Recent Acquisitions

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

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

As part of the Unilab acquisition, we acquired all of Unilab’s operations, including its primary testing facilities in Los Angeles, San Jose and Sacramento, California, approximately 365 patient service centers, 35 rapid response laboratories and approximately 4,100 employees. Following the sale of certain assets to LabCorp, we closed our previously owned clinical laboratory in the San Francisco Bay area and completed the integration of remaining customers in the northern California area to Unilab’s laboratories in San Jose and Sacramento. We continue to have two laboratories in the Los Angeles metropolitan area (our facilities in Van Nuys and Tarzana). We plan to open a new regional laboratory in the Los Angeles metropolitan area and then integrate our business in the Los Angeles metropolitan area into the new facility. We expect to incur up to $20 million of costs through 2005 to integrate Unilab and our existing California operations.  Upon completion of the Unilab integration, we expect to realize approximately $25 million to $30 million of annual synergies. We expect to achieve this annual rate of synergies by the end of 2005.

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

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

•  a loss of key customers or employees;

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

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

•  diversion of management’s attention from the day‑to‑day business of our Company as a result of the need to deal with the foregoing disruptions and difficulties; and

•  the added costs of dealing with such disruptions.

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