Exhibit 13.1

           Management's Discussion & Analysis of Financial Condition
                           and Results of Operations

Results of Operations

Year ended December 31, 1998 compared to year ended December 31, 1997

Revenue  increased to $217.4  million for the year ended  December 31, 1998 from
$214.0 million for the comparable prior year period, representing an increase of
$3.4  million  or  1.6%.   Approximately   $2.9  million  of  the  increase  was
attributable to revenue  generated from the  acquisition of Meris  Laboratories,
Inc.  ("Meris"),  which was  effective as of November 5, 1998.  Exclusive of the
acquired Meris business, revenue increased $0.5 million, primarily the result of
increases  in  reimbursement  levels  of $6.3  million  offset by  decreases  in
specimen volume of approximately $5.8 million.

The  Company  experienced  a 3.1%  increase,  exclusive  of the  acquired  Meris
business,  in the average  reimbursement  received for each  specimen  processed
during the year ended December 31, 1998 versus the comparable prior year period.
The  increase in  reimbursement  levels is  primarily  due to increases in rates
charged to managed  care clients as the Company  continues  its strategy to only
work with managed care clients who are willing to adequately  pay for the levels
of service they request and the  elimination  and  replacement  of the Company's
most unprofitable  accounts with other reasonably priced business.  Exclusive of
the acquired  Meris  business,  the Company  experienced  a 2.8% decrease in the
number of specimens processed during the year ended December 31, 1998 versus the
comparable prior year period.  The decrease in volume was the effect of Medicare
requirements for new test panels which led to changes in ordering patterns among
physicians,  the elimination of some under-performing accounts and the exit from
small  geographical  areas  where  the  Company  couldn't  achieve   significant
economies of scale.

Earnings before interest,  taxes,  depreciation and amortization ("EBITDA") were
$31.8 million for the year ended December 31, 1998 compared to $23.5 million for
the comparable prior year period. Without the effect of a $1.2 million impact on
EBITDA  resulting from the integration  period between November 5, 1998 and late
December 1998 of the Meris  acquisition,  EBITDA for the year ended December 31,
1998 would have been $33.0 million.

Salaries,  wages and  benefits  decreased  to $67.7  million  for the year ended
December 31, 1998 from $69.1 million for the comparable prior year period.  As a
percentage of revenue, salaries, wages and benefits were 31.2% and 32.3% for the
years ended December 31, 1998 and 1997,  respectively.  Such decrease  primarily
reflects a reduction  in  headcount  and tight  control  over the growth in wage
increases.

Supplies expense remained  consistent at approximately  14.0% of revenue for the
years ended December 31, 1998 and 1997.  However,  supplies expense per specimen
processed  has  increased  slightly  in 1998 as the  Company  started to perform
certain more costly  tests  in-house in late 1997 that were  previously  sent to
outside  reference  laboratories.  Although  the  Company  experienced  a slight
increase in supplies  expense  related to bringing  this testing  in-house,  the
Company had a positive net benefit as lab  subcontracting  expenses decreased by
more than 10% in the year ended December 31, 1998 from the comparable prior year
period.

Other operating  expenses decreased to $53.6 million for the year ended December
31,  1998  from  $57.0  million  for the  comparable  prior  year  period.  As a
percentage  of revenue,  other  operating  expenses were 24.7% and 26.6% for the
years  ended  December  31,  1998 and  1997,  respectively.  Such  decrease  was
primarily due to reductions in lab  subcontracting  expenses (see explanation in
preceding   paragraph)   and   reductions   in  outside   courier,   automobile,
telecommunication  and insurance expenses,  as the Company evaluated all expense
line items  throughout  1997 and 1998 and  streamlined  expenses as necessary to
achieve cost efficiencies.

Amortization  and  depreciation  expense  decreased to $7.6 million for the year
ended December 31, 1998 from $8.9 million for the  comparable  prior year period
primarily  due  to  certain  non-compete   agreements  and  laboratory  computer
equipment becoming fully amortized or depreciated in late 1997 and early 1998.

Selling,  general and administrative expenses decreased to $33.5 million for the
year ended  December 31, 1998 from $34.6 million for the  comparable  prior year
period. As a percentage of revenue, selling, general and administrative expenses
were  15.4%  and  16.2%  for  the  years  ended  December  31,  1998  and  1997,
respectively.  Such  decrease  continued  the  trend  realized  by  the  Company
throughout  1997  and  relates  to  a  reduction  in  corporate  managerial  and
administrative positions and streamlining of all operating support services.

Third party interest expense,  net decreased to $13.5 million for the year ended
December  31,  1998 from $14.1  million  for the  comparable  prior year  period
primarily due to the repayment of capital lease obligations.

The  Company  has not  recognized  an income tax  provision  for the years ended
December 31, 1998 and 1997. In 1998, the Company reduced the valuation allowance
against its deferred  tax assets by $3.9  million,  which  offset any  potential
income tax  provision.  In 1997,  the Company did not have taxable  income.  The
Company has provided a valuation allowance against the entire deferred tax asset
balance of $34.8  million at December 31, 1998.  The Company  believes  that the
valuation  allowance  is  required  since the  Company  has a recent  history of
operating and taxable losses,  had cumulative losses of $11.1 million (excluding
legal, acquisition-related and restructuring charges) for the past three years,
has historically  fallen short of its  projected  operating  results and is
still  integrating  and has not yet fully realized the benefits from the Meris
acquisition.  Based on these factors, the Company  does not  believe the weight
of the  evidence  would  support the Company having  sufficient future book and
taxable income to release some or all of the valuation allowance at
December 31, 1998.

Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996

Revenue  increased to $214.0  million for the year ended  December 31, 1997 from
$205.2 million for the comparable prior year period, representing an increase of
$8.8  million or 4.3%.  The  increase  was  primarily  the result of  additional
specimen  volume  generating  approximately  $17.6 million  offset by changes in
payor mix and decreases in reimbursement levels of approximately $8.8 million.

The $17.6 million  increase in specimen volume was due to a 8.6% increase in the
number of specimens processed during the year ended December 31, 1997 versus the
comparable prior year period. Such increase was primarily attributable to growth
in the Company's  core business.  The Company  experienced a 3.9% decline in the
average reimbursement received for each specimen processed during the year ended
December 31, 1997 versus the  comparable  prior year period.  Such  decrease was
primarily due to an increase in managed care business and a general softening in
reimbursement  levels  across most payor  groups,  most notably  from  insurance
carriers.

While  average   reimbursement  was  down  over  the  prior  year,  the  average
reimbursement over the last six months of 1997 increased approximately 2.5% over
the  average  reimbursement  in the first six months of 1997,  the first time in
over two years that average  reimbursement has increased over a comparable prior
period.

EBITDA were $23.5 million for the year ended  December 31, 1997 compared to $9.2
million for the comparable  prior year period  (excluding  legal and acquisition
related  and  restructuring  charges,  loss  on  sale  of  promissory  note  and
extraordinary item).

Salaries,  wages and  benefits  decreased  to $69.1  million  for the year ended
December 31, 1997 from $70.9 million for the comparable prior year period.  As a
percentage of revenue, salaries, wages and benefits were 32.3% and 34.5% for the
years ended December 31, 1997 and 1996,  respectively.  Such decrease  primarily
reflects a reduction in headcount, control over the growth in wage increases and
economies of scale  associated with fewer  employees  processing a significantly
higher specimen volume.

Supplies expense increased to $29.9 million for the year ended December 31, 1997
from $28.6  million for the  comparable  prior year period.  As a percentage  of
revenue,  supplies expense were consistent at 14.0% for the years ended December
31, 1997 and 1996.  However,  on a per specimen  basis,  supplies costs actually
decreased  4.2% as a result of economies of scale  associated  with an increased
specimen volume.

Other operating  expenses increased to $57.0 million for the year ended December
31,  1997  from  $54.7  million  for the  comparable  prior  year  period.  As a
percentage of revenue, other operating expenses were consistent at 26.6% for the
years ended  December 31, 1997 and 1996.  During the third quarter of 1996,  the
Company  recorded charges of approximately  $4.9 million,  primarily  related to
settlements reached with the United States  (“U.S.”)  Government and
certain other  entities in connection  with the Company's  sales,  marketing and
billing practices.  The Company agreed to pay the U.S. Government  approximately
$4.0  million to conclude an  investigation  of certain of Unilab's  billings to
Medicare and certain other  governmental  entities for hematology  indices being
billed  in  conjunction  with  complete  blood  counts.  Unilab  also  paid  the
California MediCal program approximately  $160,000 in October 1996 to settle all
their claims concerning the same issue.

During  the  fourth  quarter  of 1996,  the  Company  recorded  charges of $65.7
million,  consisting  of the  write-off of goodwill and customer  lists of $61.7
million and a reserve for managerial restructuring expenses of $4.0 million. The
write-off  of goodwill  and  customer  lists  principally  related to two of the
Company's laboratory operations, which had seen decreasing operating results and
cash flows throughout 1996. The $4.0 million managerial  restructuring  expenses
related to a reduction in headcount of approximately 25 employees, including the
resignation  of the  Company's  then  Chairman,  President  and Chief  Executive
Officer in January 1997.

Amortization  and  depreciation  expense  decreased to $8.9 million for the year
ended December 31, 1997 from $11.5 million for the comparable prior year period.
Such decrease was primarily due to a reduction in amortization  expense from the
write-off of goodwill and customer  lists of $61.7 million in the fourth quarter
of 1996 offset by increased depreciation expense from approximately $4.1 million
of laboratory  computer equipment and software placed into service at one of the
Company's laboratory locations in the first quarter of 1997.

Selling,  general and administrative expenses decreased to $34.6 million for the
year ended  December 31, 1997 from $41.8 million for the  comparable  prior year
period. As a percentage of revenue, selling, general and administrative expenses
were  16.2%  and  20.4%  for  the  years  ended  December  31,  1997  and  1996,
respectively.  Such  decrease  related  primarily to a reduction in the level of
expenditures  incurred in the sales and marketing area,  including  revisions in
incentive  programs and  reduction  in staffing  levels and  organizational  and
support  services,  and  reduction in corporate  managerial  and  administrative
positions.

Third party interest expense,  net increased to $14.1 million for the year ended
December 31, 1997 from $13.4 million for the comparable  prior year period.  The
increase was  primarily  due to the full year effect of  increased  indebtedness
incurred by the Company  under an  offering  of $120.0  million of senior  notes
("the Senior Notes") in March 1996.

Related party  interest  income of $1.3 million for the year ended  December 31,
1996 reflects  interest  income on a $15.0 million  promissory  note the Company
received upon the sale, effective June 30, 1995, of an equity investment.

In November 1996, the Company sold a 100%  participation  interest in its rights
under the $15.0 million promissory note to a third party for $11.0 million.  The
Company  recorded a $4.5 million loss upon the sale,  which  reflected  the $4.0
million loss in principal  plus the write-off of accrued and unpaid  interest of
$0.5 million from July 1, 1996 through the sale date.

Upon completion of the Senior Notes offering,  the Company wrote off $3.5]
million of deferred  financing costs related to the Company's previous credit
agreements.

Liquidity and Capital Resources

Net cash provided by operating  activities  during the year ending  December 31,
1998 was $14.0  million and reflects an  improvement  of $10.3  million over the
comparable prior year period when net cash provided by operating  activities was
$3.7 million.  The increase in 1998 was primarily due to the  improvement in the
Company's operating performance.

Net cash used by  financing  activities  was $1.8  million  for the year  ending
December 31, 1998, primarily resulting from scheduled principal repayments under
capital  lease  obligations  of $1.7  million  and  the  issuance  of  preferred
dividends of $0.1 million.

Net cash  used by  investing  activities  was $3.7  million  for the year  ended
December  31, 1998,  resulting  from  capital  expenditures  of $3.0 million and
payments made on  acquisitions  completed in 1996 and 1995 of $0.7 million.  The
Company expects that its capital expenditure requirements, excluding any amounts
related to acquisitions, will approximate $4.0 million in 1999.

In March 1996,  the Company  completed  an offering of $120.0  million of Senior
Notes.  The  proceeds  from  the  Senior  Notes  offering  were  used to  retire
outstanding  borrowings  under the  Company's  then  existing bank term loan and
relvolving  line of credit  facility in the principal  amount of $102.1 million,
plus  accrued  interest.  Interest on the Senior  Notes is 11% and is payable on
April 1st and October 1st of each year.  The Senior Notes are due April 2006 and
the Company is not  required to make any  mandatory  redemption  or sinking fund
payment with respect to the Senior Notes prior to maturity.

The Senior  Notes are not  redeemable  prior to April 1, 2001,  after  which the
Senior Notes will be  redeemable  at any time at the option of the  Company,  in
whole or in part,  at various  redemption  prices as set forth in the  indenture
covering such Senior Notes (the "Indenture"),  plus accrued and unpaid interest,
if any, to the date of  redemption.  In addition,  at any time prior to April 1,
1999, the Company may redeem up to $42.0 million in aggregate  principal  amount
of the Senior  Notes with the net  proceeds of one or more public  offerings  of
common stock of the  Company,  at a  redemption  price of 110% of the  principal
amount  thereof,  plus accrued and unpaid  interest,  if any, to the  redemption
date.

The Notes are general  unsecured  obligations of the Company and rank pari passu
in right of payment with all  unsubordinated  indebtedness  of the  Company.  In
addition,  the Indenture  limits the ability of the Company to incur  additional
indebtedness, under certain circumstances.

In connection with the acquisition of Meris,  the Company issued a $14.0 million
convertible  subordinated note, bearing interest at the rate of 7.5% and payable
on May 5 and  November 5 of each year.  The note is  subordinated  to the Senior
Notes and is due in November 2006.  The note is  convertible  into the Company's
common  stock at a  conversion  price of $3.00 per  share,  subject  to  certain
restrictions.  In  addition,  subject to certain  restrictions,  the note may be
redeemed by the Company.

In July 1996, the Company entered into an agreement with a financial institution
whereby it can sell  accounts  receivable up to a maximum of $20.0  million.  As
collections  reduce accounts  receivables  which have been sold, the Company may
sell new receivables to bring the amount sold up to a maximum of $20.0 million.

As of December 31, 1998, the Company had not sold any accounts  receivable under
this agreement. Sales of receivables,  if any, under the facility are subject to
a liquidity and debt service  coverage ratio. The Company was in compliance with
such covenants in 1998. The termination  date for the agreement is July 1999. If
the  facility  terminates  prior to July 1999 for any  reason,  the  Company  is
obligated  to pay a $200,000  early  termination  fee. A  commitment  fee of 1/2
percent is required on the unused portion of the available facility. The Company
retains collection and administrative  responsibilities  on the receivables sold
as agent for the purchaser. In addition,  accounts receivable sold, if any, will
be reflected as a reduction of accounts  receivable  in the balance  sheet.  The
full amount of the allowance for doubtful  accounts will be retained because the
Company  will  retain  substantially  the  same  risk of  credit  loss as if the
receivables had not been sold.

The Company had $20.1 million of cash and cash  equivalents  on hand at December
31,  1998.  Management  believes  that the  amount of cash and cash  equivalents
available at December 31, 1998 and the cash flow  expected to be generated  from
operations will be sufficient for the Company to meet  anticipated  requirements
for working capital,  interest  payments,  capital  expenditures,  and scheduled
principal  payments under capital lease and debt obligations for the foreseeable
future.

Year 2000

The Company is in the final stages of upgrading and  modifying  its  laboratory,
billing and accounting  systems in order for such systems to properly  recognize
and perform  date  calculations  in the year 2000 (the "year 2000  issue").  The
Company spent  approximately  $400,000 in 1998 and anticipates  spending another
$100,000 in 1999 for additional hardware,  upgraded software and consulting time
to enable the Company to properly address the year 2000 issue. The expected cost
to fix the year 2000  issue is in line with the  Company's  original  estimates.
While the consequences of an incomplete or untimely  resolution of the year 2000
issue  could have a  significant  impact on the  Company  finalizing  laboratory
results,  properly billing the numerous different payor groups and gathering and
reporting payroll, accounting and other employee and financial information,  the
Company  believes  that it will  adequately  resolve  the year 2000  issue.  The
Company  believes that  modifications  to laboratory  software and equipment and
most accounting  systems have been completed and the final  modifications to the
billing and payroll  systems will be  completed by the end of the first  quarter
1999 in order to provide  sufficient  time for  further  modifications,  if any,
prior to the arrival of the year 2000.

As part of its contingency  planning,  the Company has standardized the platform
and  software  used to process  and report  laboratory  results  during the last
several years. In addition, the Company converted the last billing system not on
the Company's  standard billing platform in 1998. If a problem occurred with the
laboratory  hardware  or  software,  the  Company  might have to rely on outside
reference laboratories to process specimens until the year 2000 issue was fixed.
If the Company had to rely on another location or outside  reference  laboratory
to process  specimens,  turn around time on test results would be diminished and
billings and cash collections from payor groups could be significantly delayed.

The  Company is  reliant on the  ability of  numerous  payor  groups,  primarily
insurance  companies and  government  payors,  to solve their year 2000 issue in
order to process the Company's  billings and make appropriate cash  remittances.
If such  payor  groups do not  properly  resolve  their year 2000  issues,  cash
collections could be significantly  delayed. In addition, the Company sends less
than 2% of its specimens to outside reference  laboratories for testing and does
not believe it would have  difficulty  finding another  reference  laboratory to
perform such tests if its current main vendor  encounters  difficulties with the
year 2000  issue.  The Company  has asked all  significant  vendors to report in
writing to the Company on the status of their year 2000 issue and whether  their
systems will be compliant in sufficient  time to satisfy the  Company's  current
requirements and workflow.  The Company reviews such reports regularly and makes
modifications to its own planning  process,  if necessary,  based on the reports
received from vendors.

Seasonality

The Company's  operations  experience  seasonal trends that the Company believes
affect all clinical laboratory  companies.  Testing volume generally tends to be
lower during the holiday seasons and, to a lesser extent,  inclement weather. As
a result, because a substantial portion of the Company's expenses are relatively
fixed over the short term,  the  Company's  operating  income as a percentage of
revenue tends to decrease during the fourth quarter of each year,  mainly due to
the Christmas and Thanksgiving holidays.

Inflation

Inflation  was not a material  factor in either  revenue or  operating  expenses
during the periods presented.

Forward Looking Statement

Each of the statements in this Annual Report which are not historical  facts may
be deemed to be forward looking  statements.  These forward  looking  statements
contain  risks and  uncertainties  and are  subject  to change  based on various
competitive,  regulatory,  reimbursement,  systems and other developments,  that
could cause the outcome noted in such forward looking statement to be materially
different.  Further  information  on  various  factors  that  could  affect  the
Company's  financial results is included in the Company's Form 10-K for the year
ended December 31, 1998.


<PAGE>
<TABLE>
                            Statements of Operations

                 (amounts in thousands, except per share data)
<CAPTION>
----------------------------------------------------------------------------------------
                                                    For the years ended December 31,
                                                     1998           1997       1996
----------------------------------------------------------------------------------------
<S>                                                 <C>         <C>          <C>
Revenue                                              $217,370    $214,001     $205,217
----------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
  Salaries, wages and benefits                         67,742      69,094       70,869
  Supplies                                             30,671      29,858       28,631
  Other operating expenses                             53,594      56,990       54,672
----------------------------------------------------------------------------------------
                                                      152,007     155,942      154,172

Legal and acquisition related charges                     --           --        4,940
Restructuring charges                                     --           --       65,655
Amortization and depreciation                           7,592       8,885       11,491
Selling, general and administrative expenses           33,530      34,570       41,801
----------------------------------------------------------------------------------------
   Total Operating Expenses                           193,129     199,397      278,059
----------------------------------------------------------------------------------------
Operating Income (Loss)                                24,241      14,604      (72,842)
Other Income (Expenses):
Third party interest, net                            (13,538)     (14,068)     (13,401)
Related party interest, net                               --           --        1,279
Loss on sale of promissory note                           --           --       (4,529)
----------------------------------------------------------------------------------------
Total Other Income (Expenses)                        (13,538)     (14,068)     (16,651)
----------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
and Extraordinary Item                                10,703          536      (89,493)
Tax Provision                                             --           --          --
----------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item               10,703          536      (89,493)
Extraordinary Item - loss on early
extinguishment of debt                                    --           --        3,451
----------------------------------------------------------------------------------------
Net Income (Loss)                                    $10,703         $536      $(92,944)
----------------------------------------------------------------------------------------
Preferred Stock Dividends                                131          138           144
Net Income (Loss) Available to
Common Shareholders                                  $10,572         $398      $(93,088)
----------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income (Loss) Before Extraordinary Item                $0.26         $0.01      $(2.43)
Extraordinary Item                                      --            --         (0.10)
Net Income (Loss)                                      $0.26         $0.01      $(2.53)
----------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income (Loss) Before Extraordinary Item                $0.25         $0.01      $(2.43)
Extraordinary Item                                      --            --         (0.10)
Net Income (Loss)                                      $0.25         $0.01      $(2.53)
----------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                 Balance Sheets
                 (amounts in thousands, except per share data)
<CAPTION>
---------------------------------------------------------------------------------------
                                                                 December 31,
Assets                                                              1998        1997
<S>                                                         <C>                <C>
---------------------------------------------------------------------------------------
Current Assets:

Cash and cash equivalents                                     $20,137           $11,652

Accounts receivable, net of allowance
  for doubtful accounts  of $10,813 and $9,819
  in 1998 and 1997, respectively                               41,326            36,583

Inventory of supplies                                           3,055             2,811

Prepaid expenses and other current assets                       1,045             1,295
---------------------------------------------------------------------------------------
Total Current Assets                                           65,563            52,341
---------------------------------------------------------------------------------------
Property and Equipment, net                                    11,277            13,160

Goodwill, net of accumulated amortization of $7,754
and $6,368 in 1998 and 1997, respectively                      56,949            43,699

Other Intangible Assets, net                                    2,370            2,731

Other Assets                                                    6,301            6,769
---------------------------------------------------------------------------------------
                                                             $142,460           $118,700
---------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
---------------------------------------------------------------------------------------
Current Liabilities:

Current portion of long-term debt                              $1,206            $1,811

Accounts payable and accrued liabilities                       14,533            15,678

Accrued payroll and benefits                                    6,892             6,302
---------------------------------------------------------------------------------------
Total Current Liabilities                                      22,631            23,791
---------------------------------------------------------------------------------------
Long-Term Debt, net of current portion                        137,170           124,285

Other Liabilities                                               4,026             2,907

Commitments and Contingencies

Shareholders' Equity (Deficit):
Convertible preferred stock,
$.01 par value; Authorized - 20,000 shares;
   Issued and Outstanding - 364 at
   December 31, 1998 and 1997
   Liquidation preference -- $2,093                                4                 4

Common stock, $.01 par value;
Voting - Authorized - 100,000 shares;
Issued and Outstanding - 40,708 and 40,578 at
December 31, 1998 and 1997, respectively                          407               406

Additional paid-in capital                                    228,395            228,052

Accumulated deficit                                          (250,173)          (260,745)
---------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit)                          (21,367)           (32,283)
---------------------------------------------------------------------------------------
                                                             $142,460           $118,700
---------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                  Statements of Shareholders' Equity (Deficit)

              For the years ended December 31, 1998, 1997 and 1996
                 (amounts in thousands, except per share data)
<CAPTION>

                                                                      Voting
                                                                   Common Stock
                                                              Shares         Amount
<S>                                                         <C>              <C>
--------------------------------------------------------------------------------------
Balances, December 31, 1995                                  35,052           $  351
--------------------------------------------------------------------------------------
Issuance of shares in connection
with a prior acquisition                                        413                4

Restricted shares issued to employees                           100                1

Issuance of shares for Company's
401(k) plan matching contributions                              434                4

Issuance of shares to certain executives
in lieu of monthly cash compensation                            164                2

Issuance of shares to a consultant for services rendered         50                1

Issuance of shares to certain Board Directors
for services rendered                                            22               --

Conversion of non-voting common stock
to voting common stock                                        1,050               10

Issuance of preferred stock dividend -- $0.36 per share         --                --
Net loss                                                        --                --
--------------------------------------------------------------------------------------
Balances, December 31, 1996                                  37,285              373
--------------------------------------------------------------------------------------
Restricted shares issued to employees                            15               --

Restricted shares forfeited by employees                        (20)              --

Issuance of shares for Company's 401(k)
plan matching contributions                                      29               --

Issuance of shares to certain Board

Directors for services rendered                                  84                1

Conversion of preferred stock to common stock                    36               --

Issuance of shares at $0.625 upon exercise
of stock options                                                 75                1

Issuance of shares to the Company's former
CEO in connection with CEO's resignation                        500                5

Shares sold to the Company's former CEO
pursuant to transition agreements in connection
with CEO's resignation                                          533                5

Shares sold to Company's current CEO
pursuant to an employment agreement                           1,143               12

Issuance of shares to Company's current CEO
as bonus pursuant to an employment agreement                    229                2

Shares sold to a Board Director pursuant to
the 1997 Directors' Stock Purchase Plan                         500                5

Issuance of shares to employees as special
year-end bonus                                                  169                2

Issuance of preferred stock dividend -- $0.36 per share          --               --

Net income                                                       --               --
--------------------------------------------------------------------------------------
Balances, December 31, 1997                                  40,578             $406
--------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors
for services rendered                                            72               1

Issuance of shares at $0.63 - $2.19 upon
exercise of options                                              19               --

Issuance of shares for Company's 401(k)
plan matching contributions                                      14               --

Restricted shares issued to employees                            17               --

Issuance of shares to part-time employees
as special bonus                                                 8                --

Issuance of preferred stock dividend -- $0.36 per share          --               --

Net income                                                       --               --
--------------------------------------------------------------------------------------
Balances, December 31, 1998                                  40,708             $407
--------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
  Non-Voting        Convertible        Additional
 Common Stock     Preferred Stock      Paid-In        Accumulated       Total Shareholders'
Shares   Amount   Shares   Amount      Capital        Deficit           Equity (Deficit)
<S>     <C>       <C>      <C>         <C>            <C>                  <C>
1,050    $10       400      $4          $224,020       $(168,055)            $56,330
--       --        --       --               996              --               1,000
--       --        --       --               350              --                 351
--       --        --       --               544              --                 548
--       --        --       --               108              --                 110
--       --        --       --               43               --                  44
--       --        --       --               17               --                  17
(1,050)  (10)      --       --               --               --                  --
--       --        --       --               --              (144)              (144)
--       --        --       --               --           (92,944)           (92,944)
--       $--       400      $4          $226,078        $(261,143)          $(34,688)
--       --        --       --               237              --                 237
--       --        --       --               (45)             --                (45)
--       --        --       --                49              --                  49
--       --        --       --                63              --                  64
--       --        (36)     --                --              --                  --
--       --        --       --                46              --                  47
--       --        --       --               214              --                 219

--       --        --       --               295              --                 300
--       --        --       --               488              --                 500
--       --        --       --                98              --                 100
--       --        --       --               276              --                 281
--       --        --       --               253              --                 255
--       --        --       --                --             (138)             (138)
--       --        --       --                --              536                536
--       $--       364      $4          $228,052        $(260,745)          $(32,283)
--       --        --       --               159               --                160
--       --        --       --                15               --                 15
--       --        --       --                25               --                 25
--       --        --       --               132               --                132
--       --        --       --                12               --                 12
--       --        --       --                --             (131)              (131)
--       --        --       --                --           10,703             10,703
--       $--       364      $4          $228,395        $(250,173)          $(21,367)
</TABLE>
<PAGE>
<TABLE>
                            Statements of Cash Flows
                                 (in thousands)
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                          For the years ended December 31,
                                                          1998           1997           1996
-----------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>            <C>
Cash Flows From Operating Activities:
Net income (loss)                                         $10,703         $536         $(92,944)
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating activities:
  Amortization and depreciation                             7,592        8,885           11,491
  Provision for doubtful accounts                          15,662       15,663           14,180
  Loss on sale of promissory note                              --           --            4,529
  Writeoff of goodwill and customer lists                      --           --           61,645
  Extraordinary item - loss on early
  extinguishment  of debt                                      --           --            3,451
Net changes in assets and liabilities
affecting operations,  net of acquisitions:
  Increase in Accounts receivable                         (17,154)      (14,967)        (11,125)
  Increase in Inventory of supplies                         (106)          (207)           (243)
  Decrease in Prepaid expenses and
  other current assets                                       250            407             117
  (Increase) decrease in Other assets                       (112)        (1,107)            229
  Increase (decrease) in Accounts payable and
  accrued liabilites                                      (4,047)        (7,221)          1,112
  Increase in Accrued payroll and benefits                   800            816           1,504
  Other                                                      408            910             926
-----------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities          13,996          3,715          (5,128)
-----------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under third party debt                             --             --          123,490
Payments of third party debt                              (1,720)        (1,776)        (104,772)
Financing costs under the Senior Notes
and Receivables Financing                                     --             --           (4,932)
Proceeds from the sale of stock                               --            581               --
Proceeds from exercise of options                             15             47               --
Other                                                        (131)         (236)              --
-----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities           (1,836)       (1,384)          13,786
-----------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures                                       (3,005)       (1,935)          (3,948)
Payments for acquisitions, net of cash acquired              (670)       (1,824)          (2,700)
Net cash proceeds from sale of equity
investment and promissory note                                 --           --            11,000
-----------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities           (3,675)       (3,759)           4,352
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash
and Cash Equivalents                                        8,485        (1,428)          13,010
Cash and Cash Equivalents - Beginning of Year              11,652        13,080               70
-----------------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Year                   $20,137       $11,652          $13,080
-----------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>

Notes to Financial Statements

1.       Description of the Company and Significant Accounting Policies

         a.       Description of the Company

         Unilab  Corporation  ("Unilab"  or  the  "Company")  provides  clinical
laboratory testing services to physicians, managed-care organizations, hospitals
and other health care providers primarily in the State of California.

         b.       Inventory of Supplies

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

         c.       Revenue Recognition

         Revenue  is  recognized  at the  time  the  service  is  provided.  The
Company's revenue is based on amounts billed or billable for services  rendered,
net of contractual  adjustments  and other  arrangements  made with  third-party
payors to provide services at less than established  billing rates. In addition,
certain  laboratory  services  are provided  pursuant to managed care  contracts
which  provide  for the  payment  of  capitated  fees (a fixed  monthly  fee per
individual  enrolled with a managed care plan for some or all  laboratory  tests
performed  during the month)  rather  than  individual  fees for tests  actually
performed.  Revenue under  capitated  arrangements  is  recognized  monthly when
billed or when due under the terms of the related contracts.

         d.   Use of Estimates

         The preparation of the financial statements requires management to make
estimates  and  assumptions  that  effect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates. The most
significant  estimates  with  regards to these  financial  statements  relate to
accounts receivable and insurance reserves.

         The  Company's  net accounts  receivable  balance is  determined  after
deductions for contractual adjustments, which are estimated based on established
billing  rates made with third  party  payors,  and an  allowance  for  doubtful
accounts,  which  primarily is based on the aging of the accounts and historical
collection  experience.  In addition,  the Company accrues for both asserted and
unasserted  claims  arising from workers  compensation  (1994 and 1995 only) and
automobile  liability  losses  (1994  through  1997 only).  The  estimate of the
liability for unasserted claims arising from unreported incidents is based on an
analysis of historical claims experience.

         e.    Fair Value of Financial Instruments and Concentration of Credit
               Risk

         The carrying amount  reported in the balance sheets for cash,  accounts
receivable,  accounts payable and accrued  liabilities  approximates  fair value
because of the immediate or short-term maturity of these financial  instruments.
The fair value of the  Company's  $120.0  million of senior  notes  approximates
$125.4  million  based on quotes from  brokers.  The Company  believes  that its
non-bank  indebtedness  approximates fair value based on current yields for debt
instruments of similar quality and terms.

         Concentration  of credit risk with respect to accounts  receivable  are
limited due to the diversity of the Company's client base. However,  the Company
provides  services to certain  patients covered by various  third-party  payors,
including the Federal and California Medicare/Medicaid programs. Revenue, net of
contractual  allowances,  from direct  billings  under  Federal  and  California
Medicare/Medicaid  programs  during each of the years ended  December  31, 1998,
1997 and 1996 approximated 25-30% of revenue.

         f.       Property and Equipment

Property  and   equipment  are  stated  at  cost  and   depreciated   using  the
straight-line  method over the  estimated  useful  lives of the related  assets.
Buildings are depreciated over 28 years,  laboratory and computer  equipment are
generally  depreciated  over 7 and 3  years,  respectively,  and  furniture  and
fixtures are  depreciated  over 5 years.  Leasehold  improvements  are amortized
using the  straight-line  method over the remaining  term of the related  lease.
Major repairs  which extend the life or add value to equipment  are  capitalized
and depreciated over their remaining useful life.

         g.       Goodwill

         Goodwill  represents  the excess of cost over the fair market  value of
net tangible and identifiable  intangible assets acquired and is amortized using
the straight-line  method.  Goodwill is amortized over 40 years for acquisitions
completed prior to January 1, 1995 and over 20 years for acquisitions after that
date. The Company  continually  evaluates whether events and circumstances  have
occurred  that indicate the remaining  estimated  useful life of goodwill  might
warrant revision or that the remaining  balance of goodwill and other long-lived
assets may not be  recoverable.  When factors  indicate  that goodwill and other
long-lived assets should be evaluated for possible impairment,  the Company uses
an estimate of  undiscounted  future net cash flows over the  remaining  life of
goodwill to  determine if  impairment  has  incurred.  Assets are grouped at the
lowest  level for which  there are  identifiable  cash  flows  that are  largely
independent from other asset groups. The Company uses discounted future expected
net cash flows to determine the amount of impairment loss.


         h.       Other Intangible Assets

         Customer  lists and  covenants  not to compete are recorded at cost and
are amortized utilizing the straight-line method over the estimated lives of the
assets, generally 10 years for customer lists and 3-5 years for covenants not to
compete.  The cost of other  intangible  assets is  evaluated  periodically  and
adjusted,  if  necessary,  if later  events and  circumstances  indicate  that a
permanent  decline in value below the current  unamortized  historical  cost has
occurred.

         i.       Income Taxes

         The Company  recognizes  deferred  tax assets and  liabilities  for the
expected future tax consequences of temporary  differences between the basis for
financial reporting purposes and the basis for tax purposes,  in accordance with
Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for
Income Taxes".

         j.       Earnings Per Common Share

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial Accounting  Standards No. 128 ("FAS 128"),  "Earnings Per
Share", which requires the disclosure of a basic and diluted earnings per share.
The  implementation  of FAS 128 had no impact on the calculation of earnings per
share previously reported for the year ended December 31, 1996.

         Basic  earnings per common share has been  computed by dividing the net
income (loss) less preferred  dividends by the weighted average number of common
shares  outstanding for each period  presented.  The weighted  average number of
common  shares  used in the  calculation  of basic  earnings  per share was 40.7
million,  39.9 million and 36.8  million for the years ended  December 31, 1998,
1997, and 1996, respectively.

         Diluted  earnings per share  includes the effect of  additional  common
shares that would have been outstanding if dilutive  potential common shares had
been  issued.  No dilutive  securities  existed in 1996.  In 1997,  the weighted
average number of dilutive stock options were 0.6 million,  which would have had
no effect on the basic  earnings per share  calculation.  In 1998,  the weighted
average  number of dilutive  stock options were 1.4 million and the  incremental
shares from the assumed conversion of the 14.0 million subordinated  convertible
note were 0.7 million,  which reduced the basic earnings per share calculated by
$0.01.  The assumed  conversion of the  convertible  preferred stock is excluded
from the calculation since its effect would be immaterial.

         Options  to  purchase  2.1 and 2.9  million  shares of common  stock at
prices  ranging  from  $2.63 to $6.88 and  $1.19 to $6.88  were  outstanding  at
December  31,  1998  and  1997,  respectively,  but  were  not  included  in the
computation  of diluted  earnings per share because the option's  exercise price
was greater than the average  market price for the year of the Company's  common
shares.



         k.       Cash and Cash Equivalents

         For the purpose of the statement of cash flows,  the Company  considers
all highly  liquid  investments  purchased  with an  original  maturity of three
months or less to be cash equivalents.

2.       Property and Equipment, Net and Other Intangible Assets

         Property and equipment, net consists of the following:

                                                           December 31,
                                                      1998           1997
                                                        (in thousands)
         Buildings                                  $3,166         $3,166
         Leasehold improvements                      5,564          5,236
         Laboratory and other equipment             30,053         29,700
         Furniture and fixtures                      3,459          3,391
                                                     -----          -----
                                                    42,242         41,493
         Less accumulated depreciation and          30,965         28,333
         amortization                               ------         ------
                                                   $11,277        $13,160

         Depreciation  expense  was  approximately  $5.0  million in 1998, $6.0
million in 1997 and $5.0 million in 1996.

         Other intangible assets consist of the following:

                                                          December 31,
                                                      1998           1997
                                                        (in thousands)
         Customer lists                             $7,675         $7,675
         Covenants not to compete                      235            300
                                                       ---            ---
                                                     7,910          7,975
         Less accumulated amortization               5,540          5,244
                                                     -----          -----
                                                    $2,370         $2,731

         Amortization expense for goodwill,  other intangible assets and certain
other deferred  costs was  approximately  $2.6 million in 1998,  $2.9 million in
1997 and $6.5 million in 1996.

3.       Acquisitions

         On  September  16,  1998,  the  Company  and Meris  Laboratories,  Inc.
("Meris")   signed  an  asset  purchase   agreement   whereby  Unilab   acquired
substantially  all of the assets of Meris. The agreement was approved on October
28, 1998 by the United States  Bankruptcy  Court in Los Angeles,  California and
Unilab took  possession  of the  acquired  net assets on  November 5, 1998.  The
purchase  price  consisted  of  the  issuance  of a  $14.0  million  convertible
subordinated  note,  $2.5 million in cash payable in  seventy-two  equal monthly
installments  and the  assumption  of net  assets  of $3.5  million,  consisting
primarily of accounts  receivable.  The  acquisition was accounted for under the
purchase  method of accounting  and the  statements  of  operations  include the
results of Meris since November 5, 1998.

         The purchase  price was allocated to the net assets  acquired  based on
their fair value at the date of acquisition, as follows:

                                                              (in thousands)
     Accounts receivable                                           $3,251
     Inventory of supplies                                            138
     Property and equipment                                           175
     Goodwill                                                      14,889
     Other intangible assets-non-compete agreements                   235
     Other assets                                                      46
                                                                       --
         Assets Acquired                                           18,734
                                                                  -------
     Issuance of convertible subordinated notes                    14,000
     Accrued employee benefits                                        306
     Assumed accounts payable                                       2,520
     Liabilities associated with integration period                 1,400
     Acquisition fees, primarily legal costs                          508
                                                                      ---
         Liabilities assumed or incurred                          $18,734

         As noted in the table above and in connection  with the  integration of
the  acquired  Meris  operations  with those of  Unilab,  the  Company  recorded
liabilities of $1.4 million,  primarily  related to severance (for the reduction
in  headcount  of  approximately  230  employees)  and  other  employee  related
liabilities.  At December 31, 1998,  approximately  $1.3 million of liabilities,
expected to be paid in the first six months of 1999, were outstanding.

         The following  unaudited pro forma results of operations for the years
ended  December 31, 1998 and 1997 (in thousands  except per share data) have
been prepared as if the acquisition of Meris occurred on January 1, 1997:

                                                      Years Ended December 31,
                                                      1998               1997
                                                           (Unaudited)
    Revenue                                        $239,649            $243,904
    Net Income                                       16,371               5,859
    Net income available to common shareholders      16,263               5,721
    Earnings per share:
         Basic                                         0.40                0.14
         Diluted                                       0.37                0.14

         The historical  financial results of Unilab for 1998 and 1997 have been
adjusted  primarily for the historical results of Meris, an increase in interest
expense due to the  additional  debt incurred to purchase Meris and cost savings
from the integration of the Meris operations into Unilab.

The  unaudited  pro forma  information  presented  above does not  purport to be
indicative of the results that actually would have been obtained if the combined
operations  had  been  conducted  during  the  periods  presented  or of  future
operations of the combined operations.


4.       Restructuring Charges

         During the fourth  quarter of 1996,  the  Company  recorded  charges of
$65.7  million,  consisting of the  write-off of goodwill and customer  lists of
$61.7 million, and a reserve for managerial  restructuring expenses,  consisting
primarily of severance  related  expenses,  of $4.0  million.  The  write-off of
goodwill  and  customer  lists  principally  related  to two  of  the  Company's
laboratory  operations,  which had seen  decreasing  operating  results and cash
flows throughout 1996.

         The $4.0 million managerial restructuring expenses related primarily to
a  reduction  in  headcount  of  approximately   25  employees,   including  the
resignation  of the  Company's  then  Chairman,  President  and Chief  Executive
Officer in  January  1997.  Most  affected  employees  were  terminated  in late
December through mid January.  At December 31, 1998,  approximately $0.5 million
of liabilities were outstanding and such amount is expected to be paid in 1999.

5.       Legal and Acquisition Related Charges

         During the third quarter of 1996, the Company  recorded charges of $4.9
million,  primarily  related  to  settlements  reached  with the  United  States
("U.S.") Government, and certain other entities in connection with the Company's
sales,  marketing  and billing  practices.  The  Company  agreed to pay the U.S.
Government approximately $4.0 million to conclude an investigation of certain of
Unilab's  billings  to Medicare  and certain  other  governmental  entities  for
hematology  indices being billed in conjunction with complete blood counts.  The
Company has remaining  payments to the U.S.  Government of $500,000 due March 1,
1999 and approximately  $324,000 due on September 1, 1999. All deferred payments
to the U.S.  Government bear interest at approximately 5.2 percent. In addition,
Unilab paid the California  MediCal  program  approximately  $160,000 in October
1996 to settle all their claims concerning the same issue.

6.       Income Taxes

         For the years ended  December 31, 1998,  1997 and 1996,  income  (loss)
before income taxes consisted of domestic earnings (losses) and no provision for
Federal or State income taxes was recorded.

         A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory  Federal  income tax rate to earnings  before
income taxes is as follows:




                                       Years Ended December 31,
(in thousands)                           1998          1997       1996
                                       -------         ----       ----
Computed income taxes                    $3,746         $188     $(31,601)
   at U.S. statutory rate
Amortization and write-off                  420          420        1,140
   of goodwill and intangible
   assets disallowed for income
   tax purposes
Capital and operating losses                  -           -        30,461
   with no tax benefit
Change in valuation allowance           (4,166)           -            -
Other                                         -        (608)           -
                                             $-          $-           $-

         Temporary  differences  and  carryforwards,  excluding the capital loss
carryforward  discussed  below,  which give rise to  deferred  tax assets are as
follows:

                                                         December 31,
(in thousands)                              1998              1997
Bad debt reserve                            $2,972            $2,563
Intangible assets                            9,807            11,752
Property and equipment                        383                383
Accrued liabilities                          1,408             2,254
Net operating loss carryforwards            21,166            21,761
                                            35,736            38,713
Valuation allowance                        (35,736)           (38,713)
                                               $--               $--

         The  realization  of the  deferred  tax assets at December  31, 1998 is
dependent upon the Company having future taxable income.  A valuation  allowance
has been provided  against the entire deferred tax asset balance at December 31,
1998 and 1997.  Approximately  $4.0  million of benefit,  if any, to be recorded
from the  recognition  of the  deferred  tax assets  would  reduce the amount of
goodwill recorded from certain acquisitions.

         In  addition,  the Company has a capital  loss of  approximately  $36.5
million from the sale of its equity investment in UGL. The capital loss can only
be utilized by the Company to the extent it offsets capital gains  generated.  A
valuation  allowance  has also been  entirely  provided  against  the  available
capital loss at December 31, 1998 and 1997.

         The Company has net operating loss and capital loss  carryforwards  for
tax purposes in the U.S.  which are  available to offset future  taxable  income
through  2012 and 2000,  respectively.  At  December  31,  1998,  available  net
operating  loss and  capital  loss  carryforwards  for U.S.  tax  purposes  were
approximately $62.0 million and $36.5 million,  respectively. Net operating loss
carryforwards  for  California  state  tax  purposes  were  approximately  $31.0
million.

7.       Loss on Sale of Promissory Note

         In November 1996, the Company sold a 100% participation interest in its
rights under a $15.0 million  promissory  note (which the Company  received upon
the sale of an equity  investment  in 1995) to a third party for $11.0  million.
The Company recorded a $4.5 million loss upon the sale, which reflected the $4.0
million loss in principal plus the write-off of accrued and unpaid interest from
July 1, 1996 through the sale date of $0.5 million.

8.       Long-Term Debt

Long-term debt consists of the following:

                                                   December 31,
(in thousands)                                   1998       1997
-------------------------------------------------------------------
Senior Notes, interest at 11.0
percent payable semi-annually               $119,344      $119,253

Convertible subordinated
note, interest at 7.5 percent
payable semi-annually                         14,000            --

Obligation under capital lease
collateralized by land and building
with interest due through 2004                  2,867        3,054

Obligations under capital leases
collateralized by equipment with
interest due through 2000                       2,165        3,789
-------------------------------------------------------------------
                                              138,376      126,096

Less -- current portion                         1,206        1,811
-------------------------------------------------------------------
                                             $137,170     $124,285
-------------------------------------------------------------------

         In March 1996,  the Company  completed an offering of $120.0 million of
senior notes (the "Senior  Notes").  The proceeds from the Senior Notes offering
were used to retire  outstanding  borrowings  under the Company's  then existing
bank term loan and revolving line of credit facility in the principal  amount of
$102.1 million,  plus accrued interest.  Interest on the Senior Notes is 11% and
is payable on April 1st and October 1st of each year.  The Senior  Notes are due
April 2006 and the Company is not required to make any  mandatory  redemption or
sinking fund payment with respect to the Senior Notes prior to maturity.

         In  connection   with  the  Senior  Notes  offering  and  the  accounts
receivable  financing  discussed below, the Company incurred  approximately $5.0
million of financing costs. The debt financing costs are deferred and amortized,
using the interest method, over the term of the related debt. Upon completion of
the Senior  Notes  offering,  the  Company  wrote-off  $3.5  million of deferred
financing  costs related to the Company's  previous credit facility in the first
quarter of 1996. The $3.5 million charge has been shown as an extraordinary loss
from the early extinguishment of debt in the statement of operations.

         The Senior  Notes were issued at a discount  of 99.242%  per note.  The
aggregate  discount on the Senior Notes approximated $0.9 million and is charged
to operations as additional  interest  expense over the life of the Senior Notes
using the  interest  method.  At December  31, 1998,  the  unamortized  discount
approximated $0.7 million.

         The Senior Notes are not redeemable prior to April 1, 2001, after which
the Senior Notes will be redeemable at any time at the option of the Company, in
whole or in part,  at various  redemption  prices as set forth in the  indenture
covering such Senior Notes (the "Indenture"),  plus accrued and unpaid interest,
if any, to the date of  redemption.  In addition,  at any time prior to April 1,
1999, the Company may redeem up to $42.0 million in aggregate  principal  amount
of the Senior  Notes with the net  proceeds of one or more public  offerings  of
common stock of the  Company,  at a  redemption  price of 110% of the  principal
amount  thereof,  plus accrued and unpaid  interest,  if any, to the  redemption
date.

         In the event of a change  in  control,  as  defined  in the  Indenture,
holders  of the  Senior  Notes  will have the right to  require  the  Company to
purchase  their  Notes,  in whole or in  part,  at a price  equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase.

         The Notes are  general  unsecured  obligations  of the Company and rank
pari  passu in right of  payment  with all  unsubordinated  indebtedness  of the
Company.  In addition,  the Indenture limits the ability of the Company to incur
additional indebtedness, under certain circumstances.

         In connection  with the  acquisition of Meris (see Note 3), the Company
issued a $14.0 million  convertible  subordinated  note, bearing interest at the
rate of 7.5%,  payable in cash or in kind, at the  Company's  option (other than
the  interest  payment  due in  November  2006,  which will be payable in cash).
Interest  is  payable  on  May 5 and  November  5 of  each  year.  The  note  is
subordinated to the Senior Notes and is due in November 2006.

         The note is convertible into the Company's common stock at a conversion
price of $3.00 per share;  however,  the holder of such note cannot exercise its
conversion right unless the Company's  average stock price during the thirty day
trading period preceding an offer to convert is equal to or greater than $3.60 a
share (the "Offer  Date").  The holder of the note can convert up to one-half of
the note during the first four years;  any  outstanding  balance after  November
2002 may be converted by the holder through the maturity  date. The Company,  at
its option,  can force conversion of the note, in whole or in part, at any Offer
Date.

         In addition,  at the  Company's  option,  the note may be redeemed,  in
whole or in part,  at any Offer Date;  provided that the holder of such note may
exercise its  conversion  right to the extent noted in the  preceding  paragraph
rather than being redeemed.  The redemption  price would equal the face value
of the note being redeemed  times a premium  percentage (the  average  stock
price  during the specified  period  divided  by  $3.00).  If the note has not
been  converted  or redeemed  prior to maturity,  the remaining note balance
will be paid in cash at the then outstanding principal amount of the note.  In
the event of a change in control, as defined in the Note, the outstanding
principal amount of the Note shall be automatically converted into shares of
the Company's common stock.

         In July 1996,  the Company  entered into an agreement  with a financial
institution  whereby it can sell  accounts  receivable  up to a maximum of $20.0
million.  As collections  reduce accounts  receivables which have been sold, the
Company  may sell new  receivables  to bring the amount  sold up to a maximum of
$20.0 million.

         As of  December  31,  1998,  the  Company  had not  sold  any  accounts
receivable  under  this  agreement.  Sales of  receivables,  if any,  under  the
facility are subject to a liquidity and debt service coverage ratio. The Company
was in compliance  with such  covenants in 1998.  The  termination  date for the
agreement is July 1999.  If the facility  terminates  prior to July 1999 for any
reason,  the Company is obligated  to pay a $200,000  early  termination  fee. A
commitment fee of 1/2 percent is required on the unused portion of the available
facility. The Company retains collection and administrative  responsibilities on
the  receivables  sold  as  agent  for  the  purchaser.  In  addition,  accounts
receivable sold, if any, will be reflected as a reduction of accounts receivable
in the balance  sheet.  The full amount of the allowance  for doubtful  accounts
will be retained because the Company will retain  substantially the same risk of
credit loss as if the receivables had not been sold.

         At December 31, 1998, future scheduled  principle payments of long-term
debt are as follows (in thousands):

    Years Ended December 31,
-------------------------------------
1999                         $1,206
2000                          1,557
2001                            442
2002                            562
2003                            706
Thereafter                  133,903
-------------------------------------
                           $138,376
-------------------------------------

9.      Capital Shares, Stock Options and Warrants

a.      Convertible Preferred Stock

        As of December 31, 1998, the Company has authorized 20,000,000 shares of
preferred  stock at $.01 par value.  The Board of  Directors of the Company will
determine,  among other things,  the number of shares,  voting rights,  dividend
rates, liquidation preferences, and redemption and conversion privileges of each
series of such preferred stock. As of December 31, 1998,  18,600,000  shares for
which no series has been designated were authorized and unissued.

         The  Company  has  364,000  shares  of  convertible   preferred   stock
outstanding at December 31, 1998. Holders of the convertible preferred stock are
entitled to  receive,  when and as  declared  by the Board of  Directors  of the
Company,  cumulative  dividends  at an annual  rate of $0.36 per share,  payable
semiannually on June 30 and December 30 in each year. The convertible  preferred
stock is  convertible  on a share for share basis into  shares of the  Company's
common stock,  at the holder's  option,  at any time from and after November 10,
1996.  36,000 shares of preferred shares were converted into common stock during
1997. In addition,  the convertible preferred stock has a liquidation preference
of $5.75 per share and the  Company  has the right at its sole  option to redeem
the  shares  any time  after  November  10,  1998,  in  whole  or in part,  at a
redemption  price of $5.75 per share plus an amount  equal to all  declared  and
unpaid dividends thereon to the redemption date.

b.       Non-Voting Common Stock

         At the Company's May 1996 annual meeting of stockholders,  an amendment
to the  Company's  Certificate  of  Incorporation  was  approved  and adopted by
stockholders  permitting the holder of all the 1,050,000  outstanding  shares of
the Company's non-voting common stock to convert such shares into regular voting
common stock.  In July 1996, all of the outstanding  shares of non-voting  stock
were converted into shares of the Company's  voting common stock on a share for
share basis.

c.       Restricted Stock

         The Company granted 17,000 restricted shares,  15,000 restricted shares
and 99,500  restricted shares of common stock to certain employees at no cost in
1998,  1997 and 1996,  respectively.  The  outstanding  restricted  shares  vest
ratably  each year on their  anniversary  date and become  fully  vested after a
period of two to five  years.  The cost of the  restricted  shares  based on the
shares' fair market value at the award dates, is charged to shareholders' equity
and subsequently amortized against earnings over the vesting period. At December
31, 1998, 260,834 restricted shares were outstanding and approximately $132,000,
$192,000  and  $351,000  was  amortized  to  expense  in 1998,  1997  and  1996,
respectively.

d.       Stock Options

         Employee Stock Option Plan

         In 1996, the Company's shareholders approved the adoption of the Unilab
Corporation Stock Option and Performance Incentive Plan (the "1996 Option Plan")
which effectively  replaced and superseded both the Stock Option Program for Key
Executives (the "Key Executive Plan") and a stock option plan for the benefit of
a broad base of Company employees (the "1995  Option  Plan").  The 1995 Option
Plan was  amended  to discontinue grants under that plan.  The 1996  Option
Plan  provides  one comprehensive  plan for all employees and all future grants
to employees will be made under the 1996 Option Plan.

         Under the  terms of the 1996  Option  Plan,  incentive  stock  options,
non-statutory  stock  options,  reload  options  or rights,  stock  appreciation
rights, restricted or unrestricted shares of Unilab stock, performance shares or
units and tax offset payments can be granted to any of the Company's  employees,
with limited  exceptions,  and options for a maximum of 4,000,000  shares of the
Company's common stock may be granted.  No employee may receive annual awards of
or relating to more than 250,000 shares of Unilab common stock.

         The 1996 Option  Plan is  administered  by a committee  of the Board of
Directors  (the  "Administrator").  The  number of  options  or awards  granted,
exercise  price,  vesting and term will be determined by the  Administrator.  At
December 31, 1998, and 1997, 3,016,999 and 2,202,334 options, respectively, were
outstanding  under the  aggregate of the 1996 Option Plan,  the 1995 Option Plan
and the Key Executive Plan.

Stock Program for Directors

         In April  1997,  the Company  reserved  1,500,000  shares  under a plan
whereby  members of the Company's  Board of Directors may purchase common shares
at the then  current  market  price of the  shares  (the "1997  Directors  Stock
Purchase  Plan").  500,000  shares were  purchased in 1997 and 1,000,000  shares
remain  outstanding under the 1997 Directors Stock Purchase Plan at December 31,
1998.

         In 1996, the Company's shareholders approved the adoption of the Unilab
Corporation Non-Employee Directors Stock Plan (the "1996 Directors Plan"), which
effectively replaced the Stock Option Program for Directors (the "1995 Directors
Plan").

         Under the terms of the 1996 Directors Plan, each outside  director will
receive an annual option grant of 10,000 shares and an additional  annual option
grant of 10,000  shares will be awarded to each  outside  director who serves as
the chairman of a committee or committees of the Board of Directors.  50 percent
of options granted under the 1996 Directors  Plans are  exercisable  immediately
and 50 percent are exercisable in one year.

         At  December   31,  1998  and  1997,   255,000  and  200,000   options,
respectively,  were  outstanding  under  the  aggregate  of the  1996  and  1995
Directors Plans.

Other

         Prior to the adoption of the 1996 Option Plan  and the 1996  Directors
Plan, the Company's Board of Directors also authorized the grant of nonqualified
stock options to individuals.

         Information regarding the Company's stock option plans and nonqualified
stock  options as of December 31, 1996,  1997 and 1998,  and changes  during the
years ending on those dates is summarized as follows:

                                                          Weighted-Average
                                        Shares             Exercise Price
--------------------------------------------------------------------------
December 31, 1995                     3,478,500               $5.40
--------------------------------------------------------------------------
Granted                                 681,500                2.11
Exercised                                  --                   --
Forfeited                              (280,500)               5.56
--------------------------------------------------------------------------
December 31, 1996                     3,879,500               $4.73
--------------------------------------------------------------------------
Granted                               1,751,000                0.62
Exercised                               (75,000)               0.63
Forfeited                              (999,166)               4.76
--------------------------------------------------------------------------
December 31, 1997                     4,556,334                3.21
--------------------------------------------------------------------------
Granted                                 949,500                2.00
Exercised                               (19,500)               0.79
Forfeited                              (170,835)               4.05
--------------------------------------------------------------------------
December 31, 1998                     5,315,499               $2.94
--------------------------------------------------------------------------

         In addition,  105,000  options were  repriced  from a weighted  average
price of $5.16 to $2.19 during  1996.  The options  outstanding  at December 31,
1998 expire in various  years  through  the year 2008.  Options  exercisable  at
December  31,  1998,  1997 and 1996 were  3,804,997,  2,940,907  and  3,049,255,
respectively.

         The weighted  average fair value of options  granted during 1998,  1997
and 1996 were  $1.55,  $0.55 and  $1.90,  respectively.  The fair  value of each
option grant is estimated  on the date of grant using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
1998, 1997 and 1996, respectively:  risk-free interest rates of 5.8 percent, 6.9
percent and 6.1 percent;  expected lives of 9.08 years,  9.09 years, 8.49 years;
expected  volatility  of 64.2  percent,  91.7  percent  and 95.6  percent and no
dividends would be issued during the option terms.

         Information  about stock options  outstanding  at December 31, 1998, is
summarized as follows:

                              Options Outstanding
-----------------------------------------------------------------------------
                                            Weighted-
                           Number           Average           Weighted-
Range of                   Outstanding      Remaining         Average
Exercise Prices            at 12/31/98      Contracted Life   Exercise Price
-----------------------------------------------------------------------------
$0.438 to $2.0             2,124,250         7.8 years          $0.90
$2.063 to $4.0             1,117,333         8.1 years          $2.16
$4.125 to $6.875           2,073,916         5.2 years          $5.46
-----------------------------------------------------------------------------
                           5,315,499         6.9 years          $2.94
-----------------------------------------------------------------------------
                               Options Outstanding
-----------------------------------------------------------------------------
                           Number           Weighted-
Range of                   Exercisable      Average
Exercise Prices            at 12/31/98      Exercise Price
-----------------------------------------------------------------------------
$0.438 to $2.0             1,277,415        $0.84
$2.063 to $4.0               468,666        $2.26
$4.125 to $6.875           2,058,916        $5.47
-----------------------------------------------------------------------------
                           3,804,997        $3.52
-----------------------------------------------------------------------------

         The  Company  accounts  for its stock  option  plans  under  Accounting
Principle  Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"
under which no compensation cost has been recognized.  Had compensation cost for
the Company's  stock option plans been  determined  consistent with Statement of
Financial Accounting Standards No. 123 ("FAS 123"),  "Accounting for Stock-Based
Compensation,"  the  Company's net income and earnings per share would have been
reduced to the following pro forma amounts:

                                              Years Ended December 31,
(in thousands)                           1998          1997           1996
-----------------------------------------------------------------------------
Net income          As Reported          $10,703        $536         $(92,944)
(loss)              Pro Forma            $9,423        $(508)        $(94,391)
-----------------------------------------------------------------------------
Net income
(loss)              As Reported          $0.25         $0.01           $(2.53)
per diluted share    Pro Forma           $0.22        $(0.01)          $(2.57)
-----------------------------------------------------------------------------

         Because  the FAS 123  method  of  accounting  has not been  applied  to
options  granted prior to January 1, 1995, the resulting  compensation  cost may
not be representative of that to be expected in future years.

e.       Stockholder Protection Rights Plan

         In February 1994, the Company adopted a stockholder  Protection  Rights
Plan, which was amended and restated in February 1996 ("Rights Plan").  Pursuant
to the Rights  Plan, a dividend of one Right for each  outstanding  share of the
Company's  common stock was issued to  shareholders of record on March 15, 1994.
Under  certain  conditions,   each  Right  may  be  exercised  to  purchase  one
one-hundredth of a share of Series A Junior  Participating  Preferred Stock at a
price of $22.50 for each share of common stock held. The Rights are  exercisable
until 10 days  after a person  or group  acquires  15% or more of the  Company's
common stock or announces a tender or exchange offer,  the consummation of which
would  result  in  ownership  by  such  person  or  group  of 15% or more of the
Company's common stock. If thereafter, a person or group acquires 15% or more of
Unilab's  outstanding  Common  Stock,  each Right will entitle its holder (other
than  such  person  or  members  of such  group)  to  purchase,  at the  Right's
then-current  purchase  price,  in  lieu  of one  one-hundredth  of a  share  of
Preferred  Stock,  a number of shares of Unilab's  Common  Stock having a market
value of twice  the  Right's  purchase  price.  In  addition,  should  Unilab be
acquired in a merger or other business combination, 50% or more of its assets or
earning power is sold or transferred,  or a reclassification or recapitalization
of the  Company  occurs  that has the effect of  increasing  by more than 1% the
proportionate  ownership of Unilab's stock by the acquiring  person,  then, each
Right will entitle its holder to purchase,  at the Right's then-current purchase
price,  a number of the  acquiring  company's  shares of common  stock  having a
market value at that time of twice the Right's purchase price.

         The  Rights  may be  redeemed  prior  to  becoming  exercisable  by the
Company,  subject to approval of the Board of Directors,  for one cent per Right
in accordance with the provisions of the Rights Plan. The Rights expire on March
15,  2004.  The  Company  has  reserved  1,000,000  shares  of  Series  A Junior
Participating Preferred Stock for issuance upon exercise of the Rights.

10.      Related Party Transactions

         The Company sold 533,333 shares,  valued at $0.3 million at the time of
issuance, to its former CEO pursuant to transition agreements between the former
CEO and the Company in connection  with the CEO's  resignation  in January 1997.
The Company  extended a $0.5 million loan to its current CEO for the purchase of
1.1 million shares of the Company's common stock in January 1997. The CEO repaid
$250,000 of the loan during  1997 and the  remaining  $250,000 is due in January
2002. The loan bears interest at 6% and is payable  quarterly.  In addition,  in
1997, the Company sold 500,000 shares,  valued at approximately  $0.3 million at
the  time of  issuance,  to a  director  of the  Company  pursuant  to the  1997
Directors Stock Purchase Plan. Each of these  transactions  were  consummated at
the then  prevailing  market price of the Company's  common  stock.  The Company
guaranteed  a loan of $0.4  million at  December  31,  1998 made by a band to an
executive  of the  Company.  The loan was used to purchase a residence  and such
residence serves as collateral for the Company's guarantee.

11.      Commitments and Contingencies

Property and equipment leased under capital leases is as follows:

                                                        December 31,
(in thousands)                                      1998              1997
-----------------------------------------------------------------------------
Building                                           $3,100            $3,100
Laboratory and other equipment                      5,638             7,283
Less-Accumulated amortization                       4,934             5,158
Net leased property under capital leases           $3,804            $5,225

         As of December 31, 1998,  future minimum rental payments required under
captial and operating leases that have initial or remaining  noncancelable terms
in excess of one year are approximately as follows:

                                           Capital            Operating
(in thousands)                             Leases             Leases
1999                                       $1,854             $9,696
2000                                        2,039              5,720
2001                                          782              4,163
2002                                          822              2,616
2003                                          863              2,067
Thereafter                                    594              1,772
Total minimum less payments                $6,954            $26,034
Less: Amount representing interest          1,922
Present value of net minimum
lease payments                             $5,032

         Rental expense for operating  leases was  approximately  $10.8 million,
$10.2 million and $9.6 million in 1998, 1997 and 1996, respectively.

         The Company has employment  agreements with its principal  officers and
certain other key  employees.  Such  agreements  expire at various dates through
November  10,  1999  and  automatically  renew  for  successive  one or two year
periods,  depending on the  employee,  until one of the parties  gives notice of
termination in accordance  with the agreement.  The agreements  also provide for
annual  bonuses for  certain  officers  and key  employees,  dependent  upon the
achievement of certain performance  objectives.  In addition, the agreements for
certain  employees provide for annual deferred  compensation  equal to 8% of the
employees' cash compensation  (inclusive of bonuses) for the year. The aggregate
commitment  under  these   agreements,   excluding   bonuses  and  any  deferred
compensation  related thereto,  is approximately  $2.2 million.  The Company may
terminate the employment agreements without cause on specified advance notice by
providing  severance  pay equal to one to two times,  depending on the employee,
the current base salary plus certain other benefits.

         In addition,  the employment agreements grant these employees the right
to receive two times their annual salary and bonus, plus continuation of certain
benefits and  acceleration  of certain  stock  options,  if there is a change in
control of the Company (as  defined)  and a  termination  of such  employees  or
certain  other  events  within  two years  thereafter.  The  maximum contingent
liability upon a change in control,  excluding any bonus, deferred compensation,
continuation of benefits or acceleration of stock options, is approximately $3.5
million.

         The Company is party to certain legal proceedings considered incidental
to its business. Although the ultimate disposition of these legal proceedings is
not determinable,  management does not believe that the ultimate outcome of such
legal  proceedings  will  have a  material  adverse  effect  upon the  financial
condition, liquidity or results of operations of the Company.

12.      Benefit Plans

         The  Company  provides  a  savings  plan  under  Section  401(k) of the
Internal  Revenue Code covering most  employees.  The expense related to Company
contributions to the plan totaled  approximately $0.3 million,  $0.1 million and
$0.5 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1995, the Company contributions, which were previously made
in cash,  were made in shares of Unilab common stock.  From September 1, 1996 to
September  30,  1997,  the  Company  discontinued  its  matching  contributions.
Effective  October 1, 1997,  the  Company  partially  re-instated  its  matching
contributions.  Such  contributions  were made in shares of Unilab common stock.
Effective January 1, 1998, the Company made Company contributions in cash, which
were used to purchase Company common stock by the plan's trustee.

         Effective  January 1, 1995, the Company adopted the Unilab  Corporation
Executive  Retirement Plan (the "SERP"), an unfunded defined  contribution plan,
for the benefit of designated  key  employees.  The benefit  earned each year is
issued into participants'  account through  memorandum  shares,  which represent
rights to receive  stock of the  Company at a future  date.  The SERP limits the
aggregate number of shares issued annually to 200,000 shares and the memorandum
shares  granted each year vest ratably over a three-year period.  As of December
31. 1998,  457,195  memorandum  shares were  outstanding,  of which 308,415 were
vested at December 31, 1998. The benefit formula to determine  amounts earned by
participants  is  primarily  based on the  employee's  final  five-year  average
compensation  and years of service.  Compensation  expense is recorded each year
for the amount of shares  that vest and  changes  in the price of the  Company's
common stock. Pension (income) expense for the SERP was approximately $407,000,
$271,000 and ($153,000) in 1998,  1997 and 1996,  respectively.  At December 31,
1998, the accumulated  obligation recognized as a liability in the balance sheet
was  approximately  $732,000.  The weighted  average  discount  rate and rate of
increase in future  compensation levels used in determining the present value of
benefit  obligations  were 6.0% and 3.8% in 1998, 6.6% and 3.8% in 1997 and 6.1%
and 3.8% in 1996.

13.      Supplemental Disclosures of Cash Flow Information

                                                    Years Ended December 31,
(in thousands)                                  1998       1997        1996
-----------------------------------------------------------------------------
Cash paid during the year for:
Interest                                      $13,419     $14,063     $12,139
Income taxes                                        2           1           9

Supplemental Disclosure
   of Noncash Investing
   and Financing Activities:

Restricted shares of
   common stock issued
   to employees                                    32          16         107

Shares issued for Company's
   401(k) plan matching
   contributions                                   25          49         548

Shares issued to certain
   Board Directors and
   a consultant for
   services rendered                              160          64          61

Payment of purchase price
   for a prior acquisition in
   common shares                                   --          --       1,000
-----------------------------------------------------------------------------
In connection with business
   acquisitions, liabilities
   were assumed as follows:

Fair value of assets acquired                  $18,734         --          --
-----------------------------------------------------------------------------
Liabilities assumed                            $18,734         --          --
-----------------------------------------------------------------------------


         During 1997, the Company issued 500,000 shares,  valued at $0.2 million
at the time of issuance,  to the  Company's  former CEO in  connection  with the
CEO's  resignation.  In 1997, the Company also issued 228,571 shares,  valued at
$0.1 million at the time of issuance,  to the  Company's  current CEO as a bonus
pursuant to an employment  agreement.  In addition,  the Company  issued in 1997
approximately 169,000 shares, valued at $0.3 million at the time of issuance, to
all full-time  employees as a special year-end bonus.  In the fourth  quarter of
1996, the Company wrote off $61.7 million of goodwill and customer lists.

14.      Quarterly Financial Data (unaudited)

         Summarized  unaudited  quarterly  financial  data for 1998 and 1997 (in
thousands, except per share data) is as follows:

<TABLE>
<CAPTION>
                                         Year Ended December 31, 1998
                                First          Second          Third          Fourth
                                Quarter        Quarter         Quarter        Quarter
<S>                            <C>            <C>             <C>            <C>
--------------------------------------------------------------------------------------
Revenue                         $54,530        $54,356         $53,160        $55,324
--------------------------------------------------------------------------------------
Direct laboratory
   and field expenses:

Salaries, wages
   and benefits                  16,823         16,567          16,255         18,097

Supplies                          7,613          7,492           7,480          8,086

Other operating
   expenses                      13,129         13,200          13,075         14,190
--------------------------------------------------------------------------------------
      Total                      37,565         37,259          36,810         40,373

Amortization and
   depreciation                   1,985          1,941           1,848          1,818

Selling, general
   and administrative
   expenses                       8,534          8,324           8,132          8,540
--------------------------------------------------------------------------------------
Operating income                  6,446          6,832           6,370          4,593
--------------------------------------------------------------------------------------
Net income                        3,072          3,446           3,062          1,123
--------------------------------------------------------------------------------------
Net income available
   to common
   shareholders                   3,039          3,413           3,029          1,091
--------------------------------------------------------------------------------------
Per common share
   data-diluted:

Net income                        $0.07          $0.08           $0.07          $0.03
--------------------------------------------------------------------------------------
Price Range:
      High                        3.00           3.125           2.625           2.375
--------------------------------------------------------------------------------------
      Low                         1.688          2.375            1.75           1.625
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                           Year Ended December 31, 1997
                                 First          Second         Third          Fourth
                                 Quarter        Quarter        Quarter        Quarter
<S>                             <C>            <C>            <C>            <C>
--------------------------------------------------------------------------------------
Revenue                          $53,033        $54,027        $54,238        $52,703
--------------------------------------------------------------------------------------
Direct laboratory
   and field expenses:

Salaries, wages
   and benefits                   17,820         17,352          17,174        16,748

Supplies                           7,551          7,616           7,488         7,203

Other operating
   expenses                       13,982         14,593          14,649        13,766
--------------------------------------------------------------------------------------
      Total                       39,353         39,561          39,311        37,717

Amortization and
   depreciation                    2,153          2,312           2,210         2,210

Selling, general
   and administrative
   expenses                        9,155          8,539           8,491         8,385
--------------------------------------------------------------------------------------
Operating income                   2,372          3,615           4,226         4,391
--------------------------------------------------------------------------------------
Net income (loss)                 (1,135)            54             691           926
--------------------------------------------------------------------------------------
Net income (loss)
   available to com-
   mon shareholders               (1,171)            18             655           896
--------------------------------------------------------------------------------------
Per common share data-diluted:
Net income (loss)                 $(0.03)         $0.00           $0.02         $0.02
--------------------------------------------------------------------------------------
Price Range:
      High                         0.875           1.125          1.813          2.125
--------------------------------------------------------------------------------------
      Low                          0.438           0.563          1.125           1.50
--------------------------------------------------------------------------------------
</TABLE>
<PAGE>

Fourth Quarter - 1998

         Effective  November 5, 1998, the Company acquired  substantially all of
the assets of Meris.  During the integration  period between November 5,1998 and
late  December  1998,  the Company  estimates  that the Meris  operations  had a
negative $1.2 million impact on operating profit for the quarter.

Fourth Quarter 1998 and 1997

         Testing volume  generally tends to be lower during the holiday seasons.
As a  result,  because a  substantial  portion  of the  Company's  expenses  are
relatively  fixed  over the short  term,  the  Company's  operating  income as a
percentage of revenue tends to decrease during the fourth quarter, mainly due to
the Christmas and Thanksgiving holidays.

<PAGE>


Report of Independent Public Accountants


To the Board of Directors and Shareholders of Unilab Corporation

We have  audited  the  accompanying  balance  sheets  of Unilab  Corporation  (a
Delaware  corporation)  as of  December  31,  1998  and  1997,  and the  related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three  years in the period  ended  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Unilab  Corporation  as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1998 in conformity
with generally accepted accounting principles.


ARTHUR ANDERSEN LLP




Los Angeles, California
February 12, 1999