Quest Diagnostics (DGX) 10-Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008
Commission file number 001-12215

Quest Diagnostics Incorporated

Three Giralda Farms
Madison, NJ 07940
(973) 520-2700

Delaware
(State of Incorporation)

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

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     X	Accelerated filer
Non-accelerated filer              (Do not check if a smaller reporting company)	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ______ No __X___

As of April 18, 2008, there were 194,827,634 outstanding shares of the registrant’s common stock, $.01 par value.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements
		Page
	Index to consolidated financial statements filed as part of this report:
	Consolidated Statements of Operations for the
	Three Months Ended March 31, 2008 and 2007	2
	Consolidated Balance Sheets as of
	March 31, 2008 and December 31, 2007	3
	Consolidated Statements of Cash Flows for the
	Three Months Ended March 31, 2008 and 2007	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations
	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	See Item 2. “Management’s Discussion and Analysis of Financial Condition	30
	and Results of Operations”
Item 4.	Controls and Procedures
	Controls and Procedures	30

1

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(unaudited)
(in thousands, except per share data)

	Three Months Ended
	March 31,
	2008			2007
Net revenues	$	1,784,637		$	1,526,208
Operating costs and expenses:
Cost of services		1,058,627			931,785
Selling, general and administrative		435,078			384,793
Amortization of intangible assets		9,264			4,460
Other operating expense, net		1,407			4,300
Total operating costs and expenses		1,504,376			1,325,338
Operating income		280,261			200,870
Other income (expense):
Interest expense, net		(47,617	)		(26,527	)
Minority share of income		(7,054	)		(6,130	)
Equity earnings in unconsolidated joint ventures		7,999			6,904
Other (expense) income, net		(1,037	)		2,008
Total non-operating expenses, net		(47,709	)		(23,745	)
Income from continuing operations before taxes		232,552			177,125
Income tax expense		91,858			69,610
Income from continuing operations		140,694			107,515
Loss from discontinued operations, net of taxes		(1,087	)		(1,622	)
Net income	$	139,607		$	105,893
Earnings per common share - basic:
Income from continuing operations	$	0.72		$	0.56
Loss from discontinued operations		-			(0.01	)
Net income	$	0.72		$	0.55
Earnings per common share - diluted:
Income from continuing operations	$	0.72		$	0.55
Loss from discontinued operations		(0.01	)		(0.01	)
Net income	$	0.71		$	0.54
Weighted average common shares outstanding:
Basic		194,143			193,379
Diluted		195,783			195,263
Dividends per common share	$	0.10			0.10

The accompanying notes are an integral part of these statements.

2

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 AND DECEMBER 31, 2007
(in thousands, except per share data)

	March 31,			December 31,
	2008			2007
	(unaudited)			(audited)
Assets
Current assets:
Cash and cash equivalents	$	170,022		$	167,594
Accounts receivable, net of allowance for doubtful accounts of $276,353
and $250,067 at March 31, 2008 and December 31, 2007, respectively		947,738			881,967
Inventories		97,363			95,234
Deferred income taxes		153,630			149,841
Prepaid expenses and other current assets		95,882			79,721
Total current assets		1,464,635			1,374,357
Property, plant and equipment, net		906,097			911,998
Goodwill, net		5,229,664			5,220,104
Intangible assets, net		884,087			886,733
Other assets		161,851			172,501
Total assets	$	8,646,334		$	8,565,693
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	1,143,937		$	1,124,716
Short-term borrowings and current portion of long-term debt		48,792			163,581
Total current liabilities		1,192,729			1,288,297
Long-term debt		3,378,715			3,377,212
Other liabilities		572,863			575,942
Stockholders’ equity:
Common stock, par value $0.01 per share; 600,000 shares authorized at
both March 31, 2008 and December 31, 2007; 214,129 and 213,745
issued at March 31, 2008 and December 31, 2007, respectively		2,141			2,137
Additional paid-in capital		2,223,863			2,210,825
Retained earnings		2,177,908			2,057,744
Accumulated other comprehensive income		51,638			25,279
Treasury stock, at cost; 19,336 and 19,705 shares at March 31, 2008 and
December 31, 2007, respectively		(953,523	)		(971,743	)
Total stockholders’ equity		3,502,027			3,324,242
Total liabilities and stockholders’ equity	$	8,646,334		$	8,565,693

The accompanying notes are an integral part of these statements.

3

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(unaudited)
(in thousands)

	Three Months Ended March 31,
	2008			2007
Cash flows from operating activities:
Net income	$	139,607		$	105,893
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization		65,259			50,335
Provision for doubtful accounts		86,022			67,508
Stock-based compensation expense		21,234			16,084
Deferred income tax benefit		(2,585	)		(8,758	)
Minority share of income		7,054			6,130
Excess tax benefits from stock-based compensation arrangements		(603	)		(4,201	)
Other, net		(3,401	)		1,348
Changes in operating assets and liabilities:
Accounts receivable		(151,793	)		(94,031	)
Accounts payable and accrued expenses		(48,472	)		(45,398	)
Integration, settlement and other special charges		(2,353	)		(2,143	)
Income taxes payable		69,027			67,895
Other assets and liabilities, net		(21,089	)		(9,109	)
Net cash provided by operating activities		157,907			151,553
Cash flows from investing activities:
Business acquisitions, net of cash acquired		22,817			(306,627	)
Capital expenditures		(46,923	)		(40,126	)
Proceeds from disposition of assets		421			1,925
Decrease (increase) in investments and other assets		6,465			(1,119	)
Net cash used in investing activities		(17,220	)		(345,947	)
Cash flows from financing activities:
Repayments of debt		(135,506	)		(128,343	)
Proceeds from borrowings		20,039			450,000
Purchases of treasury stock		-			(105,000	)
Dividends paid		(19,408	)		(19,401	)
Exercise of stock options		6,447			17,552
Excess tax benefits from stock-based compensation arrangements		603			4,201
Decrease in book overdrafts		(4,688	)		(10,158	)
Distributions to minority partners		(5,746	)		(4,743	)
Financing costs paid		-			(957	)
Net cash (used in) provided by financing activities		(138,259	)		203,151
Net change in cash and cash equivalents		2,428			8,757
Cash and cash equivalents, beginning of period		167,594			149,640
Cash and cash equivalents, end of period	$	170,022		$	158,397

The accompanying notes are an integral part of these statements.

4

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

1.         BASIS OF PRESENTATION

          Background

          Quest Diagnostics Incorporated and its subsidiaries (“Quest Diagnostics” or the “Company”) is the largest provider of diagnostic testing, information and services in the United States, providing insights that enable physicians and other healthcare professionals to make decisions to improve health. Quest Diagnostics offers patients and physicians the broadest access to diagnostic laboratory services through the Company’s nationwide network of laboratories and owned patient service centers. The Company provides interpretive consultation through the largest medical and scientific staff in the industry, with approximately 900 M.D.s and Ph.D.s around the country. Quest Diagnostics is the leading provider of gene-based testing and other esoteric testing, the leading provider of anatomic pathology services and the leading provider of testing for drugs-of-abuse. The Company is also a leading provider of testing for clinical trials, and risk assessment services for the life insurance industry. The Company’s diagnostics products business manufactures and markets diagnostic test kits and specialized point-of-care testing. Quest Diagnostics empowers healthcare organizations and clinicians with state-of-the-art information technology solutions that can improve patient care and medical practice.

          Basis of Presentation

          The interim consolidated financial statements reflect all adjustments, which in the opinion of management are necessary for a fair statement of financial condition and results of operations for the periods presented. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. The interim consolidated financial statements have been compiled without audit. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K.

          Earnings Per Share

          Basic earnings per common share is calculated by dividing net income by the weighted average common shares outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the dilutive effect of outstanding stock options, performance share units and restricted common shares granted under the Company’s Amended and Restated Employee Long-Term Incentive Plan and its Amended and Restated Director Long-Term Incentive Plan.

5

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

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

	Three Months Ended
	March 31,
	2008			2007
Income from continuing operations	$	140,694		$	107,515
Loss from discontinued operations		(1,087	)		(1,622	)
Net income available to common stockholders – basic and diluted	$	139,607		$	105,893
Weighted average common shares outstanding – basic		194,143			193,379
Effect of dilutive securities:
Stock options, restricted common shares and performance
share units		1,640			1,884
Weighted average common shares outstanding – diluted		195,783			195,263
Earnings per common share – basic:
Income from continuing operations	$	0.72		$	0.56
Loss from discontinued operations		-			(0.01	)
Net income	$	0.72		$	0.55
Earnings per common share – diluted:
Income from continuing operations	$	0.72		$	0.55
Loss from discontinued operations		(0.01	)		(0.01	)
Net income	$	0.71		$	0.54

          Stock options, restricted common shares and performance share units of 4.3 million shares and 4.6 million shares for the three months ended March 31, 2008 and 2007, respectively, were not included due to their antidilutive effect.

          Fair Value Measurements

          On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value and a common framework for measuring fair value as well as new disclosure requirements for fair value measurements used in financial statements. Under SFAS 157, fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. Fair value measurements are determined by either the principal market or the most advantageous market. The principal market is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure fair value, the Company has used the most advantageous market which is the market that the Company would receive the highest selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when using the most advantageous market, transactions costs are only considered to determine which market is the most advantageous and these costs are then excluded when applying a fair value measurement. Adoption of SFAS 157 did not have a material effect on the Company’s financial position, results of operations or cash flows.

          In February 2008, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 amended SFAS 157 to exclude from its scope SFAS No. 13, “Accounting

6

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

for Leases”, and its related interpretive accounting pronouncements that address leasing transactions. However, this exclusion does not apply to the Company’s impairment of long-lived assets under a capital lease pursuant to SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, the Company’s cost to terminate an operating lease under SFAS No. 146, “Accounting for Costs Associated with Exit and Disposal Activities,” and the measurement of acquired leases in a business combination pursuant to SFAS No. 141 or 141(R), “Business Combinations.” Also in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2amended SFAS 157 to defer the effective date of SFAS 157 for one year (January 1, 2009 for Quest Diagnostics) for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. The Company is currently assessing the impact of SFAS 157 on its non-financial assets and non-financial liabilities measured at fair value on a nonrecurring basis.

          SFAS 157 creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.

          Level 1: Quoted prices in active markets for identical assets or liabilities.

          Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

          Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

          The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis.

			Basis of Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Significant
			Identical		Other		Significant
			Assets /		Observable		Unobservable
			Liabilities		Inputs		Inputs
	March 31,
	2008		Level 1		Level 2		Level 3
Assets:
Trading securities	$	31,590	$	31,590	$	-	$	-
Cash surrender value of life insurance policies	$	15,126	$	-	$	15,126	$	-
Available-for-sale securities		2,985		2,985		-		-
Total	$	49,701	$	34,575	$	15,126	$	-
Liabilities:
Interest rate swaps	$	12,531	$	-	$	12,531	$	-
Deferred compensation liabilities		48,811		-		48,811		-
Total	$	61,342	$	-	$	61,342	$	-

          The Company offers certain employees the opportunity to participate in a supplemental deferred compensation plan. A participant’s deferrals, together with Company matching credits, are invested in a variety of participant directed stock and bond mutual funds as well as Company stock and are classified as trading securities. Changes in the fair value of these securities are measured using quoted prices in active markets based on the market price per unit multiplied by the number of units held exclusive of any transaction costs. A

7

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

corresponding adjustment for changes in fair value of the trading securities is also reflected in the changes in fair value of the deferred compensation obligation. The deferred compensation liabilities are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the trading securities.

          In connection with the acquisition of AmeriPath Group Holdings, Inc. (“AmeriPath”) in May 2007, the Company assumed a non-qualified deferred compensation program AmeriPath offers to certain employees. A participant’s deferrals, together with Company matching credits, are “invested” at the direction of the employee in a hypothetical portfolio of investments which are tracked by an administrator. The Company purchases life insurance policies, with the Company named as beneficiary of the policies, for the purpose of funding the program’s liability. Changes in the cash surrender value of the life insurance policies are based upon earnings and changes in the value of the underlying investments. Changes in the fair value of the deferred compensation obligation are derived using quoted prices in active markets based on the market price per unit multiplied by the number of units. The cash surrender value and the deferred compensation obligations are classified within Level 2 because their inputs are derived principally from observable market data by correlation to the hypothetical investments.

          The Company’s investments in available-for-sale securities are exposed to equity price fluctuations. The fair value measurements for available-for-sale securities are based upon the quoted price in active markets multiplied by the number of shares owned exclusive of any transaction costs and without any adjustments to reflect discounts that may be applied to selling a large block of the securities at one time. The Company does not believe that the changes in fair value of these assets will materially differ from the amounts that could be realized upon settlement or that the changes in fair value will have a material effect on the Company’s results of operations, liquidity and capital resources. However, the ultimate amount that could be realized upon sale or settlement of certain equity investments is dependent on several factors including external market conditions, the terms and conditions of a sale agreement, the counterparty to a sale agreement, the investment’s liquidity in capital markets and the length of time to liquidate an equity investment.

          The fair value measurements of the Company’s interest rate swaps are model-derived valuations as of a given date in which all significant inputs are observable in active markets including certain financial information and certain assumptions regarding past, present and future market conditions. The Company does not believe that the changes in the fair values of its interest rate swaps will materially differ from the amounts that could be realized upon settlement or maturity or that the changes in fair value will have a material effect on its results of operations, liquidity and capital resources.

          SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) became effective for the Company on January 1, 2008. SFAS 159 provides companies with an option to irrevocably elect to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis with the resulting changes in fair value recorded in earnings. The objective of SFAS 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by using different measurement attributes for financial assets and financial liabilities. As of January 1, 2008 and for the period ended March 31, 2008, the Company has elected not to apply the fair value option to any of its financial assets or financial liabilities on-hand because the Company does not believe that application of SFAS 159’s fair value option is appropriate, given the nature of its business operations.

          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. In accordance with the provisions of SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” at March 31, 2008 and December 31, 2007, the fair value of the Company’s debt was estimated at $3.4 billion and $3.6 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 March 31, 2008 and December 31, 2007, the estimated fair value exceeded the carrying value of the debt by $19.3 million and $59.1 million, respectively.

          New Accounting Standards

          In March 2008, the FASB issued SFAS No. 161 “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends SFAS 133 by requiring expanded disclosures about an entity’s derivative instruments and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. SFAS 161 is effective for the Company as of January 1, 2009. The Company is currently assessing the impact of SFAS 161 on its consolidated financial statements.

8

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

2.BUSINESS ACQUISITIONS

          2007 Acquisitions

          Acquisition of HemoCue

          On January 31, 2007, the Company completed its acquisition of POCT Holding AB (“HemoCue”), a Sweden-based company specializing in point-of-care testing, in an all-cash transaction valued at approximately $450 million, including $113 million of assumed debt. HemoCue is the leading international provider in point-of-care for hemoglobin, with a growing share in professional glucose and microalbumin testing. In October 2007, HemoCue received FDA 510(k) clearance for its White Blood Cell Analyzer, a whole-blood test performed on finger-stick samples that assist physicians diagnosing infection, inflammation, bone marrow failure, autoimmune diseases and many other medical conditions now routinely tested by reference laboratories.

          In conjunction with the acquisition of HemoCue, the Company repaid approximately $113 million of debt, representing substantially all of HemoCue’s existing outstanding debt as of January 31, 2007.

          The Company financed the aggregate purchase price of $344 million, which includes transaction costs of approximately $7 million of which $2 million was paid in 2006, and the repayment of substantially all of HemoCue’s outstanding debt with the proceeds from a new $450 million term loan and cash on-hand. On May 31, 2007, the Company refinanced this term loan. In January 2008, the Company received a payment of approximately $23 million from an escrow fund established at the time of the acquisition, which reduces the aggregate purchase price to $321 million.

          The acquisition of HemoCue was accounted for under the purchase method of accounting. As such, the cost to acquire HemoCue was allocated to the respective assets and liabilities acquired based on their estimated fair values as of the closing date. During 2007, the Company finalized its fair value estimates of the assets and liabilities acquired. The consolidated financial statements include the results of operations of HemoCue subsequent to the closing of the acquisition.

          Of the aggregate purchase price of $321 million, $298 million was allocated to goodwill, $38 million was allocated to customer relationships that are being amortized over 20 years and $39 million was allocated to technology that is being amortized over 14 years.

          In addition to the amortizable intangibles noted above, $53.8 million was allocated to tradenames, which is not subject to amortization, and $4.0 million was allocated to in-process research and development (“IPR&D”). The IPR&D was expensed in the Company’s results of operations during the first quarter of 2007, in accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”, and is included in “other operating expense, net” within the consolidated statements of operations.

          Supplemental pro forma combined financial information has not been presented as the acquisition is not material to the Company’s consolidated results of operations.

          Acquisition of AmeriPath

          On May 31, 2007, the Company completed its acquisition of AmeriPath in an all-cash transaction valued at approximately $2.0 billion, including approximately $780 million of assumed debt and related accrued interest. AmeriPath is a leading provider of anatomic pathology, including dermatopathology, and esoteric testing and generates annual revenues of approximately $800 million.

          Through the acquisition, the Company acquired all of AmeriPath’s operations. AmeriPath, with its team of approximately 400 board certified pathologists, operates 40 outpatient anatomic pathology laboratories and provides inpatient anatomic pathology and medical director services for approximately 200 hospitals throughout the United

9

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

States. The Company financed the all-cash purchase price and related transaction costs, together with the repayment of approximately $780 million of principal and related accrued interest representing substantially all of AmeriPath’s debt as well as the refinancing of the term loan used to finance the acquisition of HemoCue with: $1.6 billion of borrowings under a new five-year term loan facility, $780 million of borrowings under a new one-year bridge loan, and cash on-hand. In June 2007, the Company completed an $800 million senior notes offering. The net proceeds of the senior notes offering were used to repay the $780 million borrowed under the bridge loan.

          The acquisition of AmeriPath was accounted for under the purchase method of accounting. As such, the cost to acquire AmeriPath was allocated to the respective assets and liabilities acquired based on their estimated fair values as of the closing date. A preliminary allocation of the cost to acquire AmeriPath has been made to certain assets and liabilities of AmeriPath based on preliminary estimates. The Company is continuing to assess the estimated fair values of certain of the assets and liabilities acquired. The consolidated financial statements include the results of operations of AmeriPath subsequent to the closing of the acquisition.

          The following table summarizes the Company’s preliminary purchase price allocation of the cost to acquire AmeriPath:

	Estimated
	Fair Values
	as of
	May 31,
	2007
Current assets	$	199,825
Property and equipment		127,503
Intangible assets		561,300
Goodwill		1,464,059
Other assets		67,685
Total assets acquired		2,420,372
Current liabilities		144,724
Long-term liabilities		259,202
Long-term debt		801,424
Total liabilities assumed		1,205,350
Net assets acquired	$	1,215,022

          The acquired amortizable intangibles are being amortized over their estimated useful lives as follows:

	Estimated		Weighted Average
	Fair Value		Useful Life
Customer relationships	$	327,500	20 years
Tradename		2,500	2 years
Non-compete agreement		5,800	5 years

          In addition to the amortizable intangibles noted above, $226 million was allocated to certain tradenames, which are not subject to amortization.

          Of the amount allocated to goodwill and intangible assets, approximately $100 million is expected to be deductible for tax purposes.

10

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

          Pro Forma Combined Financial Information

          The following unaudited pro forma combined financial information for the three months ended March 31, 2007 assumes that the AmeriPath acquisition and related financing, including the Company’s June 2007 senior notes offering, were completed on January 1, 2007 (in thousands, except per share data):

	Three Months
	Ended
	March 31,
	2007
Net revenues	$	1,726,902
Net income		95,234
Basic earnings per common share:
Net income	$	0.49
Weighted average common shares outstanding –
basic		193,379
Diluted earnings per common share:
Net income	$	0.49
Weighted average common shares outstanding –
diluted		195,263

          The unaudited pro forma combined financial information presented above reflects certain reclassifications to the historical financial statements of AmeriPath to conform the acquired company’s accounting policies and classification of certain costs and expenses to that of Quest Diagnostics. These adjustments had no impact on pro forma net income.

3.           GOODWILL AND INTANGIBLE ASSETS

          Goodwill at March 31, 2008 and December 31, 2007 consisted of the following:

	March 31,			December 31,
	2008			2007
Goodwill	$	5,410,682		$	5,401,216
Less: accumulated amortization		(181,018	)		(181,112	)
Goodwill, net	$	5,229,664		$	5,220,104

          The changes in the gross carrying amount of goodwill for the three month period ended March 31, 2008 and for the year ended December 31, 2007 are as follows:

	March 31,			December 31,
	2008			2007
Balance at beginning of period	$	5,401,216		$	3,572,238
Goodwill acquired during the period		(18,059	)		1,789,732
Other		27,525			39,246
Balance at end of period	$	5,410,682		$	5,401,216

11

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

          For the three months ended March 31, 2008, the decrease in goodwill acquired was primarily due to a payment received from an escrow fund established at the time of the HemoCue acquisition, see Note 2 for further discussion, and the increase in other was primarily related to foreign currency translation. Approximately 90% of the Company’s goodwill as of March 31, 2008 and December 31, 2007 was included in its clinical testing business.

          For the year ended December 31, 2007, the increase in goodwill was primarily related to the acquisitions of AmeriPath and HemoCue, and the impact on goodwill as a result of the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. (See Notes 3 and 5 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 for further discussions.)

          Intangible assets at March 31, 2008 and December 31, 2007 consisted of the following:

	Weighted
	Average
	Amortization
	Period	March 31, 2008							December 31, 2007
				Accumulated							Accumulated
		Cost		Amortization			Net		Cost		Amortization			Net
Amortizing intangible assets:
Customer-related
intangibles	19 years	$	591,231	$	(77,592	)	$	513,639	$	589,418	$	(70,036	)	$	519,382
Non-compete
agreements	5 years		53,822		(46,881	)		6,941		53,832		(46,476	)		7,356
Other	13 years		64,409		(10,209	)		54,200		64,214		(8,394	)		55,820
Total	19 years		709,462		(134,682	)		574,780		707,464		(124,906	)		582,558
Intangible assets not subject
to amortization:
Tradenames			309,307		-			309,307		304,175		-			304,175
Total intangible assets		$	1,018,769	$	(134,682	)	$	884,087	$	1,011,639	$	(124,906	)	$	886,733

          Amortization expense related to intangible assets was $9.3 million and $4.5 million for the three months ended March 31, 2008 and 2007, respectively.

          The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of March 31, 2008 is as follows:

Fiscal Year Ending
December 31,
Remainder of 2008	$	28,358
2009		36,691
2010		35,913
2011		35,694
2012		34,516
2013		33,567
Thereafter		370,041
Total	$	574,780

12

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

4.STOCKHOLDERS’ EQUITY

          Changes in stockholders’ equity for the three months ended March 31, 2008 were as follows:

											Accumulated
											Other
	Shares of										Compre-
	Common				Additional						hensive			Treasury			Compre-
	Stock		Common		Paid-In			Retained			Income			Stock,			hensive
	Outstanding		Stock		Capital			Earnings			(Loss)			at Cost			Income
Balance,
December 31, 2007	194,040		$	2,137	$	2,210,825		$	2,057,744		$	25,279		$	(971,743	)
Net income									139,607								$	139,607
Currency translation												34,120						34,120
Market valuation, net of tax
benefit of $1,897												(2,893	)					(2,893	)
Deferred loss, less
reclassifications												(4,868	)					(4,868	)
Comprehensive income																	$	165,966
Dividends declared									(19,443	)
Issuance of common stock
under benefit plans	581			4		48									4,298
Stock-based compensation
expense						16,173									5,061
Exercise of stock options	212					(4,028	)								10,475
Shares to cover employee
payroll tax withholdings
on stock issued under
benefit plans	(40	)				(234	)								(1,614	)
Tax benefits associated with
stock-based compensation
plans						744
Other						335
Balance,
March 31, 2008	194,793		$	2,141	$	2,223,863		$	2,177,908		$	51,638		$	(953,523	)

          The market valuation adjustment represents unrealized holding losses on investments, net of taxes. The deferred loss primarily represents deferred losses on the Company’s interest rate swap agreements, net of amounts reclassified to interest expense. Foreign currency translation adjustments are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries.

          For the three months ended March 31, 2008, the Company reissued 0.4 million shares for employee benefit plans. The Company did not purchase any shares of its common stock during the quarter ended March 31, 2008. Since the inception of its share repurchase program in May 2003, through March 31, 2008, the Company has repurchased 44.1 million shares of its common stock at an average price of $45.35 for approximately $2 billion. At March 31, 2008, $104 million of the share repurchase authorizations remained available.

          During each of the quarters of 2008 and 2007, the Company’s Board of Directors has declared a quarterly cash dividend of $0.10 per common share.

13

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

          Changes in stockholders’ equity for the three months ended March 31, 2007 were as follows:

														Accumulated
														Other
	Shares of													Compre-
	Common					Additional								hensive				Treasury				Compre-
	Stock		Common			Paid-In				Retained				Income				Stock,				hensive
	Outstanding		Stock			Capital				Earnings				(Loss)				at Cost				Income
Balance,
December 31, 2006	193,949		$	2,138			$	2,185,073			$	1,800,255			$	(65	)		$	(968,230	)
Net income												105,893										$	105,893
Currency translation																(1,201	)						(1,201	)
Market valuation, net of tax
expense of $1,260																1,922							1,922
Deferred loss, less
reclassifications																(63	)						(63	)
Comprehensive income																						$	106,551
Dividends declared												(19,253	)
Issuance of common stock
under benefit plans	115							(526	)											5,786
Stock-based compensation
expense								16,084
Exercise of stock options	582							(10,946	)											28,498
Shares to cover employee
payroll tax withholdings
on stock issued under
benefit plans	(8	)		(1	)			(427	)
Tax benefits associated with
stock-based compensation
plans								4,882
Purchases of treasury stock	(2,060	)																		(105,000	)
Adjustments upon adoption
of FASB Interpretation
No. 48								(10,441	)			(5,146	)
Balance,
March 31, 2007	192,578		$	2,137			$	2,183,699			$	1,881,749			$	593			$	(1,038,946	)

          For the three months ended March 31, 2007, the Company repurchased 2.1 million shares of its common stock at an average price of $50.98 per share for $105 million. For the three months ended March 31, 2007, the Company reissued 0.7 million shares for employee benefit plans.

14

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

5.          SUPPLEMENTAL CASH FLOW & OTHER DATA

	Three Months Ended
	March 31,
	2008			2007
Depreciation expense	$	55,995		$	45,875
Interest expense		(49,645	)		(28,090	)
Interest income		2,028			1,563
Interest expense, net		(47,617	)		(26,527	)
Interest paid		58,929			20,274
Income taxes paid		24,842			9,251
Business acquired:
Fair value of assets assumed	$	-		$	529,962
Fair value of liabilities assumed		-			188,298

6.DISCONTINUED OPERATIONS

          During the fourth quarter of 2005, NID instituted its second voluntary product hold within a six-month period due to quality issues, which adversely impacted the operating performance of NID. As a result, the Company evaluated a number of strategic options for NID. On April 19, 2006, the Company decided to discontinue NID’s operations. During the third quarter of 2006, the Company completed its wind down of NID and classified the operations of NID as discontinued operations. Results of operations for NID have been reported as discontinued operations in the accompanying consolidated statements of operations and related disclosures for all periods presented.

          The government investigation of NID continues (see Note 7). During the third quarter of 2007, the government and the Company began settlement discussions. In the course of those discussions, the government disclosed to the Company certain of the government’s legal theories regarding the amount of damages allegedly incurred by the government. The Company analyzed the government’s position and presented its own analysis which argued against many of the government’s claims. In light of that analysis and based on the status of settlement discussions, the Company established a reserve, in accordance with generally accepted accounting principles, reflected in discontinued operations, of $241 million during the second half of 2007 in connection with these claims. The Company estimates that the amount reserved represents the minimum expected probable loss with respect to this matter. See Note 7 for further details.

          Summarized financial information for the discontinued operations of NID is set forth below:

	Three Months Ended
	March 31,
	2008			2007
Net revenues	$	-		$	-
Loss from discontinued operations before income
taxes		(1,593	)		(2,654	)
Income tax benefit		(506	)		(1,032	)
Loss from discontinued operations, net of taxes	$	(1,087	)	$	(1,622	)

15

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

          The $241 million reserve established in 2007 in connection with various government claims is included in “accounts payable and accrued expenses” in the consolidated balance sheets at March 31, 2008 and December 31, 2007. The deferred tax asset recorded in connection with establishing the reserve is included in “deferred income taxes” in the consolidated balance sheets at March 31, 2008 and December 31, 2007. The remaining balance sheet information related to NID was not material at March 31, 2008 and December 31, 2007.

7.          COMMITMENTS AND CONTINGENCIES

          The Company has lines of credit with two financial institutions totaling $95 million for the issuance of letters of credit (the “letter of credit lines”). The letter of credit lines, which are renewed annually, mature on November 30, 2008 and December 31, 2008 and are guaranteed by the Subsidiary Guarantors.

          In support of its risk management program, to ensure the Company’s performance or payment to third parties, $83 million were outstanding on the letter of credit lines at March 31, 2008. The letters of credit primarily represent collateral for current and future automobile liability and workers’ compensation loss payments.

          Contingent Lease Obligations

          The Company is subject to contingent obligations under certain leases and other instruments incurred in connection with real estate activities and other operations associated with LabOne, Inc., which the Company acquired in 2005, and certain of its predecessor companies. No liability has been recorded for any of these potential contingent obligations. See Note 15 to the Consolidated Financial Statements contained in the Company’s 2007 Annual Report on Form 10-K for further details.

          The Company is involved in various legal proceedings. Some of the proceedings against the Company involve claims that are substantial in amount.

          NID Investigation

          NID and the Company each received a subpoena from the United States Attorney’s Office for the Eastern District of New York during the fourth quarter of 2004. The subpoenas requested a wide range of business records, including documents regarding parathyroid hormone (“PTH”) test kits manufactured by NID and PTH testing performed by the Company. The Company has voluntarily and actively cooperated with the investigation, providing information, witnesses and business records of NID and the Company, including documents related to PTH tests and test kits, as well as other tests and test kits. In the second and third quarters of 2005, the FDA conducted an inspection of NID and issued a Form 483 listing the observations made by the FDA during the course of the inspection. NID responded to the Form 483.

          During the fourth quarter of 2005, NID instituted its second voluntary product hold within a six-month period due to quality issues, which adversely impacted the operating performance of NID. As a result, the Company evaluated a number of strategic options for NID, and on April 19, 2006, decided to cease operations at NID. Upon completion of the wind down of operations in the third quarter of 2006, the operations of NID were classified as discontinued operations. During the third quarter of 2006, the government issued two additional subpoenas, one to NID and one to the Company. The subpoenas covered various records, including records related to tests and test kits in addition to PTH.

          During the third quarter of 2007, the government and the Company began settlement discussions. In the course of those discussions, the government disclosed to the Company certain of the government’s legal theories regarding the amount of damages allegedly incurred by the government, which include alleged violations of civil and criminal statutes including the False Claims Act and the Food, Drug and Cosmetics Act. Violations of these statutes and related regulations could lead to a warning letter, injunction, fines or penalties, exclusion from federal healthcare programs and/or criminal prosecution, as well as claims by third parties. The Company analyzed the government’s position and presented its own analysis which argued against many of the government’s claims. In light of that

16

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

analysis and based on the status of settlement discussions, the Company has established a reserve, in accordance with generally accepted accounting principles, reflected in discontinued operations, of $241 million in connection with these claims. Of the total reserve, $51 million and $190 million were recorded in the third and fourth quarters, respectively, of 2007. The Company estimates that the amount reserved represents the minimum expected probable loss with respect to this matter. The Company does not believe that a reasonable estimate for these losses in excess of the established reserve can be made at this time. The Company has recorded a deferred tax benefit associated with that portion of the reserve that it expects will be tax deductible. Eventual losses related to these matters may substantially exceed the reserve, and the impact could be material to the Company’s results of operations, cash flows and financial condition in the period that such matters are determined or paid.

          The Company continues to engage in discussions with the United States Attorney’s Office and those discussions potentially could lead to an agreement in principle to resolve some or all of the matters in the near future. There can be no assurance, however, when or whether a settlement may be reached, or as to its terms. If the Company cannot reach an acceptable settlement agreement with the United States Attorney’s Office, the Company would defend itself and NID and could incur significant costs in doing so.

          Other Matters

          The Company has in the past entered into several settlement agreements with various government and private payers relating to industry-wide billing and marketing practices that had been substantially discontinued. The federal or state governments may bring additional claims based on new theories as to the Company’s practices which management believes to be in compliance with law. In addition, certain federal and state statutes, including the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against healthcare companies on behalf of government or private payers alleging inappropriate billing practices. The Company is aware of certain pending lawsuits, including a class action lawsuit, and has received several subpoenas related to billing practices.

          During the second quarter of 2005, the Company received a subpoena from the United States Attorney’s Office for the District of New Jersey. The subpoena seeks the production of business and financial records regarding capitation and risk sharing arrangements with government and private payers for the years 1993 through 1999. Also, during the third quarter of 2005, the Company received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General. The subpoena seeks the production of various business records including records regarding our relationship with health maintenance organizations, independent physician associations, group purchasing organizations, and preferred provider organizations relating back to as early as 1995. The Company is cooperating with the United States Attorney’s Office and the Office of the Inspector General.

          During the second quarter of 2006, each of the Company and its subsidiary, Specialty Laboratories, Inc. (“Specialty”), received a subpoena from the California Attorney General’s Office. The subpoenas seek various documents including documents relating to billings to MediCal, the California Medicaid program. The subpoenas seek documents from various time frames ranging from three to ten years. The Company and Specialty are cooperating with the California Attorney General’s Office.

          In March 2008, the U.S. Department of Justice informally requested records from the Company regarding AmeriPath’s billing practices for flow cytometry testing panels performed on blood, bone marrow and lymph node specimens. The inquiry seeks to determine whether AmeriPath may have billed for laboratory tests that were not medically necessary. The Company is cooperating fully with the inquiry.

          The Company understands that there may be pending qui tam claims brought by former employees or other “whistle blowers” as to which the Company cannot determine the extent of any potential liability. The Company also is aware of certain pending individual or class action lawsuits related to billing practices filed under the qui tam provisions of the civil False Claims Act and/or other federal and state statutes, regulations or other laws.

          Several of these other matters are in their early stages of development and involve responding to and cooperating with various government investigations and related subpoenas. While the Company believes that at least

17

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

a reasonable possibility exists that losses may have been incurred, based on the nature and status of the investigations, the losses are either currently not probable or cannot be reasonably estimated.

          Management has established reserves in accordance with generally accepted accounting principles for the other matters discussed above. Such reserves totaled less than $5 million as of March 31, 2008. Although management cannot predict the outcome of such matters, management does not anticipate that the ultimate outcome of such matters will have a material adverse effect on the Company’s financial condition but may be material to the Company’s results of operations or cash flows in the period in which the impact of such matters is determined or paid. However, there may be pending qui tam claims brought by former employees or other “whistle blowers”, or other pending claims as to which the Company has not been provided with a copy of the complaint and accordingly cannot determine the extent of any potential liability.

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

8.          BUSINESS SEGMENT INFORMATION

          Clinical testing is an essential element in the delivery of healthcare services. Physicians use laboratory tests to assist in the detection, diagnosis, evaluation, monitoring and treatment of diseases and other medical conditions. Clinical laboratory testing is generally categorized as clinical testing and anatomic pathology testing. Clinical testing is performed on body fluids, such as blood and urine. Anatomic pathology testing is performed on tissues, including biopsies, and other samples, such as human cells. Customers of the clinical testing business include patients, physicians, hospitals, employers, governmental institutions and other commercial clinical laboratories. The clinical laboratory testing business accounted for greater than 90% of net revenues from continuing operations in 2008 and 2007.

          All other operating segments include the Company’s non-clinical laboratory testing businesses and consist of its risk assessment services business, its clinical trials testing business, its healthcare information technology business, MedPlus, and its diagnostics products businesses. The Company’s risk assessment business provides underwriting support services to the life insurance industry including teleunderwriting, paramedical examinations, laboratory testing and medical record retrieval. The Company’s clinical trials testing business provides clinical testing performed in connection with clinical research trials on new drugs and vaccines. MedPlus is a developer and integrator of clinical connectivity and data management solutions for healthcare organizations, physicians and clinicians. The Company’s diagnostics products business manufactures and markets diagnostic test kits, hand-held instruments and testing systems.

          On April 19, 2006, the Company decided to discontinue NID’s operations and results of operations for NID have been classified as discontinued operations for all periods presented (see Note 6).

          During the first quarter of 2007, the Company acquired HemoCue and in the second quarter of 2007, it acquired AmeriPath (see Note 2). HemoCue is included in the Company’s other operating segments. AmeriPath’s operations are included in the Company’s clinical testing business.

18

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

          At March 31, 2008, 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.

          The following table is a summary of segment information for the three months ended March 31, 2008 and 2007. Segment asset information is not presented since it is not reported to or used by the chief operating decision maker at the operating segment level. Operating earnings (loss) of each segment represents net revenues less directly identifiable expenses to arrive at operating income for the segment. General management and administrative corporate expenses, including amortization of intangible assets, are included in general corporate expenses below. The accounting policies of the segments are the same as those of the Company as set forth in Note 2 to the Consolidated Financial Statements contained in the Company’s 2007 Annual Report on Form 10-K and Note 1 to the interim consolidated financial statements.

	Three Months Ended
	March 31,
	2008			2007
Net revenues:
Clinical laboratory testing business	$	1,628,820		$	1,391,274
All other operating segments		155,817			134,934
Total net revenues	$	1,784,637		$	1,526,208
Operating earnings (loss):
Clinical laboratory testing business	$	305,965		$	236,100		(a)
All other operating segments		8,642			(2,480	)	(b)
General corporate expenses		(34,346	)		(32,750	)
Total operating income		280,261			200,870
Non-operating expenses, net		(47,709	)		(23,745	)
Income from continuing operations
before income taxes		232,552			177,125
Income tax expense		91,858			69,610
Income from continuing operations		140,694			107,515
Loss from discontinued operations, net
of taxes		(1,087	)		(1,622	)
Net income	$	139,607		$	105,893

(a)	During the three months ended March 31, 2007, operating income included $9.9 million of charges associated with workforce reductions in response to reduced volume levels.
(b)	During the three months ended March 31, 2007, operating income included a $4.0 million charge related to the expensing of in-process research and development associated with the acquisition of HemoCue (See Note 2) and a $0.8 million charge associated with workforce reductions in response to reduced volume levels.

9.          SUMMARIZED FINANCIAL INFORMATION

          The Company’s Senior Notes due 2010, Senior Notes due 2011, Senior Notes due 2015, Senior Notes due 2017 and Senior Notes due 2037 are fully and unconditionally guaranteed by certain of the Company’s domestic, wholly owned subsidiaries (the “Subsidiary Guarantors”). With the exception of Quest Diagnostics Receivables Incorporated (see paragraph below), the non-guarantor subsidiaries are primarily foreign subsidiaries and less than wholly owned subsidiaries.

          In conjunction with the Company’s Secured Receivables Credit Facility, the Company maintains a wholly owned non-guarantor subsidiary, Quest Diagnostics Receivables Incorporated (“QDRI”). The Company and certain of its Subsidiary Guarantors transfer all private domestic receivables to QDRI. QDRI utilizes the transferred receivables to collateralize borrowings under the Company’s Secured Receivables Credit Facility. The Company

19

     QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

and the Subsidiary Guarantors provide collection services to QDRI. QDRI uses cash collections principally to purchase new receivables from the Company and the Subsidiary Guarantors.

          The following condensed consolidating financial data illustrates the composition of the combined guarantors. Investments in subsidiaries are accounted for by the parent using the equity method for purposes of the supplemental consolidating presentation. Earnings (losses) of subsidiaries are therefore reflected in the parent’s investment accounts and earnings. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. AmeriPath has been included in the accompanying condensed consolidating financial data, subsequent to the closing of the acquisition, as a Subsidiary Guarantor.

20

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

Condensed Consolidating Statement of Operations Three Months Ended March 31, 2008
				Subsidiary			Non-Guarantor
	Parent			Guarantors			Subsidiaries			Eliminations			Consolidated
Net revenues	$	197,419		$	1,480,599		$	170,156		$	(63,537	)	$	1,784,637
Operating costs and expenses:
Cost of services		119,802			876,263			62,562			-			1,058,627
Selling, general and administrative		42,242			312,744			85,951			(5,889	)		435,078
Amortization of intangible assets		55			7,918			1,291			-			9,264
Royalty (income) expense		(104,640	)		104,640			-			-			-
Other operating expense (income), net		-			(101	)		1,508			-			1,407
Total operating costs and expenses		57,459			1,301,494			151,312			(5,889	)		1,504,376
Operating income		139,960			179,105			18,844			(57,648	)		280,261
Non-operating expenses, net		(47,834	)		(53,592	)		(3,931	)		57,648			(47,709	)
Income from continuing operations before taxes		92,126			125,513			14,913			-			232,552
Income tax expense		35,136			50,390			6,332			-			91,858
Income from continuing operations		56,990			75,123			8,581			-			140,694
Loss from discontinued operations, net of taxes		-			(735	)		(352	)		-			(1,087	)
Equity earnings from subsidiaries		82,617			-			-			(82,617	)		-
Net income	$	139,607		$	74,388		$	8,229		$	(82,617	)	$	139,607
Condensed Consolidating Statement of Operations Three Months Ended March 31, 2007
				Subsidiary			Non-Guarantor
	Parent			Guarantors			Subsidiaries			Eliminations			Consolidated
Net revenues	$	211,883		$	1,222,323		$	170,885		$	(78,883	)	$	1,526,208
Operating costs and expenses:
Cost of services		123,434			748,039			60,312			-			931,785
Selling, general and administrative		52,580			254,328			83,654			(5,769	)		384,793
Amortization of intangible assets		85			2,553			1,822			-			4,460
Royalty (income) expense		(95,137	)		95,137			-			-			-
Other operating (income) expense, net		(7	)		6			4,301			-			4,300
Total operating costs and expenses		80,955			1,100,063			150,089			(5,769	)		1,325,338
Operating income		130,928			122,260			20,796			(73,114	)		200,870
Non-operating expenses, net		(28,337	)		(66,135	)		(2,387	)		73,114			(23,745	)
Income from continuing operations before taxes		102,591			56,125			18,409			-			177,125
Income tax expense		38,958			22,613			8,039			-			69,610
Income from continuing operations		63,633			33,512			10,370			-			107,515
Loss from discontinued operations, net of taxes		-			(1,520	)		(102	)		-			(1,622	)
Equity earnings from subsidiaries		42,260			-			-			(42,260	)		-
Net income	$	105,893		$	31,992		$	10,268		$	(42,260	)	$	105,893

21

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

Condensed Consolidating Balance Sheet March 31, 2008
						Non-
			Subsidiary			Guarantor
	Parent		Guarantors			Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	102,890	$	13,453		$	53,679		$	-		$	170,022
Accounts receivable, net		17,443		260,838			669,457			-			947,738
Other current assets		56,754		195,848			101,570			(7,297	)		346,875
Total current assets		177,087		470,139			824,706			(7,297	)		1,464,635
Property, plant and equipment, net		218,402		642,186			45,509			-			906,097
Goodwill and intangible assets, net		153,425		5,412,311			548,015			-			6,113,751
Intercompany receivable (payable)		1,001,807		(603,685	)		(398,122	)		-			-
Investment in subsidiaries		5,258,754		-			-			(5,258,754	)		-
Other assets		162,746		44,037			40,435			(85,367	)		161,851
Total assets	$	6,972,221	$	5,964,988		$	1,060,543		$	(5,351,418	)	$	8,646,334
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	511,463	$	587,293		$	52,478		$	(7,297	)	$	1,143,937
Short-term borrowings and current portion
of long-term debt		-		47,508			1,284			-			48,792
Total current liabilities		511,463		634,801			53,762			(7,297	)		1,192,729
Long-term debt		2,841,658		247,854			289,203			-			3,378,715
Other liabilities		117,073		462,263			78,894			(85,367	)		572,863
Stockholders’ equity		3,502,027		4,620,070			638,684			(5,258,754	)		3,502,027
Total liabilities and stockholders’ equity	$	6,972,221	$	5,964,988		$	1,060,543		$	(5,351,418	)	$	8,646,334
Condensed Consolidating Balance Sheet December 31, 2007
						Non-
			Subsidiary			Guarantor
	Parent		Guarantors			Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	111,610	$	14,847		$	41,137		$	-		$	167,594
Accounts receivable, net		27,309		234,532			620,126			-			881,967
Other current assets		46,986		183,505			101,055			(6,750	)		324,796
Total current assets		185,905		432,884			762,318			(6,750	)		1,374,357
Property, plant and equipment, net		215,062		654,341			42,595			-			911,998
Goodwill and intangible assets, net		153,848		5,422,270			530,719			-			6,106,837
Intercompany receivable (payable)		859,841		(610,371	)		(249,470	)		-			-
Investment in subsidiaries		5,149,196		-			-			(5,149,196	)		-
Other assets		167,105		48,433			38,054			(81,091	)		172,501
Total assets	$	6,730,957	$	5,947,557		$	1,124,216		$	(5,237,037	)	$	8,565,693
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	451,944	$	634,079		$	45,443		$	(6,750	)	$	1,124,716
Short-term borrowings and current portion
of long-term debt		-		62,386			101,195			-			163,581
Total current liabilities		451,944		696,465			146,638			(6,750	)		1,288,297
Long-term debt		2,829,927		247,573			299,712			-			3,377,212
Other liabilities		124,844		457,837			74,352			(81,091	)		575,942
Stockholders’ equity		3,324,242		4,545,682			603,514			(5,149,196	)		3,324,242
Total liabilities and stockholders’ equity	$	6,730,957	$	5,947,557		$	1,124,216		$	(5,237,037	)	$	8,565,693

22

QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(in thousands, unless otherwise indicated)
(unaudited)

Condensed Consolidating Statement of Cash Flows Three Months Ended March 31, 2008
				Subsidiary			Non-Guarantor
	Parent			Guarantors			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	139,607		$	74,388		$	8,229		$	(82,617	)	$	139,607
Adjustments to reconcile net income to net cash      provided by (used in) operating activities:
Depreciation and amortization		12,285			48,558			4,416			-			65,259
Provision for doubtful accounts		2,721			29,047			54,254			-			86,022
Other, net		(63,151	)		2,755			(522	)		82,617			21,699
Changes in operating assets and liabilities		28,395			(95,436	)		(87,639	)		-			(154,680	)
Net cash provided by (used in) operating      activities		119,857			59,312			(21,262	)		-			157,907
Net cash (used in) provided by investing      activities		(111,530	)		(20,649	)		21,141			93,818			(17,220	)
Net cash (used in) provided by financing      activities		(17,047	)		(40,057	)		12,663			(93,818	)		(138,259	)
Net change in cash and cash equivalents		(8,720	)		(1,394	)		12,542			-			2,428
Cash and cash equivalents, beginning of period		111,610			14,847			41,137			-			167,594
Cash and cash equivalents, end of period	$	102,890		$	13,453		$	53,679		$	-		$	170,022
Condensed Consolidating Statement of Cash Flows Three Months Ended March 31, 2007
				Subsidiary			Non-Guarantor
	Parent			Guarantors			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	105,893		$	31,992		$	10,268		$	(42,260	)	$	105,893
Adjustments to reconcile net income to net cash      provided by operating activities:
Depreciation and amortization		12,091			34,255			3,989			-			50,335
Provision for doubtful accounts		3,225			8,185			56,098			-			67,508
Other, net		(24,230	)		(2,159	)		(5,268	)		42,260			10,603
Changes in operating assets and liabilities		(1,148	)		(22,170	)		(59,468	)		-			(82,786	)
Net cash provided by operating activities		95,831			50,103			5,619			-			151,553
Net cash used in investing activities		(444,168	)		(23,524	)		(304,882	)		426,627			(345,947	)
Net cash provided by (used in) financing      activities		336,235			(23,870	)		317,413			(426,627	)		203,151
Net change in cash and cash equivalents		(12,102	)		2,709			18,150			-			8,757
Cash and cash equivalents, beginning of period		134,598			7,661			7,381			-			149,640
Cash and cash equivalents, end of period	$	122,496		$	10,370		$	25,531		$	-		$	158,397

23

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Critical Accounting Policies

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

          While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of a high volume of relatively low dollar transactions, and about one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2007.

          Recent Acquisitions

             Acquisition of AmeriPath

          On May 31, 2007, we completed the acquisition of AmeriPath, in an all-cash transaction valued at approximately $2 billion, including approximately $780 million of assumed debt and related accrued interest. AmeriPath is a leading provider of anatomic pathology, including dermatopathology, and esoteric testing which generates annual revenues of approximately $800 million.

          Through the acquisition, we acquired all of AmeriPath’s operations. AmeriPath, with its team of approximately 400 board certified pathologists, operates 40 outpatient anatomic pathology laboratories and provides inpatient anatomic pathology and medical director services for approximately 200 hospitals throughout the country. We financed the all-cash purchase price and related transaction costs, together with the repayment of approximately $780 million of principal and related accrued interest representing substantially all of AmeriPath’s debt, as well as the refinancing of the $450 million term loan used to finance the acquisition of HemoCue with $1.6 billion of borrowings under a new five-year term loan facility, $780 million of borrowings under a new one-year bridge loan, and cash on-hand. In June 2007, we completed an $800 million senior notes offering. The net proceeds of the senior notes offering were used to repay the $780 million borrowed under the bridge loan. The acquisition was accounted for under the purchase method of accounting.

          Acquisition of HemoCue

          On January 31, 2007, we acquired POCT Holding AB (“HemoCue”), a Sweden-based company specializing in point-of-care testing, in an all-cash transaction valued at approximately $450 million, including $113 million of assumed debt of HemoCue. The transaction was financed through an interim credit facility, which was refinanced during the second quarter of 2007 in connection with the financing of the AmeriPath acquisition.

          HemoCue is the leading international provider in point-of-care testing for hemoglobin, with a growing share in professional glucose and microalbumin testing. HemoCue has recently received FDA clearance for a test to determine white blood cell counts and has applied to receive CLIA-waived status. This acquisition complements our point-of-care testing for infectious disease and cancer, including new tests for colorectal cancer screening and Herpes Simplex Type 2. The acquisition increases our presence in the growing point-of-care testing market and we plan to leverage HemoCue’s international presence to reach new markets around the world. HemoCue generated annual revenues of approximately $80 million at the time of acquisition.

24

          Results of Operations

          Our clinical testing business currently represents our one reportable business segment. The clinical testing business accounted for more than 90% of net revenues from continuing operations in both 2008 and 2007. Our other operating segments consist of our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. Our business segment information is disclosed in Note 8 to the interim consolidated financial statements.

          Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

          Continuing Operations

          Income from continuing operations for the three months ended March 31, 2008 was $141 million, or $0.72 per diluted share, compared to $108 million, or $0.55 per diluted share, in 2007. The increase in income from continuing operations is principally driven by actions we have taken to reduce our cost structure.

          During the first quarter of 2007, the Company became a non-contracted provider to United Healthcare Group Inc., (“UNH”). As a result of the change in status, the Company’s revenues and earnings were significantly impacted for the first quarter and full year 2007. However, the ongoing profit impact was successfully mitigated by the end of 2007 as a result of actions taken to reduce costs and higher reimbursement for the testing we continued to perform for UNH members as a non-contracted provider.

          Results for the three months ended March 31, 2007 also include pre-tax charges of $10.7 million, or $0.03 per share, associated with workforce reductions in response to reduced volume levels, and a pre-tax charge of $4.0 million, or $0.01 per share, related to in-process research and development expense associated with the HemoCue acquisition.

          Net Revenues

          Net revenues for the three months ended March 31, 2008 grew by 16.9% over the prior year level to $1.8 billion. The acquisition of AmeriPath contributed approximately 13% to revenue growth for the three months ended March 31, 2008. While the UNH contract change took effect as of January 1, 2007, much of the loss of volume and change in revenues took place over the course of the first quarter last year. Therefore, there continues to be a carry-over impact in comparing the 2008 first quarter volume and revenues to that of the prior year. We estimate that the carry-over impact of our change in status with UNH reduced 2008 revenue growth by approximately 1%.

          Our clinical testing business, which accounts for over 90% of our net revenues, grew 17.1% above the prior year level, with AmeriPath contributing 14.3% growth. Volume, measured by the number of requisitions, increased 5.6% for the quarter ended March 31, 2008, primarily due to the impact of the AmeriPath acquisition. We estimate that the impact of our change in status with UNH reduced volume growth by approximately 1.5% . After adjusting for the impact of the UNH contract change, results for the three months ended March 31, 2008 reflect underlying improvement in volume of between one and two percent. This is despite an almost 10% decline in pre-employment drug testing volume, which accounts for approximately 7% of our total volume. We believe the volume decrease in pre-employment drug testing is principally due to slower hiring by the employers served by this business. The revenue per requisition for this business is typically lower-priced than our average, so the impact to revenue and profitability is generally much less. Revenue per requisition increased 10.8% for the three months ended March 31, 2008 and was impacted by the results of AmeriPath, which contributed 7.8% to the improvement. The balance of the increase is primarily driven by a positive test mix, partially offset by price reductions on various health plan contracts.

          Our businesses other than clinical laboratory testing accounted for approximately 9% of our net revenues for the three months ended March 31, 2008 and 2007. These businesses include our risk assessment services business, our clinical trials testing business, our healthcare information technology business, MedPlus, and our diagnostic products business. The revenues for these businesses as a group grew 16% over the prior year, with the increase primarily driven by a strong performance of our point-of-care, our clinical trials testing and our healthcare information technology businesses.

25

          Operating Costs and Expenses

          Total operating costs and expenses for the three months ended March 31, 2008 increased $179 million from the prior year period. This increase is primarily due to costs associated with the acquired operations of AmeriPath, and increased costs associated with annual compensation adjustments. These increases were partially offset by actions taken to improve our operating efficiency and reduce the size of our workforce.

          Results for the three months ended March 31, 2007, include $10.7 million of costs associated with workforce reductions ($3.9 million included in cost of services and $6.8 million included in selling, general and administrative) and $4 million of in-process research and development costs associated with the acquisition of HemoCue, which was recorded in other operating expense, net.

          Cost of services, which includes the costs of obtaining, transporting and testing specimens, was 59.3% of net revenues for the three months ended March 31, 2008, decreasing from 61.1% of net revenues in the prior year period. The improvement over the prior year reflects actions taken to reduce our cost structure and higher revenue per requisition.

          Selling, general and administrative expenses, which include the costs of the sales force, billing operations, bad debt expense, and general management and administrative support, were 24.4% of net revenues for the three months ended March 31, 2008, compared to 25.2% in the prior year period. This improvement was primarily due to actions taken to reduce our cost structure and higher revenue per requisition, partially offset by the impact of the acquired operations of AmeriPath. In addition, the first quarter of 2007 contained costs associated with efforts to retain business and clarify for patients, physicians and employers misinformation regarding the UNH contract change.

          For the three months ended March 31, 2008 and 2007, bad debt expense was 4.8% and 4.4% of net revenues, respectively. The increase was driven by the inclusion of AmeriPath, which carries a higher bad debt rate than the rest of our business, primarily due to its revenue and customer mix, and increased the consolidated bad debt rate by approximately 0.7% .

          Other operating expense, net represents miscellaneous income and expense items related to operating activities, including gains and losses associated with the disposal of operating assets and provisions for restructurings and other special charges. For the three months ended March 31, 2007, other operating expense, net includes a $4.0 million charge related to in-process research and development expense recorded in connection with the acquisition of HemoCue.

          Operating Income

          Operating income for the three months ended March 31, 2008 was $280 million, or 15.7% of net revenues, compared to $201 million, or 13.2% of net revenues, in the prior year period. The increase in the operating income percentage is primarily due to actions we have taken to reduce our cost structure, partially offset by the impact of the acquired operations of AmeriPath. In addition, the operating income percentage for the three months ended March 31, 2008, reflects the impact of the various items which served to reduce cost of services and selling, general and administrative expenses as a percentage of revenues.

          Other Income (Expense)

          Interest expense, net for the three months ended March 31, 2008 increased $21 million over the prior year period. The increase was primarily due to additional interest expense associated with borrowings used to fund the acquisition of AmeriPath.

          Discontinued Operations

          Loss from discontinued operations, net of tax, for the three months ended March 31, 2008 was $1.1 million, or $0.01 per diluted share, compared to $1.6 million, or $0.01 per diluted share in 2007. Results for the three months ended March 31, 2008 and 2007 reflect expenses associated with the on-going government investigation of NID, which is more fully described in Notes 6 and 7 to the interim consolidated financial statements.

26

          Quantitative and Qualitative Disclosures About Market Risk

          We address our exposure to market risks, principally the market risk of changes in interest rates, through a controlled program of risk management that may include the use of derivative financial instruments. We do not hold or issue derivative financial instruments for trading purposes. We do not believe that our foreign exchange exposure is material to our financial condition or results of operations. See Note 11 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K for additional discussion of our financial instruments and hedging activities.

          At March 31, 2008 and December 31, 2007, the fair value of our debt was estimated at approximately $3.4 billion and $3.6 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 March 31, 2008, and December 31, 2007, the estimated fair value exceeded the carrying value of the debt by approximately $19.3 million and $59.1 million, respectively. A hypothetical 10% increase in interest rates on our total debt portfolio (representing approximately 54 and 61 basis points at March 31, 2008 and December 31, 2007, respectively) would potentially reduce the estimated fair value of our debt by approximately $76 million and $78 million at March 31, 2008 and December 31, 2007, respectively.

          Borrowings under our senior unsecured revolving credit facility, our secured receivables credit facility, our term loan due December 2008, and our term loan due May 2012, are subject to variable interest rates. Interest on our secured receivables credit facility is based on rates that are intended to approximate commercial paper rates for highly-rated issuers. Interest rates on our senior unsecured revolving credit facility, term loan due December 2008 and term loan due May 2012 are subject to a pricing schedule that can fluctuate based on changes in our credit ratings. As such, our borrowing cost under these credit arrangements will be subject to both fluctuations in interest rates and changes in our credit ratings. As of March 31, 2008, the borrowing rates under these credit facilities were: for our senior unsecured credit facility, LIBOR plus 0.40%; for our term loan due December 2008, LIBOR plus 0.55%; and for our term loan due May 2012, LIBOR plus 0.50% . At March 31, 2008, the LIBOR rate was 2.70% . At March 31, 2008, there was $1.4 billion outstanding under our term loan due May 2012, $45 million outstanding under our term loan due December 2008; and no borrowings outstanding under our secured receivables credit facility and our $750 million senior unsecured revolving credit facility.

          During the third quarter ended September 30, 2007, we entered into various variable-to-fixed interest rate swap agreements, whereby we fixed the interest rates on $500 million of our term loan due May 2012 for periods ranging from October 2007 through October 2009. The fixed interest rates range from 5.095% to 5.267% . Based on our net exposure to interest rate changes, a hypothetical 10% change in interest rates on our variable rate indebtedness (representing approximately 31 basis points) would impact annual net interest expense by approximately $3 million, assuming no changes to the debt outstanding at March 31, 2008.

          The fair value of the interest rate swap agreements at March 31, 2008 was $12.5 million. A hypothetical 10% decrease in interest rates on our term loan (representing approximately 30 basis points) would potentially decrease the fair value of these instruments by approximately $1.3 million. A hypothetical 10% increase in interest rates would potentially increase the fair value of these instruments by approximately $1.6 million. For details regarding our outstanding debt and our financial instruments, see Notes 10 and 11 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.

          Risk Associated with Investment Portfolio

          Our investment portfolio includes equity investments in publicly held companies that are classified as available-for-sale securities and other strategic equity holdings in privately held companies. These securities are exposed to price fluctuations and are generally concentrated in the life sciences industry. The carrying values of our available-for-sale equity securities and privately held securities were $17 million at March 31, 2008.

          We do not hedge our equity price risk. The impact of an adverse movement in equity prices on our holdings in privately held companies cannot be easily quantified, as our ability to realize returns on investments depends on, among other things, the enterprises’ ability to raise additional capital or derive cash inflows from continuing operations or through liquidity events such as initial public offerings, mergers or private sales.

27

          Fair Value Measurements

          On January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). Adoption of this accounting standard did not have a material effect on our financial position, results of operations or cash flows. See Note 1 to the interim consolidated financial statements for further details.

          SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) became effective for the Company on January 1, 2008. As of January 1, 2008 and for the period ended March 31, 2008, the Company has elected not to apply the fair value option to any of its financial assets or financial liabilities on-hand because the Company does not believe that application of SFAS 159’s fair value option is appropriate given the nature of its business operations. See Note 1 to the interim consolidated financial statements for further details.

          Liquidity and Capital Resources

          Cash and Cash Equivalents

          Cash and cash equivalents at March 31, 2008 totaled $170 million compared to $168 million at December 31, 2007. Cash flows from operating activities in 2008 were $158 million, which were used to fund investing and financing activities of $17 million and $138 million, respectively. Cash and cash equivalents at March 31, 2007 totaled $158 million, compared to $150 million at December 31, 2006. Cash flows from operating activities in 2007 were $152 million, which together with cash flows from financing activities of $203 million, were used to fund investing activities of $346 million.

          Cash Flows from Operating Activities

          Net cash provided by operating activities for the three months ended March 31, 2008 was $158 million compared to $152 million in the prior year period. This increase was due to higher earnings in the current year partially offset by a larger increase in accounts receivable compared to the prior year. Days sales outstanding, a measure of billing and collection efficiency, were 48 days at March 31, 2008 unchanged from the fourth quarter of 2007. During the first quarter of 2007, days sales outstanding improved by one day to 47 days at March 31, 2007.

          Cash Flows from Investing Activities

          Net cash used in investing activities for the three months ended March 31, 2008 was $17 million, consisting principally of capital expenditures of $47 million, partially offset by $23 million related to the receipt of a payment from an escrow fund established at the time of the acquisition of HemoCue, and a decrease in investments of $7 million.

          Net cash used in investing activities for the three months ended March 31, 2007 was $346 million, consisting principally of $307 million related to the acquisition of HemoCue and capital expenditures of $40 million.

          Cash Flows from Financing Activities

          Net cash used in financing activities for the three months ended March 31, 2008 was $138 million, consisting primarily of net reductions of debt of $115 million, which included the repayment of $120 million on our Secured Receivables Credit Facility and $15 million on our Term Loan due December 31, 2008, offset partially by borrowings of $20 million on our Secured Receivables Credit Facility. In addition cash flows from financing activities include dividend payments of $19 million.

          Net cash provided by financing activities for the three months ended March 31, 2007 was $203 million, consisting primarily of proceeds from borrowings of $450 million, used to finance the acquisition of HemoCue and to fund the repayment of HemoCue’s outstanding debt, and $22 million in proceeds from the exercise of stock options, including related tax benefits, partially offset by repayments of debt totaling $128 million, purchases of treasury stock totaling $105 million and dividend payments of $19 million. The $128 million of debt repayment consists of $113 million to repay HemoCue’s outstanding debt and a repayment of $15 million on our term loan due 2008. The $105 million of treasury stock represents 2.1 million shares of our common stock purchased at an average price of $50.98 per share.

28

          Dividend Program

          During each of the quarters of 2007, our Board of Directors declared a quarterly cash dividend of $0.10 per common share. On February 14, 2008, our Board of Directors declared a quarterly cash dividend per common share of $0.10, paid on April 18, 2008. We expect to fund future dividend payments with cash flows from operations, and do not expect the dividend to have a material impact on our ability to finance future growth.

          Share Repurchase Plan

          We did not purchase any shares of our common stock during the first quarter of 2008. Through March 31, 2008, we have repurchased approximately 44.1 million shares of our common stock at an average price of $45.35 for $2 billion under our share repurchase program. At March 31, 2008, the total available for repurchases under the remaining authorizations was $104 million.

          Contractual Obligations and Commitments

          The following table summarizes certain of our contractual obligations as of March 31, 2008:

	Payments due by period
	(in thousands)
				Remainder
Contractual Obligations		Total		of 2008		1-3 years		3 –5 years		After 5 years
Long-term debt	$	3,406,275	$	46,800	$	586,397	$	1,474,641	$	1,298,437
Capital lease obligations		21,232		1,992		1,925		2,123		15,192
Interest payments on outstanding debt		1,619,683		136,465		342,832		221,104		919,282
Operating leases		689,217		133,305		276,402		148,255		131,255
Purchase obligations		81,932		30,742		39,467		11,214		509
Total contractual obligations	$	5,818,339	$	349,304	$	1,247,023	$	1,857,337	$	2,364,675

          Interest payments on our long-term debt have been calculated after giving effect to our interest rate swap agreements, using the interest rates as of March 31, 2008 applied to the March 31, 2008 balances, which are assumed to remain outstanding through their maturity dates.

          A full description of the terms of our indebtedness and related debt service requirements and our future payments under certain of our contractual obligations is contained in Note 10 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K. A full discussion and analysis regarding our minimum rental commitments under noncancelable operating leases and noncancelable commitments to purchase products or services at December 31, 2007 is contained in Note 15 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K.

          As of March 31, 2008, our total liabilities for unrecognized tax benefits were approximately $101 million, which were excluded from the table above. Based upon the expiration of statutes of limitations, settlements and/or the conclusion of tax examinations, we believe it is reasonably possible that this amount may decrease by up to $36 million within the next twelve months. For the remainder, we cannot make reasonably reliable estimates of the timing of the future payments of these liabilities. See Note 5 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K for information regarding our contingent tax liability reserves.

          Our credit agreements relating to our senior unsecured revolving credit facility, our term loan due December 2008 and our term loan due May 2012 contain various covenants and conditions, including the maintenance of certain financial ratios, that could impact our ability to, among other things, incur additional indebtedness. We do not expect these covenants to adversely impact our ability to execute our growth strategy or conduct normal business operations.

          Unconsolidated Joint Ventures

          We have investments in unconsolidated joint ventures in Phoenix, Arizona; Indianapolis, Indiana; and Dayton, Ohio, which are accounted for under the equity method of accounting. We believe that our transactions with our joint ventures are conducted at arm’s length, reflecting current market conditions and pricing. Total net revenues of our unconsolidated joint ventures equal less than 6% of our consolidated net revenues. Total assets associated with our unconsolidated joint ventures are less than 2% of our consolidated total assets. We have no material unconditional obligations or guarantees to, or in support of, our unconsolidated joint ventures and their operations.

          Requirements and Capital Resources

          We estimate that we will invest between $280 million and $300 million during 2008 for capital expenditures to support and expand our existing operations, principally related to investments in information technology, equipment, and facility upgrades. During the first quarter of 2008, we continued to make investments in support of our plans to develop and deploy standard systems across both the AmeriPath practices and our clinical laboratories. We have completed the enhancements to the AmeriPath laboratory and billing systems and we plan to begin deployment of the enhanced systems in the second quarter of 2008. These investments will enable significant productivity gains and improved customer service.

          As of March 31, 2008, $1.1 billion of borrowing capacity was available under our existing credit facilities, including $375 million available under our secured receivables credit facility.

          Our secured receivables credit facility, which is supported by one-year back-up facilities provided by two banks on a committed basis, matures on May 23, 2008. We are currently in discussions to renew or replace the facility.

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

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for the foreseeable future. We believe that our credit profile should provide us with access to additional financing, if necessary, to fund growth opportunities that cannot be funded from existing sources.

          Impact of New Accounting Standards

          In March 2008, the Financial Accounting Standards Board issued SFAS No. 161 “Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”. The impact of this accounting standard is discussed in Note 1 to the interim consolidated financial statements.

          Forward-Looking Statements

          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. Risks and uncertainties that may affect our future results include, but are not limited to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, changes in government regulations, changing relationships with customers, payers, suppliers and strategic partners and other factors discussed in “Business” in Part I, Item 1, “Risk Factors” and “Cautionary Factors That May Affect Future Results” in Item I, Part 1A, “Legal Proceedings” in Part I, Item 3, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A in our 2007 Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” in our 2008 Quarterly Reports on Form 10-Q and other items throughout the 2007 Form 10-K and our 2008 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

          See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Item 4.      Controls and Procedures

(a)

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

(b)

During the first quarter of 2008, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.      Legal Proceedings

          See Note 7 to the interim consolidated financial statements for information regarding the status of legal proceedings involving the Company.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

          We did not purchase any shares of our common stock during the quarter ended March 31, 2008.

Item 6.      Exhibits

Exhibits:
10.1	Amendment No. 1 to Letter of Agreement between SmithKline Beecham Corporation and Quest Diagnostics Incorporated dated March 31, 2008.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Signatures

          Pursuant to the requirements 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.

April 24, 2008
Quest Diagnostics Incorporated

By	/s/ Surya N. Mohapatra
	Surya N. Mohapatra, Ph.D.
	Chairman of the Board, President and
	Chief Executive Officer
By	/s/ Robert A. Hagemann
	Robert A. Hagemann
	Senior Vice President and
	Chief Financial Officer

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