduction in accounts
receivable and a corresponding decrease in accrued expenses of approximately $69
million, neither reduction having a cash impact.



                                                    2000         1999     1998
                                                  --------     --------  -------
                                                                     
Business acquired:
Fair value of tangible assets acquired ......     $ 61,894     $702,489       --
Fair value of liabilities assumed ...........       26,212      378,113       --
Common shares issued to acquire SBCL ........           --      260,710       --



                                      F-16
   67

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

7. PROVISIONS FOR RESTRUCTURING AND OTHER SPECIAL CHARGES

      During the second quarter of 2000, the Company recorded a net special
charge of $2.1 million. Of the special charge, $13.4 million represented the
costs to cancel certain contracts that management believed were not economically
viable as a result of the SBCL acquisition. These costs were principally
associated with the cancellation of a co-marketing agreement for clinical trials
testing services. These 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 (see Note 17).

      During the third and fourth quarters of 1999, the Company recorded
provisions for restructuring and other special charges totaling $30.3 million
and $43.1 million, respectively, principally incurred in connection with the
acquisition and planned integration of SBCL.

      Of the $30.3 million special charge recorded in the third quarter of 1999,
$19.8 million represented stock-based employee compensation of which $17.8
million related to special one-time grants of the Company's common stock to
certain individuals of the combined company, and $2.0 million related to the
accelerated vesting, due to the completion of the SBCL acquisition, of
restricted stock grants made in previous years. In addition, during the third
quarter of 1999, the Company incurred $9.2 million of professional and
consulting fees related to integration planning activities. The remainder of the
third quarter charge related to costs incurred by the Company in conjunction
with its planned offering of new senior subordinated notes, the proceeds of
which were expected to be used to repay the Company's existing 10 3/4% senior
subordinated notes. During the third quarter of 1999, the Company decided not to
proceed with the offering due to unsatisfactory conditions in the high yield
market.

      Of the $43.1 million charge recorded in the fourth quarter of 1999, $36.4
million represented costs related to planned integration activities affecting
Quest Diagnostics' operations and employees (see Note 4 for details). In
addition to the net charge of $36.4 million, the Company recorded $3.5 million
of special recognition awards granted in the fourth quarter of 1999 to certain
employees involved in the transaction and integration planning processes of the
SBCL acquisition. The remainder of the fourth quarter special charge was
primarily attributable to professional and consulting fees incurred in
connection with integration related planning activities.

      In the fourth quarter of 1997, the Company recorded a special charge
totaling $48.7 million in connection with a series of actions aimed at reducing
excess capacity in its network of clinical laboratories through facility
reductions and consolidations. The charges consisted primarily of workforce
reduction programs, costs associated with exiting a number of leased facilities,
the write-off of certain assets, the write-down of a non-strategic investment
and a charge to write-down intangible assets reflecting the estimated impairment
as a result of the Company's actions. During the fourth quarter of 1998, the
Company determined that reserves established in the fourth quarter of 1997,
primarily related to employee severance costs, were in excess of what would
ultimately be required by approximately $3.0 million. Also, in the fourth
quarter of 1998, the Company determined that the write-down of a non-strategic
investment, recorded in the fourth quarter of 1997 and included in restructuring
and other special charges, should be increased by approximately $3.0 million.
The effect of these adjustments, which were included in the amounts utilized in
1998 below, was to reallocate the remaining reserves associated with the 1997
fourth quarter charge.

      The following table summarizes the Company's accruals associated with
prior restructuring plans (in millions):



                                                                        Costs of
                                                       Employee          Exiting
                                                      Severance          Leased
                                                        Costs          Facilities          Other             Total
                                                        ------            ------           ------            ------
                                                                                                 
Balance, December 31,1997.....................          $ 18.5            $  6.6           $  5.1            $ 30.2
Amounts utilized in 1998......................           (13.4)             (2.5)            (2.8)            (18.7)
                                                        ------            ------           ------            ------
   Balance, December 31, 1998.................             5.1               4.1              2.3              11.5
Amounts utilized in 1999......................            (4.6)             (2.1)            (0.1)             (6.8)
Reversal......................................            (0.1)             (1.3)            (2.0)             (3.4)
                                                        ------            ------           ------            ------
   Balance, December 31, 1999.................          $  0.4            $  0.7           $  0.2            $  1.3
                                                        ======            ======           ======            ======



                                      F-17
   68

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

      As discussed in Note 4, upon finalizing the initial integration plan for
SBCL in the fourth quarter of 1999, the Company determined that $3.4 million of
the remaining reserves associated with the 1997 consolidation plan were no
longer necessary, due to changes in the plan as a result of the SBCL
integration.

      No material accruals, related to prior restructuring plans, existed at
December 31, 2000.

8. EXTRAORDINARY LOSS

      Extraordinary losses were recorded in 2000 and 1999 representing the
write-off of deferred financing costs associated with debt which was prepaid
during the periods.

      During the fourth quarter of 2000, the Company prepaid $155 million of
term loans under its Credit Agreement. The extraordinary loss recorded in the
fourth quarter of 2000 in connection with this prepayment was $4.8 million ($2.9
million, net of taxes).

      In conjunction with the acquisition of SBCL, the Company repaid the entire
amount outstanding under its then existing credit agreement. The extraordinary
loss recorded in the third quarter of 1999 in connection with this prepayment
was $3.6 million ($2.1 million, net of taxes).

9. PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment at December 31, 2000 and 1999 consisted of
the following:



                                                                          2000              1999
                                                                       ----------       ----------
                                                                                  
Land..........................................................         $   35,084       $   35,928
Buildings and improvements....................................            258,433          263,232
Laboratory equipment, furniture and fixtures..................            386,204          376,175
Leasehold improvements........................................             60,187           59,774
Computer software developed or obtained for internal use......             38,567           26,500
Construction-in-progress......................................             55,078           33,836
                                                                       ----------       ----------
                                                                          833,553          795,445
Less: accumulated depreciation and amortization...............           (383,697)        (367,467)
                                                                       ----------       ----------
     Total....................................................         $  449,856       $  427,978
                                                                       ==========       ==========


10. INTANGIBLE ASSETS

      Intangible assets at December 31, 2000 and 1999 consisted of the
following:



                                                                          2000           1999
                                                                       ----------     ----------
                                                                                
Goodwill .....................................................         $1,387,242     $1,517,527
Customer lists ...............................................             39,480         38,556
Other (principally non-compete agreements) ...................             39,347         39,346
                                                                       ----------     ----------
                                                                        1,466,069      1,595,429
Less: accumulated amortization ...............................           (204,466)      (159,547)
                                                                       ----------     ----------
     Total ...................................................         $1,261,603     $1,435,882
                                                                       ==========     ==========



                                      F-18
   69

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

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

      Accounts payable and accrued expenses at December 31, 2000 and 1999
consisted of the following:



                                                                        2000           1999
                                                                     -----------    -----------
                                                                             
Accrued expenses .................................................   $   199,528    $   288,603
Accrued wages and benefits .......................................       240,275        189,945
Accrued settlement reserves ......................................        86,076         49,473
Accrued restructuring and integration costs ......................        33,012         45,023
Income taxes payable .............................................        18,450         29,324
Trade accounts payable ...........................................       112,241         53,441
                                                                     -----------    -----------
     Total .......................................................   $   689,582    $   655,809
                                                                     ===========    ===========


12. DEBT

      Short-term borrowings and current portion of long-term debt at December
31, 2000 and 1999 consisted of the following:



                                                                        2000           1999
                                                                     ----------     ----------
                                                                              
Short-term borrowings under receivables financing                   $   256,000    $        --
Current portion of long-term debt ...............................         9,408         45,435
                                                                     ----------     ----------
     Total .......................................                  $   265,408    $    45,435
                                                                     ==========     ==========


      On July 21, 2000, the Company completed a $256 million receivables-backed
financing transaction (the "Receivables Financing"), the proceeds of which were
used to pay down loans outstanding under the Credit Agreement. Approximately $48
million was used to completely repay amounts outstanding under the capital
markets loan, with the remainder used to repay amounts outstanding under the
term loans. In addition, the repayment of the capital markets loan reduced the
borrowing spreads on all remaining term loans under the Credit Agreement. The
Receivables Financing facility was provided on an uncommitted basis by Blue
Ridge Asset Funding Corporation, a commercial paper funding vehicle administered
by Wachovia Bank, N.A. and with a one year back-up facility provided on a
committed basis by Wachovia Bank, N.A. The Receivables Financing has an initial
term of three years, unless extended, or terminated early as a result of the
termination of liquidity commitments to Blue Ridge Asset Funding Corporation.
The borrowings outstanding under the Receivables Financing are classified as a
current liability since the lenders fund the borrowings through the issuance of
commercial paper which matures at various dates up to ninety days from the date
of issuance. Interest is based on rates which approximate commercial paper rates
for highly rated issuers. The weighted average interest rate on borrowings
outstanding at December 31, 2000 was 7.2%.

      Long-term debt at December 31, 2000 and 1999 consisted of the following:



                                                                        2000         1999
                                                                     --------     ----------
                                                                            
Senior secured variable rate bank term loans:
   Term loan, payable through June 2005; 8.6% interest as of
     December 31, 1999............................................   $       --   $  362,600
   Term loan, payable through June 2006; 9.8% and 9.4% interest as
     of December 31, 2000 and 1999, respectively .................      304,288      319,425
   Term loan, payable through June 2006; 10.1% and 9.8% interest
     as of December 31, 2000 and 1999, respectively ..............      281,304      295,300
   Capital markets term loan, due August 2001; 9.2% interest as of
     December 31, 1999 ...........................................           --       47,674
10 3/4% senior subordinated notes due 2006 .......................      150,000      150,000
Other ............................................................       34,521       41,878
                                                                     ----------   ----------
   Total .........................................................      770,113    1,216,877
Less current portion .............................................        9,408       45,435
                                                                     ----------   ----------
   Total long-term debt ..........................................   $  760,705   $1,171,442
                                                                     ==========   ==========



                                      F-19
   70

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

      At the closing of the SBCL acquisition on August 16, 1999, the Company
entered into a new senior secured credit facility (the "Credit Agreement"). The
Credit Agreement included the following facilities: a $250 million six-year
revolving credit facility; a $400 million amortizing term loan payable through
June 2005; a $325 million term loan with minimal amortization until maturity in
June 2006; a $300 million term loan with minimal amortization until maturity in
June 2006; and a $50 million two-year capital markets term loan due August 2001,
which does not amortize (collectively the "Term Loans"). As discussed above, the
proceeds from the Receivables Financing was used to completely repay amounts
outstanding under the capital markets loan, with the remainder primarily used to
repay amounts outstanding under the term loans. Up to $75 million of the
revolving credit facility may be used for letters of credit. Other than the
reduction for outstanding letters of credit, which approximated $13 million, all
of the revolving credit facility was available for borrowing at December 31,
2000.

      Interest is based on certain published rates plus an applicable margin
that will vary depending on the financial performance of the Company. The
applicable margin was reduced by 25 basis points upon the repayment of the
capital markets term loan in the third quarter of 2000. At the option of the
Company, the Company may elect to enter into Libor based interest rate contracts
for periods up to 180 days. Interest on any outstanding principal amount of the
Term Loans not covered under Libor based interest rate contracts is based on the
alternate base rate which is calculated by reference to the prime rate or
federal funds rate (as those terms are defined in the Credit Agreement). Prior
to the repayment of the capital markets term loan, a commitment fee of 0.50% was
payable on the unused portion of the revolving credit facility; thereafter, the
fee will range from 0.375% to 0.50% based on the financial performance of the
Company. The Credit Agreement requires the Company to mitigate the risk of
changes in interest rates associated with its variable interest rate
indebtedness through the use of interest rate swap agreements. Under such
arrangements, the Company converts a portion of its variable rate indebtedness
to fixed rates based on a notional principal amount. The settlement dates are
correlated to correspond to the interest payment dates of the hedged debt.
During the term of the Credit Agreement, the notional amounts under the interest
rate swap agreements, plus the principal amount outstanding of the Company's
fixed interest rate indebtedness, must be at least 50% of the Company's net
funded debt (as defined in the Credit Agreement). As of December 31, 2000 and
1999, the aggregate notional principal amount under interest rate swap
agreements, at a fixed interest rate of 6.2% and 6.1%, respectively, totaled
approximately $410 million and $450 million, respectively. The interest rate
swap agreements mature at various dates through November 2002.

      The Credit Agreement is collateralized by substantially all tangible and
intangible assets of the Company and by a guaranty from, and a pledge of all
capital stock and tangible and intangible assets of, all of the Company's
present and future wholly-owned domestic subsidiaries. The borrowings under the
Credit Agreement rank senior in priority of repayment to any subordinated
indebtedness.

      On December 16, 1996, the Company issued $150.0 million of 10 3/4% senior
subordinated notes due 2006 (the "Notes"). The Notes are general unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future senior debt (as defined in the indenture relating to the
Notes (the "Indenture")), including all indebtedness of the Company under the
Credit Agreement. Interest is payable on June 15 and December 15. The Notes will
be redeemable, in whole or in part, at the option of the Company at any time on
or after December 15, 2001, at specified redemption prices. The Notes are
guaranteed, fully, jointly and severally, and unconditionally, on a senior
subordinated basis by substantially all of the Company's wholly-owned, domestic
subsidiaries. In order to complete the Receivables Financing, an amendment to
the Indenture was required. The Company obtained the required consents from the
noteholders to approve the amendments, effective as of July 21, 2000.

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


                                      F-20
   71

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

      Long-term debt, including capital leases, maturing in each of the years
subsequent to December 31, 2001 is as follows:



                                                          
                 Year ending December 31,
                 2002                                        $  7,337
                 2003                                          32,434
                 2004                                           6,666
                 2005                                           6,706
                 2006 and thereafter                          707,562
                                                             --------
                    Total long-term debt                     $760,705
                                                             ========


13. 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, 600,000 shares have been designated Series A Preferred Stock
and 1,000 shares have been designated Voting Cumulative Preferred Stock. No
shares have been issued, other than the Voting Cumulative Preferred Stock.

      Voting Cumulative Preferred Stock

      At December 31, 2000 and 1999, 1,000 shares of Voting Cumulative Preferred
Stock, which have a $1.0 million aggregate liquidation preference, were issued
and outstanding. Dividends are at an annual rate of 11.75% and are payable
quarterly. The Voting Cumulative Preferred Stock is generally entitled to one
vote per share, voting together as one class with the Company's common stock.
Whenever dividends on the Voting Cumulative Preferred Stock are in arrears, no
dividends or redemptions or purchases of shares may be made with respect to any
stock ranking junior as to dividends or liquidation to the Voting Cumulative
Preferred Stock until all such amounts have been paid. The Voting Cumulative
Preferred Stock is not convertible into shares of any other class or series of
stock of the Company and will be redeemable in whole or in part, at the option
of the Company at any time on or after December 31, 2002, at specified
redemption prices. On January 1, 2022, the Company must redeem all of the then
outstanding shares of the Voting Cumulative Preferred Stock at a redemption
price equal to the liquidation preference plus any unpaid dividends. The Voting
Cumulative Preferred Stock ranks senior to the Quest Diagnostics common stock
and the Series A Preferred Stock.

      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.

      Common Stock Purchase Program

      In 1998, the Board of Directors authorized a limited share purchase
program which permitted the Company to purchase up to $27 million of its
outstanding common stock through 1999. Cumulative purchases under the program
through December 31, 1999 totaled $14.1 million. Shares purchased under the
program were reissued in connection with certain employee benefit plans. The
Company suspended purchases of its shares when it reached a preliminary
understanding of the transaction with SmithKline Beecham on January 15, 1999.


                                      F-21
   72

                 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 2000,
1999 and 1998 were as follows:



                                                              Foreign
                                                              Currency                   Accumulated Other
                                                            Translation   Market Value     Comprehensive
                                                             Adjustment    Adjustment      Income (Loss)
                                                             ----------    ----------      -------------
                                                                                    
Balance, December 31, 1997 ..........................        $(1,170)        $(1,345)        $(2,515)
Translation adjustment ..............................           (924)             --            (924)
Market value adjustment, net of tax expense of $262 .             --             401             401
                                                             -------         -------         -------
Balance, December 31, 1998 ..........................         (2,094)           (944)         (3,038)
Translation adjustment ..............................           (356)             --            (356)
Market value adjustment, net of tax expense of $616 .             --             944             944
                                                             -------         -------         -------
Balance, December 31, 1999 ..........................         (2,450)             --          (2,450)
Translation adjustment ..............................           (758)             --            (758)
Market value adjustment, net of tax benefit of $1,469             --          (2,250)         (2,250)
                                                             -------         -------         -------
Balance, December 31, 2000 ..........................        $(3,208)        $(2,250)        $(5,458)
                                                             =======         =======         =======


      The market valuation adjustment for 1999 included holding gains, net of
taxes, of $2.8 million, offset by a reclassification adjustment, net of taxes,
of $1.8 million related to the gain recognized in net income associated with the
sale of an investment during the fourth quarter of 1999. The market value
adjustment for 2000 represented unrealized holding losses, net of taxes, of $2.3
million.

14. STOCK OWNERSHIP AND COMPENSATION PLANS

      Employee and Non-employee Directors Stock Ownership Programs

      In conjunction with the acquisition of SBCL, 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 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
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
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.

      Under the 1996 EEPP, the maximum number of shares of Quest Diagnostics'
common stock that may be optioned or granted was 3 million shares. The 1999 EEPP
increased the maximum number of shares of Quest Diagnostics' common stock that
may be optioned or granted by 6 million shares. Any remaining shares under the
1996 EEPP are available for issuance under the 1999 EEPP.


                                      F-22
   73

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

      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 500 thousand
shares. The stock options expire ten years from date of grant and generally vest
over three years. During 2000, 1999 and 1998, grants under the Director Option
Plan totaled 75, 69 and 52 thousand shares, respectively.

      Transactions under the stock option plans were as follows (options in
thousands):



                                                               2000              1999              1998
                                                            ---------         ---------         ---------
                                                                                           
Options outstanding, beginning of year .............            5,741             2,950             1,896
Options granted ....................................              748             3,359             1,336
Options exercised ..................................           (1,662)             (294)              (27)
Options terminated .................................             (204)             (274)             (255)
                                                            ---------         ---------         ---------
Options outstanding, end of year ...................            4,623             5,741             2,950
                                                            =========         =========         =========

Exercisable ........................................            1,809             2,222               405

Weighted average exercise price:
      Options granted ..............................        $   63.23         $   26.37         $   16.39
      Options exercised ............................            16.88             15.98             16.36
      Options terminated ...........................            28.20             25.77             14.65
      Options outstanding, end of year .............            29.19             21.15             15.14
      Exercisable, end of year .....................            18.72             15.61             16.50

Weighted average fair value of options at grant date        $   29.95         $   12.79         $    7.31


      The increase in options exercisable during 1999 was primarily related to
the completion of the SBCL acquisition which accelerated the vesting of certain
grants made in previous years in accordance with the original terms of such
option grants.

      The following relates to options outstanding at December 31, 2000:



                                Options Outstanding                                              Options Exercisable
- ------------------------------------------------------------------------------------    ---------------------------------------
                                            Weighted Average
                                                Remaining
       Range of              Shares         Contractual Life     Weighted Average            Shares         Weighted Average
    Exercise Price       (in thousands)        (in years)         Exercise Price         (in thousands)      Exercise Price
    --------------       --------------        ----------         --------------         --------------      --------------
                                                                                                  
   $10.51 - $22.56            1,357                6.5               $  15.52                  1,285             $  15.36
   $25.84 - $38.31            2,726                8.7                  27.22                    524                26.91
   $57.06 - $67.81              396                9.4                  60.21                     --                   --
   $70.31 - $99.63               24                9.6                  79.05                     --                   --
  $100.25 - $112.56              57                9.6                 104.50                     --                   --
  $117.75 - $135.50              63                9.9                 127.09                     --                   --



                                      F-23
   74

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

      The following summarizes the activity relative to incentive stock awards
granted in 2000, 1999 and 1998 (shares in thousands):



                                                                   2000       1999       1998
                                                                   ------     ------     ------
                                                                                
Incentive shares, beginning of year .........................       568        370        422
Incentive shares granted ....................................       460        555        359
Incentive shares vested .....................................      (112)      (348)       (33)
Incentive shares forfeited and canceled .....................       (22)        (9)      (378)
                                                                   ----       ----        ---
Incentive shares, end of year ...............................       894        568        370
                                                                   ====       ====        ===

Weighted average fair value of incentive shares at grant date      $47.08     $23.90     $16.06


      The balance of the incentive stock awards at December 31, 2000 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 2 million. Approximately 231, 206, and
232 thousand shares of common stock were purchased by eligible employees in
2000, 1999 and 1998, 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. Substantially all
of the Company's employees are eligible to participate in the ESOP. The
Company's contributions to the ESOP trust are based on 2% of eligible employee
compensation for those employees who are actively employed or on a leave of
absence on December 31 of each year. Company contributions to the trust may be
in the form of shares of Quest Diagnostics' common stock, cash or any
combination of the above. The Company's contributions to this plan aggregated
$21.0 million and $7.5 million for 2000 and 1999, respectively. No
contributions were made to the plan in 1998.

      Stock-Based Compensation

      Quest Diagnostics has adopted the disclosure-only provisions of SFAS 123,
but follows APB 25 and related interpretations to account for its stock-based
compensation plans. Stock-based compensation expense recorded in accordance with
APB 25 was $24.6 million, $26.5 million, and $2.1 million in 2000, 1999 and
1998, respectively. As discussed in Note 7, for the year ended December 31,
1999, the provisions for restructuring and other special charges included
approximately $20 million of stock-based compensation expense.

      If the Company had elected to recognize compensation cost based on the
fair value at the grant dates for awards under its stock-based compensation
plans, consistent with the method prescribed by SFAS 123, the Company's net
income (loss) would have been $81.6 million, $(11.5) million, and $21.4 million
for 2000, 1999 and 1998, respectively. Basic net income (loss) per common share
would have been $1.82 per common share, $(0.33) per common share, and $0.72 per
common share for 2000, 1999 and 1998, respectively. Diluted net income (loss)
per common share would have been $1.73 per common share, $(0.33) per common
share, and $0.71 per common share for 2000, 1999 and 1998, respectively.


                                      F-24
   75

                 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:



                                         2000         1999         1998
                                         ----         ----         ----
                                                           
Dividend yield .....................      0.0%         0.0%         0.0%
Risk-free interest rate ............      6.5%         5.8%         5.3%
Expected volatility ................     43.7%        46.8%        42.0%
Expected holding period, in years ..        5            5            5


15. EMPLOYEE RETIREMENT PLANS

      Defined Contribution Plan

      The Company maintains a defined contribution plan covering substantially
all of its employees. The Company's expense for its contributions to this plan
aggregated $29.0 million, $18.3 million, and $15.5 million for 2000, 1999 and
1998, respectively.

16. RELATED PARTY TRANSACTIONS

      As part of the SBCL acquisition agreements, SmithKline Beecham and Quest
Diagnostics entered into the following agreements: a long term contract under
which Quest Diagnostics is the primary provider of testing to support SmithKline
Beecham's clinical trials testing requirements worldwide (the "Clinical Trials
Agreement"); 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 (the "Data Access Agreements"); and an agreement under which SmithKline
Beecham agreed to provide, through December 31, 2000, various administrative
services that it had previously provided to SBCL prior to its acquisition by
Quest Diagnostics (the "Transitional Services Agreement").

      Significant transactions with SmithKline Beecham during 2000 and 1999
included (in addition to the acquisition of SBCL during 1999):



                                                           2000         1999
                                                          -------      -------
                                                                 
Clinical trials testing revenues ...................      $31,334      $10,261
Revenues under Data Access Agreements ..............          650           --
Purchases, primarily related to services rendered by
  SmithKline Beecham under the Transitional Services
  Agreement ........................................       15,901        4,577


      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
(see Note 17).

      At December 31, 2000 and 1999, net amounts due from SmithKline Beecham
totaled $58.6 million and $46.0 million, respectively; $44.5 million and $18.0
million, respectively, was classified in prepaid expenses and other current
assets at December 31, 2000 and 1999; and $14.1 million and $28.0 million,
respectively, was classified in other assets at December 31, 2000 and 1999.

      At December 31, 2000 and 1999, the amount due from Corning, classified in
prepaid expenses and other current assets, was $8.1 million and $14.0 million,
respectively. The receivable from Corning was decreased in 2000, 1999 and 1998
by $5.9 million, $2.0 million, and $0.7 million, respectively, through an
adjustment to additional paid-in capital, based on management's best estimate of
amounts which are probable of being received from Corning to satisfy the


                                      F-25
   76

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

remaining indemnified government claims. In January 2001, the Company received
$8.1 million from Corning related to certain indemnified government claims
settled in December 2000 (see Note 17).

17. COMMITMENTS AND CONTINGENCIES

      Minimum rental commitments under noncancelable operating leases, primarily
real estate, in effect at December 31, 2000 are as follows:



        Year ending December 31,
                                                           
        2001.............................................     $  70,821
        2002.............................................        56,742
        2003.............................................        42,902
        2004.............................................        30,103
        2005.............................................        23,745
        2006 and thereafter..............................        58,672
                                                              ---------
        Minimum lease payments...........................       282,985
        Noncancelable sub-lease income...................       (36,254)
                                                              ---------
        Net minimum lease payments.......................     $ 246,731
                                                              =========


      Operating lease rental expense for 2000, 1999 and 1998 aggregated $76.5
million, $59.1 million, and $46.3 million, respectively.

      The Company is substantially self-insured for all casualty losses and
maintains excess coverage primarily on a claims made basis. The basis for
insurance reserves at December 31, 2000 and 1999 is the actuarially determined
projected losses for each program (limited by its self-insured retention) based
upon the Company's loss experience.

      The Company has entered into several settlement agreements with various
governmental and private payers during recent years relating to industry-wide
billing and marketing practices that had been substantially discontinued by
early 1993. 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 governmental payers. Several of
the cases involve the operations of SBCL prior to the closing of the SBCL
acquisition.

      In March 1997, a former subsidiary of Damon Corporation ("Damon"), an
independent clinical laboratory acquired by Corning and contributed to Quest
Diagnostics in 1993, was served a complaint in a purported class action. Quest
Diagnostics was added to the complaint by the plaintiffs in August 1999. The
complaint asserted claims relating to private reimbursement of billings that
were similar to those that were part of a prior government settlement. The
Company entered into a settlement agreement which received the final approval of
the court on July 14, 2000. The final settlement releases the Company and all of
its subsidiaries, other than SBCL, from potential private claims related to the
reimbursement of billings that were the subject of the lawsuit. During the
second quarter of 2000, the Company recorded a reduction in reserves
attributable to the favorable resolution of this matter (see Note 7).

      In December 2000, the Company entered into a settlement agreement with the
federal government and certain state government healthcare programs for
approximately $13 million, primarily relating to prior billing and marketing
practices at several former facilities of Nichols Institute that occurred prior
to the Company's acquisition of Nichols Institute.

      In April 1998, the Company entered into a settlement agreement with the
U.S. Attorney's Office in Baltimore for approximately $7 million related to the
billing of certain tests performed for which the Company had incomplete or
missing order forms from the physician. The occurrence of this practice was
relatively rare and was engaged in primarily to preserve the integrity of test
results from specimens subject to rapid deterioration. In August 1998, the
Company entered into a settlement agreement with the Office of Inspector General
of the Department of Health and Human


                                      F-26
   77

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

Services for approximately $15 million related to overcharges for medically
unnecessary testing for end stage renal dialysis patients.

      The settlements do not constitute an admission with respect to any issue
arising from these actions. These settlements were covered by the
indemnification from Corning discussed below and were fully reserved for.

      Corning has agreed to indemnify the Company against all monetary
settlements for any governmental claims relating to the billing practices of the
Company and its predecessors based on investigations that were pending on
December 31, 1996. Corning also agreed to indemnify the Company in respect of
private claims relating to indemnified or previously settled government claims
that alleged overbillings by Quest Diagnostics or any of its existing
subsidiaries for services provided before January 1, 1997. Corning will
indemnify Quest Diagnostics in respect of private claims for 50% of the
aggregate of all judgment or settlement payments made by December 31, 2001 that
exceed $42 million. The 50% share will be limited to a total amount of $25
million and will be reduced to take into account any deductions or tax benefits
realized by Quest Diagnostics. At December 31, 2000 and 1999, the receivable
from Corning, which was classified in prepaid expenses and other current
assets, totaled $8.1 million and $14.0 million, respectively. The receivable
from Corning represented management's best estimate of amounts which are
probable of being received from Corning to satisfy the remaining indemnified
governmental claims on an after-tax basis. In accordance with the indemnity
described above, the Company received $8.1 million from Corning in January 2001
in connection with the Nichols Institute settlement which is discussed above.

      Similar to Quest Diagnostics, SBCL has entered into settlement agreements
with various governmental agencies and private payers primarily relating to its
prior billing and marketing practices. Effective in 1997, SBCL and the U.S.
government and various states reached a settlement with respect to the
government's civil and administrative claims. SBCL is also responding to claims
from private payers relating to billing and marketing issues similar to those
that were the subject of the settlement with the government. The claims include
ten purported class actions filed in various jurisdictions in the United States
and two non-class action complaints by a number of insurance companies. Nine of
the purported class actions have been consolidated into one complaint, which
has been consolidated with one of the insurers' suits for pre-trial
proceedings.

      SmithKline Beecham has agreed to indemnify Quest Diagnostics, on an
after-tax basis, against monetary payments for governmental claims or
investigations relating to the billing practices of SBCL that had been settled
before or were pending as of the closing date of the SBCL acquisition.
SmithKline Beecham has also agreed to indemnify Quest Diagnostics, on an
after-tax basis, against monetary payments to private payers, relating to or
arising out of the governmental claims. The indemnification with respect to
governmental claims is for 100% of those claims. SmithKline Beecham will
indemnify Quest Diagnostics, in respect of private claims for: 100% of those
claims, up to an aggregate amount of $80 million; 50% of those claims to the
extent the aggregate amount exceeds $80 million but is less than $130 million;
and 100% of such claims to the extent the aggregate amount exceeds $130
million. The indemnification also covers 80% of out-of-pocket costs and
expenses relating to investigations of the claims indemnified against by
SmithKline Beecham. SmithKline Beecham has also agreed to indemnify the Company
with respect to pending actions relating to a former SBCL employee that at
times reused certain needles when drawing blood from patients. In addition,
SmithKline Beecham has agreed to indemnify the Company against all monetary
payments relating to professional liability claims of SBCL for services
provided prior to the closing of the SBCL acquisition.

      Amounts due from SmithKline Beecham at December 31, 2000 related to
indemnified billing, professional liability and other claims discussed above,
totaled approximately $58 million and represented management's best estimate of
the amounts which are probable of being received from SmithKline Beecham to
satisfy the indemnified claims on an after-tax basis. The estimated reserves and
related amounts due from SmithKline Beecham are subject to change as additional
information regarding the outstanding claims is gathered and evaluated.

      At December 31, 2000 recorded reserves, relating primarily to billing
claims including those indemnified by Corning and SmithKline Beecham,
approximated $88 million, including $2 million in other long-term liabilities.
Although management believes that established reserves for both indemnified and
non-indemnified claims are sufficient, it is possible that additional
information (such as the indication by the government of criminal activity,
additional tests being questioned or other changes in the government's 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


                                      F-27
   78

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

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.

18. SUBSEQUENT EVENTS

      On February 1, 2001, the Company acquired the assets of Clinical
Laboratories of Colorado, LLC for $47 million which included $4 million under
non-competition agreements. In connection with the transaction, Quest
Diagnostics also entered into a laboratory services agreement with Centura
Health, under which it will manage five rapid turnaround laboratories in the
Denver metropolitan area.

      On February 21, 2001, the Board of Directors approved a two-for-one stock
split of the Company's common stock, subject to stockholder approval of an
increase in the number of common shares authorized from 100 million shares to
300 million shares. The stock split will be effected by the issuance on May 31,
2001, 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. All references to
the number of common shares and per common share amounts, including earnings per
common share calculations, have not been restated to reflect this proposed stock
dividend, since the stock dividend is contingent upon stockholder approval.

19. SUMMARIZED FINANCIAL INFORMATION

      The Notes described in Note 12 are guaranteed, fully, jointly and
severally, and unconditionally, on a senior subordinated basis by substantially
all of the Company's wholly-owned, domestic subsidiaries ("Subsidiary
Guarantors"). With the exception of Quest Diagnostics Receivables Incorporated
(see paragraphs below), the non-guarantor subsidiaries are foreign and less than
wholly-owned subsidiaries.

      In conjunction with the Receivables Financing described in Note 12, the
Company formed a new wholly-owned non-guarantor subsidiary, Quest Diagnostics
Receivables Incorporated ("QDRI"). The Company and the Subsidiary Guarantors
transferred 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 utilized the transferred
receivables to collateralize the Receivables Financing obtained through Blue
Ridge Asset Funding Corporation.

      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.

      Investments in subsidiaries are accounted for by the parent on 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 eliminate investments
in subsidiaries and intercompany balances and transactions.

      The following condensed consolidating financial data illustrates the
composition of the combined guarantors. It reflects the impact of the
Receivables Financing as discussed above beginning with the third quarter of
2000, the addition of SBCL as a Subsidiary Guarantor for periods subsequent to
the closing of the acquisition during the third quarter of 1999 (see Note 3) and
the formation of two joint ventures in 1998 that are non-guarantor subsidiaries.
The Company believes that separate complete financial statements of the
respective guarantors would not provide additional material information which
would be useful in assessing the financial composition of the Subsidiary
Guarantors.


                                      F-28
   79

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

Condensed Consolidating Balance Sheet
December 31, 2000



                                                                  Subsidiary     Non-Guarantor
                                                    Parent        Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------        ----------     ------------    ------------     ------------
                                                                                                   
Assets
- ------
Current assets:
Cash and cash equivalents .....................  $        --      $  163,863      $     7,614     $        --     $   171,477
Accounts receivable, net ......................        6,159          29,548          449,866              --         485,573
Other current assets ..........................      191,693         129,881            9,030          (6,965)        323,639
                                                 -----------      ----------      -----------     -----------     -----------
   Total current assets .......................      197,852         323,292          466,510          (6,965)        980,689
Property, plant and equipment, net ............      121,159         316,630           12,067              --         449,856
Intangible assets, net ........................       72,514       1,180,341            8,748              --       1,261,603
Intercompany receivable (payable) .............      (78,538)        253,994         (175,456)             --              --
Investment in subsidiaries ....................    1,031,135              --               --      (1,031,135)             --
Other assets ..................................       66,623          71,692           34,073              --         172,388
                                                 -----------      ----------      -----------     -----------     -----------
   Total assets ...............................  $ 1,410,745      $2,145,949      $   345,942     $(1,038,100)    $ 2,864,536
                                                 ===========      ==========      ===========     ===========     ===========

Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses .........  $   247,558      $  418,147      $    30,842     $    (6,965)    $   689,582
Short-term borrowings and current portion of
  long-term debt ..............................          837           8,215          256,356              --         265,408
                                                 -----------      ----------      -----------     -----------     -----------
   Total current liabilities ..................      248,395         426,362          287,198          (6,965)        954,990
Long-term debt ................................       95,711         661,340            3,654              --         760,705
Other liabilities .............................       34,844          71,159           11,043              --         117,046
Preferred stock ...............................        1,000              --               --              --           1,000
Common stockholders' equity ...................    1,030,795         987,088           44,047      (1,031,135)      1,030,795
                                                 -----------      ----------      -----------     -----------     -----------
   Total liabilities and stockholders' equity .  $ 1,410,745      $2,145,949      $   345,942     $(1,038,100)    $ 2,864,536
                                                 ===========      ==========      ===========     ===========     ===========


Condensed Consolidating Balance Sheet
December 31, 1999



                                                                  Subsidiary     Non-Guarantor
                                                    Parent        Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------        ----------     ------------    ------------     ------------
                                                                                                   
Assets
- ------
Current assets:
Cash and cash equivalents...................      $        --      $    18,864     $     8,420      $       --      $    27,284
Accounts receivable, net....................           68,941          455,503          14,812              --          539,256
Other current assets........................          113,539          185,438           7,144              --          306,121
                                                  -----------      -----------     -----------      ----------      -----------
   Total current assets.....................          182,480          659,805          30,376              --          872,661
Property, plant and equipment, net..........          111,411          302,268          14,299              --          427,978
Intangible assets, net......................          161,438        1,274,202             242              --        1,435,882
Intercompany receivable (payable)...........          (43,291)          56,798         (13,507)             --               --
Investment in subsidiaries..................          853,865               --              --        (853,865)              --
Other assets................................           11,850          106,952          23,158              --          141,960
                                                  -----------      -----------     -----------      ----------      -----------
   Total assets.............................      $ 1,277,753      $ 2,400,025     $    54,568      $ (853,865)     $ 2,878,481
                                                  ===========      ===========     ===========      ==========      ===========

Liabilities and Stockholders' Equity
- -----------------------------------
Current liabilities:
Accounts payable and accrued expenses.......      $   192,679      $   449,372     $    13,758      $       --      $   655,809
Current portion of long-term debt...........            4,635           40,369             431              --           45,435
                                                  -----------      -----------     -----------      ----------      -----------
   Total current liabilities................          197,314          489,741          14,189              --          701,244
Long-term debt..............................          176,601          991,396           3,445              --        1,171,442
Other liabilities...........................           40,776           92,870           9,087              --          142,733
Preferred stock.............................            1,000               --              --              --            1,000
Common stockholders' equity.................          862,062          826,018          27,847        (853,865)         862,062
                                                  -----------      -----------     -----------      ----------      -----------
   Total liabilities and stockholders'equity      $ 1,277,753      $ 2,400,025     $    54,568      $ (853,865)     $ 2,878,481
                                                  ===========      ===========     ===========      ==========      ===========



                                      F-29
   80

                 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, 2000



                                                                  Subsidiary     Non-Guarantor
                                                    Parent        Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------        ----------     ------------    ------------     ------------
                                                                                                   
Net revenues ............................        $   520,198      $ 2,773,568     $   274,987     $  (147,591)    $ 3,421,162

Costs and expenses:
   Cost of services .....................            348,227        1,621,667          86,343              --       2,056,237
   Selling, general and administrative ..            233,409          638,534         139,993         (10,493)      1,001,443
   Interest, net ........................             38,436          195,614          16,140        (137,098)        113,092
   Amortization of intangible assets ....              4,153           41,005             507              --          45,665
   Provisions for restructuring and other
     special charges ....................              2,594           (4,134)          3,640              --           2,100
   Royalty (income) expense .............            (94,959)          94,959              --              --              --
   Other, net ...........................             (1,806)            (322)          3,772              --           1,644
                                                 -----------      -----------     -----------     -----------     -----------
     Total ..............................            530,054        2,587,323         250,395        (147,591)      3,220,181
                                                 -----------      -----------     -----------     -----------     -----------
Income (loss) before taxes and
   extraordinary loss ...................             (9,856)         186,245          24,592              --         200,981
Income tax expense (benefit) ............               (619)          86,196          10,456              --          96,033
                                                 -----------      -----------     -----------     -----------     -----------
Income (loss) before equity earnings and
   extraordinary loss ...................             (9,237)         100,049          14,136              --         104,948
Equity income from subsidiaries .........            111,512               --              --        (111,512)             --
                                                 -----------      -----------     -----------     -----------     -----------
Income before extraordinary loss ........            102,275          100,049          14,136        (111,512)        104,948
Extraordinary loss, net of taxes ........               (223)          (2,673)             --              --          (2,896)
                                                 -----------      -----------     -----------     -----------     -----------
Net income ..............................        $   102,052      $    97,376     $    14,136     $  (111,512)    $   102,052
                                                 ===========      ===========     ===========     ===========     ===========


Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1999



                                                                  Subsidiary     Non-Guarantor
                                                    Parent        Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------        ----------     ------------    ------------     ------------
                                                                                                   
Net revenues ...............................     $   636,778      $ 1,475,064     $    93,401     $        --      $ 2,205,243

Costs and expenses:
   Cost of services ........................         407,908          915,438          56,643              --        1,379,989
   Selling, general and administrative .....         232,558          380,237          30,645              --          643,440
   Interest, net ...........................           9,508           51,456             486              --           61,450
   Amortization of intangible assets .......           7,307           22,103             374              --           29,784
   Provisions for restructuring and other
     special charges .......................          62,496            8,137           2,752              --           73,385
   Royalty (income) expense ................         (71,678)          71,678              --              --               --
   Other, net ..............................          (3,245)            (230)          6,286              --            2,811
                                                 -----------      -----------     -----------     -----------      -----------
     Total .................................         644,854        1,448,819          97,186              --        2,190,859
                                                 -----------      -----------     -----------     -----------      -----------
Income (loss) before taxes and extraordinary
   loss ....................................          (8,076)          26,245          (3,785)             --           14,384
Income tax expense(benefit) ................          (4,524)          18,461           1,721              --           15,658
                                                 -----------      -----------     -----------     -----------      -----------
Income (loss) before equity earnings and
   extraordinary loss ......................          (3,552)           7,784          (5,506)             --           (1,274)
Equity earnings from subsidiaries ..........           2,278               --              --          (2,278)              --
                                                 -----------      -----------     -----------     -----------      -----------
Income (loss) before extraordinary loss ....          (1,274)           7,784          (5,506)         (2,278)          (1,274)
Extraordinary loss, net of taxes ...........          (2,139)              --              --              --           (2,139)
                                                 -----------      -----------     -----------     -----------      -----------
Net income (loss) ..........................     $    (3,413)     $     7,784     $    (5,506)    $    (2,278)     $    (3,413)
                                                 ===========      ===========     ===========     ===========      ===========



                                      F-30
   81

                 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, 1998



                                                                  Subsidiary     Non-Guarantor
                                                    Parent        Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------        ----------     ------------    ------------     ------------
                                                                                                   
Net revenues .........................           $  594,544       $  828,119      $   35,944      $       --      $1,458,607

Costs and expenses:
   Cost of services ..................              365,065          510,945          20,783              --         896,793
   Selling, general and administrative              239,329          196,984           9,572              --         445,885
   Interest, net .....................                8,608           24,190             605              --          33,403
   Amortization of intangible assets .                7,538           13,766             393              --          21,697
   Royalty (income) expense ..........              (73,138)          73,138              --              --              --
   Other, net ........................                 (219)               6           7,181              --           6,968
                                                 ----------       ----------      ----------      ----------      ----------
     Total ...........................              547,183          819,029          38,534              --       1,404,746
                                                 ----------       ----------      ----------      ----------      ----------
Income (loss) before taxes ...........               47,361            9,090          (2,590)             --          53,861
Income tax expense (benefit) .........               18,961            9,248          (1,233)             --          26,976
Equity loss from subsidiaries ........               (1,515)              --              --           1,515              --
                                                 ----------       ----------      ----------      ----------      ----------
Net income (loss) ....................           $   26,885       $     (158)     $   (1,357)     $    1,515      $   26,885
                                                 ==========       ==========      ==========      ==========      ==========


Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2000



                                                                Subsidiary     Non-Guarantor
                                                    Parent      Guarantors     Subsidiaries    Eliminations     Consolidated
                                                    ------      ----------     ------------    ------------     ------------
                                                                                                  
Cash flows from operating activities:
Net income .................................     $  102,052      $   97,376      $   14,136      $ (111,512)     $  102,052
Extraordinary loss, net of taxes ...........            223           2,673              --              --           2,896
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
   Depreciation and amortization ...........         30,447          99,234           4,615              --         134,296
   Provision for doubtful accounts .........         14,333         117,927         102,434              --         234,694
   Provisions for restructuring and other
     special charges .......................          2,594          (4,134)          3,640              --           2,100
   Other, net ..............................        (96,318)        140,905          15,850           3,273          63,710
   Changes in operating assets and
     liabilities ...........................         73,941        (168,296)       (184,177)        108,239        (170,293)
                                                 ----------      ----------      ----------      ----------      ----------
Net cash provided by (used in) operating
   activities ..............................        127,272         285,685         (43,502)             --         369,455
Net cash provided by (used in) investing
   activities ..............................         89,886         (66,325)         (4,948)        (66,628)        (48,015)
Net cash provided by (used in) financing
   activities ..............................       (217,158)        (74,361)         47,644          66,628        (177,247)
                                                 ----------      ----------      ----------      ----------      ----------
Net change in cash and cash equivalents ....             --         144,999            (806)             --         144,193
Cash and cash equivalents, beginning of year             --          18,864           8,420              --          27,284
                                                 ----------      ----------      ----------      ----------      ----------
Cash and cash equivalents, end of year .....     $       --      $  163,863      $    7,614      $       --      $  171,477
                                                 ==========      ==========      ==========      ==========      ==========



                                      F-31
   82

                 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, 1999



                                                                Subsidiary    Non-Guarantor
                                                    Parent      Guarantors    Subsidiaries    Eliminations     Consolidated
                                                    ------      ----------    ------------    ------------     ------------
                                                                                                
Net income (loss) ............................    $    (3,413)  $     7,784   $    (5,506)    $    (2,278)     $    (3,413)
Extraordinary loss, net of taxes .............          2,139            --            --              --            2,139
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
   Depreciation and amortization .............         32,083        55,020         3,732              --           90,835
   Provision for doubtful accounts ...........         36,121       101,762         4,450              --          142,333
   Provisions for restructuring and other
      special charges ........................         62,496         8,137         2,752              --           73,385
   Other, net ................................        (15,039)       (8,954)        3,737           2,278          (17,978)
   Changes in operating assets and liabilities        (53,317)       11,821         3,730              --          (37,766)
                                                  -----------   -----------   -----------     -----------      -----------
Net cash provided by operating activities ....         61,070       175,570        12,895              --          249,535
Net cash used in investing activities ........     (1,068,476)      (30,099)       (9,415)             --       (1,107,990)
Net cash provided by (used in) financing
   activities ................................        816,800      (134,813)          844              --          682,831
                                                  -----------   -----------   -----------     -----------      -----------
Net change in cash and cash equivalents ......       (190,606)       10,658         4,324              --         (175,624)
Cash and cash equivalents, beginning of year          190,606         8,206         4,096              --          202,908
                                                  -----------   -----------   -----------     -----------      -----------
Cash and cash equivalents, end of year .......    $        --   $    18,864   $     8,420     $        --      $    27,284
                                                  ===========   ===========   ===========     ===========      ===========


Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 1998



                                                                Subsidiary    Non-Guarantor
                                                    Parent      Guarantors    Subsidiaries    Eliminations     Consolidated
                                                    ------      ----------    ------------    ------------     ------------
                                                                                                
Net income (loss) ............................    $    26,885   $      (158)  $    (1,357)    $     1,515      $    26,885
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
   Depreciation and amortization .............         31,749        35,339         1,757              --           68,845
   Provision for doubtful accounts ...........         48,246        39,935         1,247              --           89,428
   Other, net ................................         29,691        (7,390)        2,536          (1,515)          23,322
   Changes in operating assets and liabilities         (9,672)      (50,640)       (6,786)             --          (67,098)
                                                  -----------   -----------   -----------     -----------      -----------
Net cash provided by (used in) operating
   activities ................................        126,899        17,086        (2,603)             --          141,382
Net cash used in investing activities ........        (20,194)      (17,124)       (2,402)             --          (39,720)
Net cash provided by (used in) financing
   activities ................................        (39,151)      (27,283)        6,019              --          (60,415)
                                                  -----------   -----------   -----------     -----------      -----------
Net change in cash and cash equivalents ......         67,554       (27,321)        1,014              --           41,247
Cash and cash equivalents, beginning of year          123,052        35,527         3,082              --          161,661
                                                  -----------   -----------   -----------     -----------      -----------
Cash and cash equivalents, end of year .......    $   190,606   $     8,206   $     4,096     $        --      $   202,908
                                                  ===========   ===========   ===========     ===========      ===========



                                      F-32
   83

                 QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
                      (in thousands, except per share data)
                     Quarterly Operating Results (unaudited)



                                                     First           Second           Third             Fourth          Total
                                                    Quarter          Quarter          Quarter          Quarter           Year
                                                    -------          -------          -------          -------           ----
2000
- ----
                                                                                                       
Net revenues ................................     $   857,479      $   877,113      $   850,236      $   836,334      $ 3,421,162
Gross profit ................................         328,442          356,676          345,494          334,313        1,364,925
Income before taxes and extraordinary loss ..          35,196           58,213(a)        54,019           53,553          200,981
Extraordinary loss ..........................              --               --               --           (2,896)(b)       (2,896)
Net income ..................................          17,809           30,168           28,712           25,363          102,052

Basic net income per common share:
Income before extraordinary loss ............            0.40             0.68             0.64             0.62             2.34
Net income ..................................            0.40             0.68             0.64             0.56             2.28

Diluted net income per common share:
Income before extraordinary loss ...........             0.39             0.64             0.60             0.59             2.22
Net income ..................................            0.39             0.64             0.60             0.53             2.16


1999 (c)
- --------
                                                                                                       
Net revenues ................................     $   381,841      $   394,034      $   614,842      $   814,526      $ 2,205,243
Gross profit ................................         144,433          157,963          228,752          294,106          825,254
Income (loss) before taxes and extraordinary loss      14,078           24,507           (5,559)(d)      (18,642)(d)       14,384
Extraordinary loss ..........................              --               --           (2,139)(e)           --           (2,139)
Net income (loss) ...........................           7,433           13,087           (9,396)         (14,537)          (3,413)

Basic net income (loss) per common share:
Income (loss) before extraordinary loss .....            0.25             0.44            (0.20)           (0.33)           (0.04)
Net income (loss)............................            0.25             0.44            (0.26)           (0.33)           (0.10)

Diluted net income (loss) per common share
Income (loss) before extraordinary loss .....            0.24             0.43            (0.20)           (0.33)           (0.04)
Net income (loss) ...........................            0.24             0.43            (0.26)           (0.33)           (0.10)


(a)   During the second quarter of 2000, the Company recorded a net special
      charge of $2.1 million (see Note 7).

(b)   During the fourth quarter of 2000, the Company prepaid $155.0 million of
      term loans under its Credit Agreement. The extraordinary loss recorded in
      the fourth quarter of 2000 represented $4.8 million ($2.9 million, net of
      tax) of deferred financing costs which were written-off in connection with
      the prepayment of the term loans (see Note 8).

(c)   On August 16, 1999, Quest Diagnostics completed the acquisition of SBCL.
      The quarterly operating results include the results of operations of SBCL
      subsequent to the closing of the acquisition (see Note 3).

(d)   During the third and fourth quarters of 1999, the Company recorded
      provisions for restructuring and other special charges totaling $30.3
      million and $43.1 million, respectively, principally incurred in
      connection with the acquisition and planned integration of SBCL (see Note
      7).

(e)   In conjunction with the acquisition of SBCL, the Company repaid the entire
      amount outstanding under its then existing credit agreement. The
      extraordinary loss recorded in the third quarter of 1999 represented $3.6
      million ($2.1 million, net of tax) of deferred financing costs which were
      written-off in connection with the extinguishment of the credit agreement
      (see Note 8).


                                      F-33
   84

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



                                                  Balance at       Provision for       Net Deductions        Balance at
                                                    1-1-00       Doubtful Accounts       and Other            12-31-00
                                                    ------       -----------------       ---------            --------
                                                                                                 
Year ended December 31, 2000
   Doubtful accounts and allowances ...........    $121,550           $  234,694         $ 235,886           $ 120,358

                                                  Balance at       Provision for       Net Deductions        Balance at
                                                    1-1-99       Doubtful Accounts       and Other            12-31-99
                                                    ------       -----------------       ---------            --------
Year ended December 31, 1999
   Doubtful accounts and allowances ..........     $ 70,701           $  142,333         $  91,484           $ 121,550

                                                  Balance at       Provision for       Net Deductions        Balance at
                                                    1-1-98       Doubtful Accounts       and Other            12-31-98
                                                    ------       -----------------       ---------            --------
Year ended December 31, 1998
   Doubtful accounts and allowances ...........      89,870               89,428           108,597              70,701










                                     F-34

EX-3.3

   1
                                                                     Exhibit 3.3












                         QUEST DIAGNOSTICS INCORPORATED

  A Delaware corporation (formerly known as Corning Clinical Laboratories Inc.,
                  MetPath Inc. and Corning Lab Services Inc.)


                          AMENDED AND RESTATED BY-LAWS


                      As amended through February 21, 2001
   2
                         QUEST DIAGNOSTICS INCORPORATED

                             A Delaware corporation

                          AMENDED AND RESTATED BY-LAWS

                                TABLE OF CONTENTS

                                    ARTICLE I
                                  STOCKHOLDERS

                                                                           Page

Section   1.01   Annual Meetings........................................... 1
Section   1.02   Special Meetings.......................................... 1
Section   1.03   Notice of Meetings........................................ 1
Section   1.04   Business Transacted at Special
                 Meetings of Stockholders.................................. 1
Section   1.05   Quorum.................................................... 1
Section   1.06   Nominations and Stockholder
                 Business.................................................. 2

                                   ARTICLE II
                               BOARD OF DIRECTORS

Section   2.01   General Powers............................................ 4
Section   2.02   Number and Term of Office................................. 4
Section   2.03   Annual and Regular Meetings............................... 4
Section   2.04   Special Meetings; Notice.................................. 4
Section   2.05   Telephonic Meetings....................................... 5
Section   2.06   Quorum and Vote........................................... 5
Section   2.07   Action Without a Meeting.................................. 5
Section   2.08   Manner of Acting.......................................... 5
Section   2.09   Resignations.............................................. 5
Section   2.10   Reliance on Accounts and
                 Reports, etc.............................................. 5
Section   2.11   Committees................................................ 5

                                   ARTICLE III
                                    OFFICERS

Section   3.01   Number and Designation.................................... 6
Section   3.02   Additional Officers....................................... 6

                                       (i)
   3
                                                                           Page

Section   3.03   Election.................................................  6
Section   3.04   Removal and Vacancies....................................  6
Section   3.05   Duties of the Chairman of
                 the Board of Directors...................................  6
Section   3.06   Duties of the President..................................  6
Section   3.07   Duties of the Vice President ............................  7
Section   3.08   Duties of the Secretary..................................  7
Section   3.09   Duties of the Treasurer..................................  7
Section   3.10   Duties of the Controller.................................  7
Section   3.11   Duties of the Assistant Secretary........................  7
Section   3.12   Duties of the Assistant Controller.......................  8
Section   3.13   Duties of the Assistant Treasurer........................  8

                                   ARTICLE IV
                  EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES

Section   4.01   General..................................................  8
Section   4.02   Corporate Indebtedness...................................  8
Section   4.03   Checks, Drafts, etc......................................  8
Section   4.04   Deposits.................................................  9
Section   4.05   Dividends................................................  9
Section   4.06   Fiscal Year..............................................  9

                                    ARTICLE V
                                  CAPITAL STOCK

Section   5.01   Certificates of Stock....................................  9

                                   ARTICLE VI
                                  SEAL; OFFICES

Section   6.01   Seal.....................................................  9
Section   6.02   Offices..................................................  10

                                   ARTICLE VII
                                 INDEMNIFICATION

Section   7.01   Indemnification..........................................  10

                                  ARTICLE VIII
                                   AMENDMENTS

Section   8.01   Amendments...............................................  12



                                      (ii)
   4
                                       1




                          AMENDED AND RESTATED BY-LAWS

                                       OF

                         QUEST DIAGNOSTICS INCORPORATED

                                    ARTICLE I

                                  STOCKHOLDERS

Section 1.01. Annual Meetings. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such other
business as properly may come before such meeting shall be held at such place
either within or outside the State of Delaware, at such time and date as shall
be fixed from time to time by resolution of the Board of Directors and as set
forth in the notice of the meeting.

Section 1.02. Special Meetings. Except as otherwise required by law, special
meetings of the stockholders may be called only the Board of Directors.(1) Such
special meetings of the stockholders shall be held at such places, within or
outside the State of Delaware, as shall be specified in the respective notices
or waivers of notice thereof.

Section 1.03. Notice of Meetings. The Secretary or any Assistant Secretary shall
cause written notice of the date, time and place of each meeting of the
stockholders to be given, at least ten but not more than fifty days prior to the
meeting, to each stockholder of record entitled to vote. Such notice shall be
given either personally or by mail or other means of written communication,
addressed to each stockholder at the address of such stockholder appearing on
the books of the Corporation at the time such notice is dispatched. Such further
notice shall be given as may be required by law. Notice of any meeting of
stockholders need not be given to any stockholder who shall sign a waiver of
such notice in writing, whether before or after the time of such meeting. Notice
of any adjourned meeting of the stockholders of the Corporation need not be
given.

Section 1.04. Business Transacted at Special Meetings of Stockholders. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice thereof.

Section 1.05. Quorum. Except as at the time otherwise required by statute or by
the Certificate of Incorporation, the presence at any stockholders meeting, in
person or by proxy, of the holders of record of shares of stock (of any class)
entitled to vote at the meeting, aggregating a majority of the total number of
shares of stock of all classes then issued and outstanding and entitled to vote
at the meeting, shall be necessary and sufficient to constitute a quorum for the
transaction of business.
- ---------------
(1) Amended 10/22/98
   5
                                       2




Section 1.06.  Nominations and Stockholder Business.

(a)  Annual Meeting of Stockholders.

(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of notice provided for in this Section 1.06, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 1.06.

(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this
Section 1.06, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation between January 1 and February 15 of the year in which such annual
meeting is held. Such stockholder's notice shall set forth (i) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (A) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (B) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.

(3) Notwithstanding, anything in the second sentence of paragraph (a)(2) of this
Section 1.06 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for Director or specifying the
size of the increased Board of Directors made by the Corporation at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 1.06 shall also be considered
timely, but only with respect to nominees for any new position created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the
   6
                                       3


Corporation not later than the close of business on the 10th day following the
day on which such public announcement is first made by the Corporation.(2)


(b) Special Meetings of Stockholders. Only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the Corporation who is a stockholder of record at the time
of giving of notice provided for in this Section 1.06, who shall be entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 1.06. Nominations by stockholders of persons for election to the
Board of Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by paragraph (a)(2) of this Section 1.06 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the 90th day prior to such special meeting, and not later than
the close of business on the later of the 60th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.

(c)  General.

(1) Only such persons who are nominated in accordance with the procedures set
forth in this Section 1.06 shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 1.06. The Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting, was made in accordance with the procedures set forth in this Section
1.06 and, if any proposed nomination or business is not in compliance with this
Section 1.06, to declare that such defective proposal shall be disregarded.

(2) For purposes of this Section 1.06, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.

(3) Notwithstanding the foregoing provisions of this Section 1.06, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Section 1.06. Nothing in this Section 1.06 shall be deemed to affect any rights
of stockholders to request


- -------------
(2) Amended 5/11/99
   7
                                       4

inclusion of proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.


                                   ARTICLE II

                               BOARD OF DIRECTORS

Section 2.01. General Powers. The property, affairs and business of the
Corporation shall be managed by the Board of Directors. The Board of Directors
may exercise all the powers of the Corporation, whether derived from law or the
Certificate of Incorporation, except such powers as are, by statute, by the
Certificate of Incorporation or by these By-Laws, vested solely in the
stockholders of the Corporation. No Director need be a stockholder of the
Corporation.

Section 2.02. Number and Term of Office. The Board of Directors shall consist of
such number (but in no event less than three nor more than twelve) of Directors
as may be determined from time to time by resolution adopted by affirmative vote
of a majority of the whole Board of Directors. Each Director (whenever elected)
shall hold office until his or her successor shall have been elected and shall
have qualified, or until his or her death, or until he or she shall have
resigned in the manner provided in Section 2.09 hereof or shall have been
removed in accordance with the Certificate of Incorporation.(3)

Section 2.03. Annual and Regular Meetings. The annual meeting of the Board of
Directors, for the choosing of officers and for the transaction of such other
business as may come before the meeting, shall be held in each year as soon as
possible after the annual meeting of the stockholders at the place of such
annual meeting of the stockholders, and notice of such annual meeting of the
Board of Directors shall not be required to be given. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix the time and place (which may be within or outside the State of
Delaware) thereof. Notice of such regular meetings need not be given; provided,
however, that in case the Board of Directors shall fix or change the time or
place of regular meetings, notice of such action shall be given personally or by
mail, facsimile or similar means of communication promptly to each Director who
shall not have been present at the meeting at which such action was taken.

Section 2.04. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any, or
by the President (or, in the absence or disability of the Chairman of the Board
and the President, by any Vice President), or by any two Directors, at such time
and place (which may be within or outside of the State of Delaware) as may be
specified in the respective notices or waivers of notice thereof. Special
meetings of the Board of Directors may be called on two days' notice to each
Director, personally or by telephone or facsimile or on four days' notice by
mail. Notice of any special meeting need not be given to any Director who shall
be
- ----------------------
(3) Amended  effective 1/1/00 and 2/21/01
   8
                                       5

present at such meeting, or to any Director who shall waive notice of such
meeting in writing, whether before or after the time of such meeting, and any
business may be transacted thereat. No notice need be given of any adjourned
meeting.

Section 2.05. Telephonic Meetings. Directors may participate in a meeting of the
Board of Directors, or a meeting of any committee designated by the Board, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this By-Law shall constitute presence in
person at such meeting.

Section 2.06. Quorum and Vote. At all meetings of the Board of Directors, the
presence of a majority of the total authorized number of Directors under Section
2.02 hereof shall be necessary and sufficient to constitute a quorum for the
transaction of business. Except when otherwise required by statute, the vote of
a majority of the total number of Directors present and acting at a meeting at
which a quorum is present shall be the act of the Board of Directors. In the
absence of a quorum, a majority of the Directors present may adjourn the meeting
from time to time, until a quorum shall be present.

Section 2.07. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or any meeting of a Committee of
the Board of Directors may be taken without a meeting, if written consents
thereto are signed by all members of the Board or Committee and such written
consents are filed with the minutes of proceedings of the Board.

Section 2.08. Manner of Acting. The Directors shall act only as a Board, and the
individual Directors shall have no power as such, except as permitted by
statute.

Section 2.09. Resignations. Any Director may resign at any time by delivering a
written resignation to the Chairman of the Board, if any, the President, a Vice
President, the Secretary or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.

Section 2.10. Reliance on Accounts and Reports, etc. A Director, or a member of
any committee designated by the Board of Directors, in the performance of his or
her duties, shall be fully protected in relying in good faith on the records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees, or committees
of the Board of Directors or by any other person as to matters the Director or
member reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation.

Section 2.11. Committees. The Board may establish such committees having such
responsibilities and composition as it shall from time to time by resolution
determine.
   9
                                       6


                                   ARTICLE III

                                    OFFICERS

Section 3.01. Number and Designation. The officers of the Corporation shall be
chosen by the Board of Directors and shall have such titles and duties as shall
be determined from time to time by the Board of Directors. All officers of the
Corporation shall hold office until their successors are chosen and qualify or
their earlier resignation or removal. Any number of offices may be held by the
same person. The Chairman shall be a member of the Board of Directors.(4)

Section 3.02. Additional Officers Appointed by the Chairman or the Chief
Executive Officer. The Board of Directors may delegate its Chairman or the Chief
Executive Officer to appoint and remove such additional officers as the Chairman
or the Chief Executive Officer, as the case may be, shall designate in writing,
with such authority as shall be set forth in writing, and such appointments
shall be reported to the Board of Directors.(5)

Section 3.03. Election. The Board of Directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting, shall choose the officers of the
Corporation. If any officers are not chosen at an annual meeting, such officers
may be chosen at any subsequent regular or special meeting.

Section 3.04. Removal and Vacancies. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors, either with or without cause. Any vacancy
occurring in any office of the Corporation shall be filled by the Board of
Directors.

Section 3.05. Duties of the Chairman of the Board of Directors. The Chairman of
the Board of Directors, if present, shall preside at all stockholders' meetings
and all meetings of the Board at which he is present and shall have such other
duties as shall be assigned to him or her by the Board of Directors. The
Chairman may be the Chief Executive Officer of the Corporation.

Section 3.06. Duties of the President. The President shall have direct charge of
the business of the Corporation, subject to the general control of the Board of
Directors, and may be the Chief Executive Officer and/or the Chief Operating
Officer of the Corporation. In the absence of the Chairman of the Board or if no
Chairman of the Board has been chosen, the President shall also have the duties
of the Chairman of the Board.


- -----------------
(4) Amended effective 6/29/1999.
(5) Amended effective 6/29/1999.
   10
                                       7


Section 3.07. Duties of the Vice President. In the event of the absence or
disability of the Chairman of the Board and the President, the Executive or
Senior Vice President, if any, or if absent, any Vice President designated by
the Board of Directors, shall perform all the duties of the President, and when
so acting, shall have all the powers of, and be subject to all the restrictions
upon, the President. Except where by law the signature of the President is
required, each of the Vice Presidents shall possess the same power as the
President to sign all certificates, contracts, obligations and other instruments
of the Corporation. Any Vice President shall perform such other duties and may
exercise such other powers as from time to time may be assigned to him or her by
these By-Laws or by the Board of Directors or the President. An Executive Vice
President may be the Chief Operating Officer of the Corporation.

Section 3.08. Duties of the Secretary. The Secretary shall, if present, act as
Secretary of, and keep the minutes of, all the proceedings of the meetings of
the stockholders and of the Board of Directors and of any committee of the Board
of Directors in one or more books to be kept for that purpose; shall perform
such other duties as shall be assigned to him or her by the President or the
Board of Directors; and, in general, shall perform all duties incident to the
office of Secretary.

Section 3.09. Duties of the Treasurer. The Treasurer shall keep or cause to be
kept full and accurate records of all receipts and disbursements in the books of
the Corporation and shall have the care and custody of all funds and securities
of the Corporation. He or she shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, shall render to the President and the
Board of Directors, whenever they request it, an account of all of his or her
transactions as Treasurer and shall perform such other duties as may be assigned
to him or her by the President or the Board of Directors; and, in general, shall
perform all duties incident to the office of Treasurer.

Section 3.10. Duties of the Controller. The Controller shall be the chief
accounting officer of the Corporation. The Controller shall keep or cause to be
kept all books of account and accounting records of the Corporation and shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the Corporation. The
Controller shall prepare or cause to be prepared appropriate financial
statements for the Corporation and shall perform such other duties as may be
assigned to him or her by the President or the Board of Directors; and, in
general, shall perform all duties incident to the office of Controller.

Section 3.11. Duties of the Assistant Secretary. The Assistant Secretary, if
any, shall, in the absence or disability of the Secretary, exercise the powers
and perform the duties of the Secretary, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.

Section 3.12. Duties of the Assistant Controller. The Assistant Controller, if
any, shall, in the absence or disability of the Controller, exercise the powers
and perform the duties
   11
                                       8

of the Controller, and shall perform such other duties as shall be assigned to
him or her by the President or the Board of Directors.

Section 3.13. Duties of the Assistant Treasurer. The Assistant Treasurer, if
any, shall, in the absence or disability of the Treasurer, exercise the powers
and perform the duties of the Treasurer, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.


                                   ARTICLE IV

                  EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES

Section 4.01. General. Subject to the provisions of Sections 4.02, 4.03 and 4.04
hereof, all deeds, documents, transfers, contracts, and agreements and other
instruments requiring execution by the Corporation shall be signed by the
Chairman of the Board, the President, a Vice President or the Treasurer, or as
the Board of Directors may otherwise from time to time authorize by resolution.
Any such authorization may be general or confined to specific instances.

Section 4.02. Corporate Indebtedness. No loan shall be contracted on behalf of
the Corporation, and no evidences of indebtedness shall be issued in its name,
unless authorized by the Board of Directors. Such authorizations of the Board
may be general or confined to specific instances. Loans authorized by the Board
of Directors may be effected at any time for the Corporation from any bank,
trust company or other institution, or from any firm, corporation or individual.
All bonds, debentures, notes and other obligations or evidences of indebtedness
of the Corporation issued for such loans as the Board shall authorize shall be
made, executed and delivered as the Board of Directors shall authorize. All
notes and other obligations or evidences of indebtedness permitted hereunder
without authorization of the Board of Directors shall be signed by the
President, a Vice President or the Treasurer. When so authorized by the Board of
Directors, any part of or all the properties, including contract rights, assets,
business or goodwill of the Corporation, whether then owned or thereafter
acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in
trust as security for the payment of such bonds, debentures, notes and other
obligations or evidences of indebtedness to the Corporation, and of the interest
thereon, by instruments executed and delivered in the name of the Corporation.

Section 4.03. Checks, Drafts, etc. All checks, drafts, bills of exchange or
orders for the payment of money, issued in the name of the Corporation, shall be
signed only by the Treasurer or such other person or persons and in such manner
as may from time to time be designated by the Board of Directors, which
designation may be general or confined to specific instances; and unless so
designated, no person shall have any power or authority thereby to bind the
Corporation or to pledge its credit or to render it liable.
   12
                                       9


Section 4.04. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
select. The Board of Directors may make such special rules and regulations with
respect to such bank accounts, not inconsistent with the provisions of these
By-Laws, as it may deem expedient. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation shall be endorsed, assigned and delivered by the Treasurer or such
other person or persons and in such manner as may from time to time be
designated by the Board of Directors.

Section 4.05. Dividends. Dividends upon the stock of the Corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law. Such
declaration may be continuing or limited to a specific payment or distribution.
Dividends may be paid in cash, in property, or in shares of stock, subject to
the provisions of the Certificate of Incorporation.

Section 4.06. Fiscal Year. The fiscal year of the Corporation shall be the
calendar year, unless otherwise fixed by resolution of the Board of Directors.


                                    ARTICLE V

                                  CAPITAL STOCK

Section 5.01. Certificates of Stock. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board of Directors, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or by the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation.


                                   ARTICLE VI

                                  SEAL; OFFICES

Section 6.01. Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.

Section 6.02. Offices. The Corporation may have offices at such other places
both within or outside the State of Delaware as the Board of Directors may from
time to time determine or as the business of the Corporation may require.
   13
                                       10


                                   ARTICLE VII

                                 INDEMNIFICATION

Section 7.01. Indemnification. (a) No director of the Corporation shall have any
personal liability to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.

         (b) Each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action either in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
pursuant to the Employee Retirement Income Security Act of 1974, as amended, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to be indemnified conferred in
this Section 7.01 shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that, the payment of
such expenses incurred by the director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is to
be rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan), in advance of the final
disposition of proceeding, shall be made only upon delivery to the Corporation
   14
                                       11

of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Article or otherwise. The
Corporation may also provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing indemnification of
directors and officers.(6)

         (c) The indemnification provided by this Section 7.01 shall not limit
or exclude any rights, indemnities or limitations of liability to which any
person may be entitled, whether as a matter of law, under the Certificate of
Incorporation of the Corporation, by agreement, vote of the stockholders or
disinterested directors of the Corporation or otherwise.

         (d) If a claim under paragraph (b) of this Section 7.01 is not paid in
full by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard or conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall create a
presumption that the claimant has not met the applicable standard of conduct.

         (e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of the State of Delaware.

- ------------------
(6) Amended 5/9/00
   15
                                       12





                                  ARTICLE VIII

                                   AMENDMENTS

Section 8.01. Amendments. These By-Laws may only be altered or repealed and new
By-Laws adopted by resolution of the Board of Directors or of the
Shareholders.(7)







- ------------
(7) Amended 10/22/98

EX-4.4

   1


                                                                     EXHIBIT 4.4

                       AMENDMENT NO. 3 TO RIGHTS AGREEMENT


      THIS AMENDMENT (this "Amendment") effective as of the 18th day of October,
2000, amends and modifies, at the Company's direction, a certain Rights
Agreement dated as of December 31, 1996, as previously amended (the "Rights
Agreement") between Quest Diagnostics Incorporated (the "Company") and Harris
Trust and Savings Bank, as Rights Agent. All terms defined in the Rights
Agreement shall have the same meanings in this Amendment unless otherwise
defined.

      WHEREAS, Quest Diagnostics Incorporated (the "Corporation") has previously
appointed Harris Trust and Savings Bank or an affiliate thereof ("Harris") as
Rights Agent under the Rights Agreement; and

      WHEREAS, Section 21 of the Rights Agreement headed "Change of Rights
Agent" provides for the appointment of a successor Rights Agent, and sets forth
specified requirements for any such successor Rights Agent; and

      Whereas, Harris wishes to terminate its appointment, as of the Effective
Date stated below, as Rights Agent in light of the transfer of certain of its
operations to Computershare Investor Services, L.L.C., a Delaware limited
liability company, together with its affiliates, ("Computershare"); and

      WHEREAS, the Company wishes to appoint Computershare as successor Rights
Agent and Computershare consents to such appointment; and

      WHEREAS, effective December 8, 1999, the Rights Agreement was amended to
increase the exercise price of a Right under Section 7(b) of the Right Agreement
from $35 to $125; and

      WHEREAS, on October 18, 2000, the Board of Directors of the Company
adopted a resolution approving the amendment of the Rights Agreement to increase
the exercise price of a Right under Section 7(b) of the Rights Agreement from
$125 to $500;

      NOW, THEREFORE, in consideration of the premises, the parties hereto agree
as follows:

      1.    All terms not defined herein have the meanings set forth in the
            Rights Agreement.

      2.    The sentence in Section 21 that begins on line 24 of page 52 with
            "Any successor rights agent. . . ." and ends on line 9 of page 53
            with ". . . combined capital and surplus of at least $50,000,000" is
            hereby deleted and replaced as follows:

            Any successor Rights Agent, whether appointed by the Company or by
            such a court, shall be: (a) a corporation, limited liability company
            or trust company (or


   2

            similar form of entity under the laws of any state of the United
            States or a foreign jurisdiction) authorized to conduct business
            under the laws of the United States or any state of the United
            States, which is authorized under such laws to exercise corporate
            trust, fiduciary or stockholder services powers and is subject to
            supervision or examination by a federal or state authority and which
            has at the time of its appointment as Rights Agent a combined
            capital and surplus of at least $10,000,000; or (b) an Affiliate
            controlled by a corporation, limited liability company or entity
            described in clause (a) of this sentence.

      3.    Computershare Investor Services, LLC ("Computershare") is hereby
            appointed as Successor Rights Agent under the above Rights
            Agreement, succeeding Harris, effective as of the date of this
            Amendment ("Effective Date"), to act in accordance with and pursuant
            to the terms and conditions of the Rights Agreement.

      4.    Computershare's execution of this Agreement shall constitute the
            acceptance by Computershare of the agency herein conferred, and
            shall evidence its agreement to carry out and perform its duties
            under the Rights Agreement in accordance with the provisions
            thereof, as previously and hereby amended.

      5.    Computershare and its affiliates will be entitled to rely and act
            upon any written orders or directions regarding the issuance and
            delivery of certificates for the above described shares signed by
            the Secretary or any Assistant Secretary of the Corporation and by
            one of the following officers:

                  Chief Executive Officer
                  President
                  Chief Operating Officer
                  Chief Financial Officer
                  Treasurer
                  Corporate Controller
                  General Counsel

            or any list, instrument, order, paper, stock certificate, signature
            or guarantee believed by Computershare and its affiliates in good
            faith to be genuine and to have been signed, countersigned or
            executed by any such authorized officers;

      6.    Section 20(c) of the Rights Agreement is hereby deleted and replaced
            as follows:

            The Rights Agent shall be liable hereunder to the Company and any
            other Person only for its own gross negligence or willful
            misconduct.

      7.    The sentence in Section 18 that begins on line 7 of page 45 with
            "The Company also agrees. . . ." and ends on line 14 of page 45 with
            ". . . liability in the premises" is hereby deleted and replaced as
            follows:

            The Company also agrees to indemnify and hold harmless Computershare
            and each member, director, officer, employee, and affiliate of
            Computershare,


   3

            (collectively, the "Indemnified Parties") against any and all
            actions, claims, demands, losses, damages, liabilities, costs and
            expenses of any kind or nature whatsoever (including without
            limitation, reasonable attorneys' and consultants' fees, costs and
            expenses) incurred by or asserted against any of the Indemnified
            Parties from and after the date hereof, relating to, or in
            connection with Computershare's provision of services under the
            Rights Agreement (including, without limitation, responding to any
            demand or claim of liability in the premises) or any breach by the
            Company of any term or condition of the Rights Agreement; provided,
            however, that no Indemnified Party shall have the right to be
            indemnified hereunder for any liability finally determined by a
            court of competent jurisdiction, subject to no further appeal, to
            have resulted solely from the gross negligence or willful misconduct
            of such Indemnified Party.

      8.    Section 7(b) of the Rights Agreement is hereby deleted and replaced
            as follows:

            (b)   The Purchase Price for each one one-hundredth of a Preferred
                  Share purchasable pursuant to the exercise of a Right shall be
                  Five Hundred Dollars ($500.00), and shall be subject to
                  adjustment from time to time as provided in Section 11 or 13
                  hereof and shall be payable in lawful money of the United
                  States of America in accordance with paragraph (c) below.

      9.    This Amendment shall be deemed to be a contract made under the laws
            of the State of Delaware and for all purposes shall be governed by
            and construed in accordance with the laws of such State applicable
            to contracts to be made and performed entirely within such State.

      10.   Except as expressly amended hereby, all the terms and conditions of
            the Rights Agreement, as previously amended, shall remain in full
            force and effect.

      IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date set forth above.

QUEST DIAGNOSTICS INCORPORATED            COMPUTERSHARE INVESTOR
                                          SERVICES LLC, Successor Rights Agent

By:                                       By:
   -------------------------------           ---------------------------------
Name: Leo C. Farrenkopf, Jr.              Name:
      ------------------------                  ------------------------------
Title: Vice President and Secretary       Title:
       -----------------------------            ------------------------------


HARRIS TRUST AND SAVINGS BANK
Rights Agent


By:
   --------------------------------
Title:
      -----------------------------

EX-21

   1


                                                                      Exhibit 21
                                                          As of February 5, 2001

                       Quest Diagnostics Incorporated (DE)

       (Incorporated on December 12, 1990 in Delaware; EIN No. 16-1387862)

                                  Subsidiaries

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)
            (100%)      Quest Diagnostics LLC (AZ)
            (100%)      Quest Diagnostics Clinical Laboratories of Missouri LLC
                        (MO)
            (33-l/3%)   Compunet Clinical Laboratories (OH )
            (44%)       Mid America Clinical Laboratories (IN)
            (51%)       Diagnostic Laboratory of Oklahoma LLC (OK)

100%    DPD Holdings, Inc. (DE)
        100%  MetWest Inc. (DE)
            100%  Quest Diagnostics of Arizona Incorporated (DE)
                  49%  Sonora Quest Laboratories LLC (AZ)

100%    Laboratory Holdings Incorporated (MA)
        100%    Quest Diagnostics Incorporated  (CT)
        100%    Quest Diagnostics Incorporated  (MA)

100%    Quest Holdings Incorporated  (MD)
        100%  Quest  Diagnostics Incorporated  (MD)
              100%    Diagnostic Reference Services Inc. (MD)
                      50%    Pathology Building Partnership (MD) (gnl pshp)

100%    Quest Holdings Incorporated  (MI)
        100%   Quest Diagnostics Incorporated  (CA)

100%    Quest Diagnostics LLC (IL)

100%    Quest Diagnostics Incorporated  (MI)

100%    Quest Diagnostics of Pennsylvania Inc. (DE)
        100%    Quest Diagnostics Incorporated  (OH)
        100%    Medical Management Systems Inc. (PA)
                   51%     Quest Diagnostics Venture LLC (PA)
                   53.5%  Associated Clinical Laboratories  (PA) (gen pshp)
         50%    Surgical Eye Enterprise L.P. (PA) (ltd. pshp)
                   50%    Surgical Eye Institute L.P.  (PA) (ltd.  pshp)

100%    Quest Holdings Incorporated (DE)
        51%     Quest Diagnostics of Missouri LLC (MO)
100%    Quest MRL, Inc.(DE)

100 %   Quest Diagnostics Ventures LLC (DE)

100%    Quest Diagnostics Receivables Inc. (DE)

100%    Quest Diagnostics Investments Incorporated  (DE)
        100%  Quest Diagnostics Finance Incorporated (DE)

100%    Nichols Institute Diagnostics (CA)
        100%    Nichols Institute Sales Corporation (U.S.V.I.)
100%    Nichols Institute Diagnostics Limited (U. K.)
100%    Nichols Institute Diagnostics Trading S.A. (Switzerland)
100%    Nichols Institute Diagnostika GMBH (Germany)


   2

        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%    Quest Diagnostics do Brasil Ltda. S.C. (Brazil)

100%    Quest Diagnostics Limited (UK)
        100%   The Pathology Partnership plc

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)


                                       2

EX-23

   1


                                                                      EXHIBIT 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17077, 333-17079, 333-17083, 333-60477,
333-66177, 333-74103 and 333-85713) of Quest Diagnostics Incorporated of our
report dated January 24, 2001, except as to Note 18 which is as of February 21,
2001, relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, New York
April 2, 2001