Acquisition of Unilab Corporation

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

Integration of Acquired Businesses

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

Unilab Corporation

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

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

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

American Medical Laboratories, Incorporated and Clinical Diagnostics Services, Incorporated

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

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

Six Sigma and Standardization Initiatives

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