To Our Shareholders, Employees and Customers:

2006 was a year of outstanding performance for Quest Diagnostics. We enhanced our value proposition to patients, physicians, hospitals and payers, and we reported strong financial performance.

Among the many highlights of our 2006 financial performance:

• Revenues grew 15% to $6.3 billion;
• Earnings per share grew 13% to $3.14, despite a reduction of 9% in 2006 associated with accounting changes and special charges; and
• Cash from operations reached $952 million, an increase of $100 million from 2005.

We drove strong organic revenue growth and increased profitability.

We are proud to be the undisputed leader in a dynamic industry that provides a critical healthcare service to doctors and patients. Advances in technology are increasing the relevance of diagnostic testing, while enabling us to make it less painful and more convenient than ever. New diagnostic markers are helping doctors do a better job of diagnosing, monitoring and treating disease. Miniaturization is enabling diagnostic testing devices to move closer to the patient, whether in the doctor’s office or at the patient’s bedside. Tests once reserved exclusively for specialized esoteric laboratories are starting to be performed by labs within hospitals.

As advances are made in diagnostic testing and services, our industry is undergoing dramatic change brought on by broad shifts in the healthcare sector. Health plans have consolidated, creating integrated enterprises with greater purchasing power. Our industry is fragmented, and competition is fierce. As a result, pricing pressure is heightened and will continue, at least through the end of 2007.

Courage, Compassion, Commitment
In the face of these challenges, we have the courage to lead by holding fast to the values that have made us the leader. Our compassion for the patient is at the core of what we do. It compels us to constantly enhance quality and innovate. And we have a commitment to growth that creates benefits for customers, opportunities for employees and increased value for shareholders. In the pages that follow, we show the ways that our company and our people embody these behaviors.

In late 2006 we announced that we were unable to come to terms with UnitedHealthcare, which represented approximately 7% of our revenues.

We had historically enjoyed a strong relationship with United as its largest laboratory provider, serving 12 million patients. When United issued a request for bids, we met their requirement to help them reduce overall lab costs. And we continued to expand access and service for patients and doctors. However, they insisted on unreasonable and unilateral terms that would have been irresponsible of us to accept. In the long term, this was the right thing to do for our shareholders and our industry.

Ever since we announced the United contract loss in October 2006, we have been working to retain United physicians and patients. United has threatened financial penalties for doctors who choose Quest Diagnostics. This is unprecedented and is influencing physician behavior.

It is clear that 2007 will be a year of transition; however, we expect to return to both top- and bottom-line growth in 2008.

A Successful Strategy
Our strategy is based on three simple but profound words—Patients, Growth and People. We remain deeply committed to improving the overall patient experience, driving growth and facilitating the success of our colleagues. The opportunities we see are limitless.

We are making it easier and more convenient for patients to be tested. For example, in many locations, we have enabled patients to make appointments for testing online. Based on the initial success, we are expanding this initiative company wide. Our emphasis on establishing “Gold Standards” for customer service and training our frontline employees who interact with patients and physicians has resulted in improved patient satisfaction scores.

We continue to lead the way with important new tests for cancers, infectious disease and cardiovascular disease. We introduced an important new cancer test to identify cancers of unknown primary origin. We expanded our Leumeta™ family of cancer tests, which use blood plasma instead of painful bone marrow biopsies to assess leukemia and lymphoma.

During 2006, we acquired both Enterix, which makes the InSure™ colorectal cancer screening test, and Focus Diagnostics, a recognized world leader in infectious disease testing.

We are excited to acquire the worldwide rights to the InSure test for colorectal cancer screening. Colorectal cancer is the third most common form of cancer in the U.S. and is often curable when detected early. We have seen how a simple, non-invasive annual test such as InSure can have a profound impact on early detection. We see an opportunity to help patients around the world screen for colorectal cancer at an early stage when the disease is most treatable.

Focus Diagnostics has been recognized worldwide for its leadership in infectious and immunologic diseases such as herpes, SARS and avian flu, and its expertise in developing new diagnostics. Focus also has a unique capability to perform testing for the effectiveness of vaccines under development. Focus will further expand our capabilities and strengthen our position as the leading provider and developer of esoteric tests to hospitals and physicians.

We are driving organic growth in diagnostic testing by continuing to leverage our sales, service and science. We have created specialized sales organizations to serve medical specialists and to provide information technology services and genetic testing.

We are working with large health plans to understand and meet their needs using our considerable capabilities. While price is always an important element for any health plan, it is still only one of a number of elements, including quality, service, access and convenience that add up to a unique experience for patients, doctors and payers. We are helping health plans improve patient care and reduce overall healthcare spending through collaborations to screen health plan members for colorectal cancer using our proprietary InSure test and increase the use of e-prescribing using our Care360™ Physician Portal. Early in 2007, we renewed our long-term relationship with Aetna based on the access we provide to high-quality, cost-effective lab services.

Hospital testing represents another major opportunity. Today we are the world’s largest laboratory serving hospitals, and we are poised to continue to grow this business. Hospitals appreciate our ability to combine the quality and expertise of our world-renowned Nichols Institute esoteric testing laboratories with the logistics and customer service capabilities of Quest Diagnostics.

We are continuously improving our value proposition to both physicians and hospitals through advanced healthcare information technology. Today, more than 100,000 doctors use our Care360 Physician Portal for real-time lab results and patient-centric reports, as well as to connect to other medical professionals. The Care360 Physician Portal also enables physicians to review a patient’s medication history, clinical notes and messages from other physicians. The physician can also electronically prescribe medications right from the patient chart, reviewing many drug-to-drug and allergy-to-drug interactions and sending the prescription directly to a local pharmacy or pharmacy benefit management company.

Because It Matters
All labs are not the same. Our firm belief is that a laboratory test is not a commodity. Someone’s life depends on the results. Our job is to provide accurate and timely results to physicians and ensure that our patients are treated with care and compassion. Our commitment to service, quality, convenience and innovation is how we distinguish ourselves every day with doctors and patients.

Our industry is not ranked on service metrics by independent firms. So we com­mis­­sioned National Analysts Worldwide, a well-known market research firm, to survey physicians to find out if they had a preference between the two largest national laboratories. The majority of physicians expressed a preference for one of the labs. Among those with a preference, doctors overwhelmingly chose Quest Diagnostics over our largest national competitor.¹ Additionally, doctors rated Quest Diagnostics higher on every one of the 11 metrics in the survey.

Doctors appreciate the “Quest Diagnostics difference,” and we want everyone to know why. We launched our first national image campaign, which has been an important element in our effort to build our brand and raise awareness directly with patients, physicians, hospitals and payers.

Another way we raise awareness of the value of diagnostic testing is by using our large database of test results to identify broad health trends. During 2006 we issued the Quest Diagnostics Health Trends Diabetes Report, which found that between 2001 and 2005 people with diabetes who visit health professionals appeared to be doing a better job of managing their disease over time.

Visualizing the Future
It has been 10 years since our company was spun out as an independent company by Corning Incorporated. During the past decade, we have learned that leading change is one of the most challenging things our company can do, but we have also proved that it can also be one of the most rewarding. A $10,000 investment in Quest Diagnostics in January 1997 was worth approximately $145,000 at the end of 2006. During that time, revenues have grown from $1.5 billion to $6.3 billion, and we have joined the Fortune 500, S&P 500 and Dow Jones Sustainability World Index.

I strongly believe that our greatest achievements lie ahead. We are the leader in a growing industry with only 13% of the overall market. We will take a strong company and make it stronger. Our primary focus is to grow and strengthen our clinical diagnostic testing business by focusing on opportunities in cancer testing and esoteric clinical testing. At the same time, we are beginning to develop new areas for growth in near-patient testing and international diagnostic testing services.

We are responding to important industry trends. Technology is enabling diagnostic testing to take place closer than ever to the patient. Imagine bringing diagnostic testing to remote locations around the world where electricity is scarce and professional medical care even more so. Physicians are using advanced technology to conduct tests in their offices and at patient bedsides. Patients are taking more responsibility for their personal health, and they want faster answers to medical questions. And hospitals are now able to perform more esoteric tests in-house that once were the exclusive province of the specialized esoteric testing laboratory.

This market is in its early stages and is growing rapidly. To help us meet growing demand, early in 2007 we acquired HemoCue, a leading global provider in near-patient testing for hemoglobin. HemoCue builds on our previous acquisitions of Focus Diagnostics and Enterix. We are using our relationships with physicians to enter near- patient testing.

The global market for diagnostic testing is large, highly fragmented and growing. The emerging middle class in many developing countries has both the desire and ability to pay for diagnostic tests. Quest Diagnostics has the expertise, resources and discipline required to cultivate strong business in these regions. Moreover, we have the experience to help shape the diagnostic testing industry in emerging markets, thereby gaining a solid foothold and a strong competitive stance.

Today we have one strong growth platform based on diagnostic testing services. Near-patient testing products and international services will provide two new areas for growth which will be important contributors for our future. We will be helping more patients and more doctors more often in more places.

We have a proven strategy based on Patients, Growth and People. We have the financial strength to execute our strategy and position ourselves for sustainable growth. We have the courage to lead, the compassion for our patients and an unwavering commitment to growth.

I am excited about the future and the opportunities that lie ahead. Thank you for your continued support and your confidence as we begin our second decade.

Take Care,

Surya N. Mohapatra, Ph.D.
Chairman, President and Chief Executive Officer

¹  The survey queried a nationally representative sample of general and family practitioners, internists, obstetricians and gynecologists who have had experience with both Quest Diagnostics and LabCorp over the six months ended in January, 2007.