SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the fiscal year ended December 31, 1999
                                -----------------

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

    For the transition period from __________ to __________

                           Commission File No. 0-22758

                               UNILAB CORPORATION
                               ------------------
             (Exact name of Registrant as specified in its Charter)

 Delaware                                         95-4415490
(State or other jurisdiction            (I.R.S. Employer Identification No.)
 of incorporation or organization)

  18448 Oxnard Street,  Tarzana, California           91356
  (Address of principal executive offices)          (Zip code)

                                 (818) 996-7300
                                 --------------
              (Registrant's telephone number, including area code)

Securities  registered  pursuant to Section  12(b) of the Act:  None  Securities
registered pursuant to Section 12(g) of the Act:

  Title of Each Class               Name of Each Exchange on Which Registered
  -------------------               -----------------------------------------
  Common Stock, $.01 par value          American Stock Exchange
                                       (through November 23, 1999)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed  by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirement for the past 90 days.

       Yes   X         No____
           -----

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

At November 22, 1999,  the day before the  Registrant  ceased to have its shares
publicly  traded as a result of a merger with an  affiliate  of Kelso & Company,
41,993,968  shares of Registrant's  Common Stock,  par value $.01 per share were
outstanding.  The  aggregate  market  value of the  Common  Stock,  based on the
closing price on the American  Stock  Exchange as of November 22, 1999,  held by
nonaffiliates of the Registrant was approximately  $210.8 million. The Company's
common stock has not traded publicly since November 23, 1999.


Page 1 of 42 pages.


<PAGE>

                                TABLE OF CONTENTS

Item                                                                    PAGE

Part I.   1  Business..............................................        5

          2  Properties  ..........................................       17

          3  Legal Proceedings.....................................       18

          4  Submission of Matters to a Vote of Security Holders
             .....................................................        18

Part II.  5  Market for the Registrant's Common Equity and
             Related Stockholder Matters  ........................        19

          6  Selected Financial Data  ............................        20

          7  Management's Discussion and Analysis of Financial
             Condition and Results of Operations..................        21

          7A.  Quantitative and Qualitative Disclosure
               of Market Risk.....................................        27

          8  Financial Statements and Supplementary Data .........        27

          9  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure..................        27

Part III.10  Directors and Executive Officers of the Registrant...        28

         11  Executive Compensation...............................        31

         12  Security Ownership of Certain Beneficial Owners
             and Management ......................................        36

         13  Certain Relationships and Related Transactions.......        37

Part IV. 14  Exhibits, Financial Statement Schedules and
             Reports on Form 8-K .................................        38

Signatures   .....................................................        39



<PAGE>


CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

         The Private  Securities  Litigation Reform Act of 1995 (the "Litigation
Reform  Act")  provides  a  "safe  harbor"  for  forward-looking  statements  to
encourage  companies to provide  prospective  information  about their companies
without  fear  of  litigation,  provided  those  statements  are  identified  as
forward-looking  and  are  accompanied  by  meaningful   cautionary   statements
identifying  important  factors  that  could  cause  actual  results  to  differ
materially  from those  projected  in the  statement.  Accordingly,  the Company
hereby identifies the following important factors that could cause the Company's
actual financial or operating results to differ materially from those projected,
forecast or estimated by the Company in forward-looking statements.

         The Company wishes to caution  investors that the following factors are
hereby  identified  as  potentially  important  factors  that  could  cause  the
Company's actual financial or operating  results to differ materially from those
projected,  forecast or estimated by the Company in  forward-looking  statements
contained in this Form 10-K.

(a)      Adverse actions by governmental or other  third-party  payors,
         including   Medicare  and   Medicaid,   including   unilateral
         reduction of fee schedules payable to the Company.

(b)      The impact of the  Company's  compliance  with  Medicare  and Medicaid
         administrative  and legal  policies,  including, specifically,  but
         without limitation,  the requirements by Medicare carriers that
         physicians provide diagnosis (ICD-9)  codes for certain tests in order
         for such tests to be deemed  "medically  necessary"  and,  therefore,
         reimbursed;  the policy of HCFA to eliminate  Medicare  reimbursement
         for tests contained in certain  commonly ordered  automated
         multichannel  chemistry panels (CPT Series  80002-80019) and the
         replacement of such panels in  1998  with  four  clinically  relevant
         test  groupings;   reimbursement  based  on  demonstrable  "medical
         necessity";  and, in connection with such "medical  necessity" issues
         and  compliance-related  recommendations made by governmental
         representatives  (including the recommendations made in the OIG Model
         Compliance Plan for Clinical  Laboratories, as amended), the Company's
         introduction  during 1998 of a new  requisition  form for
         ordering  chemistry tests and  introduction in 2000 of a new
         requisition form to reflect certain other CPT code changes.

(c)      Adverse  implications of the Company's  introduction of a new
         requisition form to meet the requirements set forth in (b) above.

(d)      Impact of  changes  in payor  mix,  including  the shift  from
         traditional,   fee-for-service   medicine  to  managed   care,
         including the increased shift of MediCal  testing  business to
         managed care.

(e)      Failure to properly contain costs and expenses.

(f)      Failure to obtain new or retain existing customers at profitable
         pricing.

(g)      Adverse results from any new governmental  investigations,  or
         liability from acquired  companies that have had  governmental
         investigations,  including in particular  significant monetary
         damages  and/or  exclusion  from  the  Medicare  and  Medicaid
         programs and/or other significant litigation.

(h)      Computer or other system  failures  that affect the ability of
         the Company to perform tests,  report test results or properly
         bill customers, including the Year 2000 issue.

(i)      Inability to obtain professional liability insurance coverage or a
         material increase in premiums for such coverage.

(j)      Denial of CLIA  certification or other licensure of any of the
         Company's  clinical  laboratories  under  CLIA,  by  HCFA  for
         Medicare and  Medicaid  programs or other  federal,  state and
         local agencies.


<PAGE>
                                     PART I

Item 1.         Business

General

                 Unilab  Corporation  ("Unilab" or the "Company") is the largest
independent  clinical  laboratory  testing  company  in  California,   providing
laboratory  testing services to physicians,  managed care groups,  hospitals and
other  health  care  providers.  The  Company  believes  that  its  revenues  in
California  for the year ended December 31, 1999 were more than twice the annual
sales in California of the next largest independent  clinical laboratory in that
market.  In May 1999, the Company completed the acquisition of substantially all
of the  assets  of  Bio-Cypher  Laboratories,  a  Sacramento,  California  based
independent  clinical lab, resulting in an increase of Unilab's estimated market
share from 20% to 25% of California's independent clinical laboratory market. In
November 1999, the Company  completed a "going  private"  transaction by merging
with an affiliate of Kelso & Company,  a New York investment firm ("Kelso") (the
"Kelso  Transaction").  As of December  31,  1999,  the Company  operated  three
centrally  located  full-service  laboratories,  approximately  40 strategically
located  short  turn  around  ("STAT")   laboratories  and   approximately   320
conveniently  located patient service centers ("PSC").  As of December 31, 1999,
the Company  processed on average  43,000  patient  specimens and performed over
100,000 test batteries per work day.

Facilities and Testing

                 Unilab   currently   operates   three   full-service   clinical
laboratories in San Jose, Tarzana (Los Angeles) and Sacramento, California which
offer over 1,000 clinical testing procedures,  ranging from routine screening to
advanced technical procedures,  used in the diagnosis,  monitoring and treatment
of diseases and other medical  conditions.  Unilab  operates 24 hours a day, 365
days a year,  utilizing a fully  integrated  collection and  processing  system.
Patient  specimens are collected  from client offices or Unilab's own collecting
stations and efficiently transported to full-service or STAT laboratories, where
each  specimen and related test  request form is checked for  completeness,  bar
coded and  entered  into  Unilab's  computer  system  for  testing  and  billing
purposes.  Laboratory technicians then perform the requested tests, with results
generally  available  to  clients  the  next  morning  electronically.  Unilab's
clinical computer program keeps track of patients' samples, reports test results
in a readable format and maintains records and billing information.

                 Tests  performed  by Unilab  measure the levels of, and analyze
chemical and cellular  components in, human body fluids and tissue, and are used
in the diagnosis,  monitoring and treatment of disease.  They include procedures
in the areas of blood chemistry,  hematology,  urine chemistry, tissue pathology
and cytology,  among others.  Commonly ordered  individual tests include red and
white blood cell counts, PAP smears,  blood cholesterol level tests,  urinalysis
and procedures to measure blood sugar levels and to determine pregnancy. Routine
test groups include tests to determine the function of the kidney,  heart, liver
and thyroid,  as well as other organs, and a general health screen that measures
several  important  body  health  parameters.  Many  of the  routine  tests  are
performed by automated equipment and are capable of being performed and reported
within a 24-hour period.  Approximately 85% of the tests conducted by Unilab are
considered to be routine. Reports are generally sent electronically to equipment
installed by Unilab in the physicians' offices.

                 Unilab also conducts esoteric testing services.  Esoteric tests
generally require complex manual techniques,  a higher degree of technical skill
and knowledge and sophisticated equipment. As a consequence,  esoteric tests are
priced higher than routine  tests.  Two examples of esoteric  tests  provided by
Unilab  include  immunoelectrophoresis,  used for the  diagnosis  of  autoimmune
disorders and myelomas,  and hepatitis markers,  used for the diagnosis of acute
hepatitis A and B and for  identification of chronic carriers of these diseases.
The number of esoteric tests performed by the Company has been increasing as new
medical discoveries are made and testing procedures  developed.  Unilab performs
approximately  98% of the tests requested by its clients,  with the remaining 2%
performed by third party reference laboratories or pathologists with whom Unilab
contracts.  On a revenue  basis,  approximately  6% of testing fees collected by
Unilab are paid to third party reference laboratories or pathology services.

Customers

         Unilab  provides  testing  services  to a broad  range of  health  care
providers.  The following  factors,  among others, are often used by health care
providers in selecting a  laboratory:  (1) service  capability  and  convenience
offered by facilities,  including  accessibility  of PSCs and local STAT testing
availability;  (2) size and scope of testing services  performed;  (3) accuracy,
timeliness  and  consistency  in reporting  test results;  (4) reputation in the
medical  community and (5) pricing of the  laboratory's  testing  services.  The
Company's primary customer types are described below:

     o    Physicians and Physician  Groups.  Physicians  performing  testing for
          their patients who are  unaffiliated  with a pre-paid  health plan are
          the principal  source of the  Company's  clinical  laboratory  testing
          business.  These physicians often participate in independent physician
          associations   ("IPAs")  to  achieve  greater  local  recognition  and
          contracting leverage. When Unilab provides contracted testing services
          to physicians  who belong to IPAs,  the IPA is usually  billed under a
          capitated  arrangement.  Otherwise,  services rendered for physicians'
          non-managed  care  patients are billed to various other payors such as
          insurance, client bill, Medicare or Medicaid.

    o     Health  Maintenance  Organizations and Other Managed Care Groups.
          HMOs and other managed care payors,  which designate the laboratory to
          be used for tests ordered by the  physician,  represent a substantial
          portion of Unilab's  business. HMOs  generally select an  independent
          laboratory  based on  competitive  pricing  offered to high volume
          customers, capability of the  laboratory  to  effectively  service
          incremental  blocks of business,  field  distribution  system,
          including couriers and PSCs to service their networks of physician
          providers,  and the reputation of the laboratory in the  medical
          community.  We believe  that  Unilab  services  more  managed  care
          contracts  than any other lab in the California  marketplace, and that
          the Company has become a preferred lab services provider to managed
          care for several reasons.  First,  Unilab has a state-wide  presence,
          which gives  managed care clients the ability to partner with one lab
          subcontractor that has state-wide  coverage,  instead of several
          subcontractors with limited geographic  coverage. Second,  internal
          cost-efficiencies  allow  Unilab to offer competitive  pricing to the
          cost-conscious  managed care community. Third, Unilab possesses
          considerable expertise in addressing the needs and issues of managed
          care payors.

     o    Hospitals.  Unilab provides both esoteric testing for hospitals, which
          often are not  equipped  to  perform  such  sophisticated  tests,  and
          general   reference  testing  for  hospitals  which  have  reduced  or
          eliminated  their  in-hospital  laboratory  testing  in an  attempt to
          reduce their cost of  delivering  patient  care.  The  selection of an
          independent  laboratory by hospitals is usually based on reputation of
          the  laboratory in the medical  community,  type of services  offered,
          accuracy,  timeliness and  consistency of test results and competitive
          pricing.

     o    Independent  Laboratories.  Unilab  also  provides  reference  testing
          services to independent clinical laboratories which do not have a full
          range of testing capabilities.

     o    Clinics.  The  Company  has  arrangements  with  a  broad  network  of
          community  health clinics across the state of California  that provide
          preventive  health care and/or medical  attention for the lower-income
          and indigent patient population (frequently MediCal recipients). Under
          these arrangements, Unilab is the primary provider of testing services
          for patients who choose to use these clinics.

                 California has the highest enrollment rate (approximately 40%
of the population) in managed care plans of any state in the country and, as a
result, delivery of health care to participants in such plans has become
integral to the health care delivery system throughout the state.  The
proliferation of managed care providers in the healthcare industry has altered
the customer base of healthcare service providers, especially in California.
From 1993 to 1994, Unilab more than doubled its number of covered lives (i.e.,
individuals covered by contracts between pre-paid health plans and Unilab for
the provision of laboratory services) to over 2 million lives.  During 1995 the
Company continued to serve a similar number of covered lives, and during the
first half of 1996, increased its managed care coverage to over 2 1/2million
lives. Today, Unilab serves approximately 3.8 million managed care lives.
This business had historically been viewed as having substantial value, in
large part because of the economies of scale inherent in its considerable
volume.  It was also viewed as a competitive advantage in obtaining additional
non-managed care business generated from many of the same offices which were
serving managed care patients.  Increasingly, Unilab, like other major
laboratory companies, came to recognize that the pricing received in relation
to the cost of services provided to managed care patients was disproportionately
low, and the Company undertook a concerted effort in 1997 to improve the
situation.  To this end, Unilab renegotiated contracts representing
approximately two-thirds of the covered lives and received an average price
increase in excess of 50% on those renegotiated contracts.  By year-end 1998,
Unilab had once again repriced the capitation rates on approximately 40% of its
managed care lives at an average increase of greater than 30%.  During the
course of 1999, the Company negotiated approximately 15% of covered lives at an
average increase of approximately 30%.  In addition, these contracts have
increasingly been structured so that they exclude unlimited high cost services,
such as high labor-intensive pap smears and outsourced esoteric tests.  Unilab
is committed to providing high quality laboratory testing at profitable pricing
levels.

Specimen Collection and Processing

                 Unilab utilizes an extensive distribution and collection system
of approximately 420 collection routes, approximately 320 PSCs and approximately
35 courier hubs to achieve  efficient  and  integrated  collection  and testing.
Courier routes are logically designed based on lab location,  geographic density
and specimen  volume.  Strategically  located  full  service labs and  satellite
courier "hubs" serve as control  centers to ensure courier  routing is efficient
and tightly  controlled.  In addition,  PSCs act as initial specimen  processing
centers,  effectively  putting  control of the  specimen in Unilab's  possession
earlier in the process. The Company believes this distribution infrastructure is
integral to providing efficient, convenient and reliable service to its clients.

Quality Assurance

                 Unilab believes that its quality  assurance  procedures meet or
exceed  the  highest  standards  in  the  industry.  Unilab  has  established  a
comprehensive  quality  assurance  program for all of its laboratories and other
facilities to ensure that  specimens are  collected  and  transported  properly,
tests are performed  accurately,  and client,  patient and test  information are
reported,  billed  and filed  correctly.  Unilab's  quality  assurance  programs
include  (i)  preventive  maintenance  of  laboratory  testing  equipment,  (ii)
maintenance  of high  personnel  standards and training  which require that only
qualified  personnel  perform  testing,  (iii)  rigorous  utilization of control
specimens in order to ensure accuracy and precision of test equipment,  and (iv)
a  tightly  managed  collection  and  distribution  network.  In  addition,  all
laboratories certified by the Health Care Financing  Administration ("HCFA") for
participation in the Medicare program under the Clinical Laboratory  Improvement
Amendments of 1988 ("CLIA"),  such as Unilab,  must participate in basic quality
assurance programs.  Each of Unilab's laboratories is licensed (or has licensure
pending) by its respective  state  authorities and is also certified by HCFA for
participation in the Medicare program under CLIA.

                 In addition,  Unilab  participates  in a number of  independent
proficiency   testing   programs.   Participation  in  a  federally   recognized
proficiency  testing program is a requirement of CLIA. Under these programs,  an
independent testing authority submits pre-tested samples to a laboratory.  These
tests  measure the  laboratory's  test results  against known  proficiency  test
values.  Unilab also  participates in a number of proficiency  testing  programs
which generally entail submitting  pre-tested  samples to a laboratory to verify
the laboratory  test results  against the known  proficiency  test value.  These
proficiency  programs are conducted both by Unilab on its own and in conjunction
with groups such as the College of American  Pathologists ("CAP"), and state and
Federal government regulatory agencies.  CAP is an independent  non-governmental
organization  of board  certified  pathologists  which  offers an  accreditation
program to which laboratories can voluntarily  subscribe.  The CAP accreditation
program involves both on-site inspections of the laboratory and participation in
CAP's proficiency  testing program for all categories in which the laboratory is
accredited by CAP. CAP's proficiency testing program is federally recognized for
purposes of CLIA. A laboratory's  receipt of  accreditation by CAP satisfies the
Medicare   requirement  for   participation  in  proficiency   testing  programs
administered by an external source. Each of Unilab's  full-service  laboratories
in Sacramento, San Jose and Tarzana has earned full accreditation by CAP. In the
1999  External  Proficiency  Testing  Program  conducted by CAP at the Company's
three  primary  laboratories,  the total  accuracy  rate for all sections of the
laboratories  was 99.4%.  The total accuracy rates for 1996-1998  ranged between
99.4% and 99.5%, slightly better than the 1995 cumulative accuracy rate of 99.3%
and the 1994 cumulative accuracy rate of 99.2%.

Regional Operations, Sales, Service and Marketing

                 As of December 31,1999, Unilab's sales and service organization
was comprised of approximately 75 full-time sales and sales/service employees.
Sales representatives are primarily responsible  for  executing   focused  sales
initiatives    established   within   their   regions,    while    sales/service
representatives  are primarily  responsible for account  retention and enhancing
client  relations  (although they also have defined  selling  responsibilities).
This separation  between  "selling" and "servicing" is a key feature of Unilab's
sales  organization,  in that sales/service staff specialize in their respective
disciplines.  Incentive compensation paid on new sales  generation--achieved  by
either sales or sales/service representatives--is designed to recognize the cost
of supporting  the new business and reward the  dedication to client support and
client retention.

                 Unilab's  marketing  department  is committed to promoting  the
Company's  mission of  maintaining  high quality and  cost-effective  laboratory
services that are responsive to the values and needs of patients and physicians.
Unilab promotes this mission and other Company  initiatives through the creation
and targeted  dissemination  of marketing  materials to clients and prospects by
Unilab's sales and sales/service representatives (as well as Unilab's couriers).
More  specifically,  Unilab's  marketing  initiatives and materials address four
distinct objectives:

o Enhance medical community  awareness of Unilab's full spectrum of services;  o
Promote and sell new services and technological  advances;  o Educate clients on
regulatory and compliance issues that will affect the medical  community;  and o
Address customer needs and concerns about new testing procedures.

                 These  marketing   initiatives   are   prioritized   through  a
collaborative effort among senior management,  sales and sales/service employees
and other relevant departments.

Acquisitions

                 Unilab's  management,  while  employed  by the  Company  or its
predecessor,  has successfully  executed and integrated a number of acquisitions
in the clinical  laboratory  industry,  which have  accounted  for a substantial
portion  of the  Company's  growth.  The  November  1998  acquisition  of  Meris
Laboratories and the May 1999 acquisition of Bio-Cypher  Laboratories  served in
large part to increase market share from  approximately 15% to approximately 25%
of California's  independent clinical laboratory testing market.  Unilab intends
to selectively  seek  acquisitions  designed to result in cost savings and other
benefits  resulting  from the  elimination or reduction of (i)  redundancies  in
testing  equipment  and  personnel,   (ii)  overlapping  courier  routes,  (iii)
overlapping  PSCs  and  STAT  laboratories,   (iv)  duplicative   administrative
personnel and (v) redundant  marketing efforts and personnel.  The Company seeks
to achieve  consolidation  efficiencies within six months after completion of an
acquisition.

Bio-Cypher Acquisition

                 On April 5, 1999, the Company signed a definitive  agreement to
acquire substantially all of the assets of Physicians Clinical Laboratory (doing
business  as  Bio-Cypher  Laboratories),  second  only  to  Unilab  in  size  in
California, with 1998 revenues of $60 million. The transaction closed on May 10,
1999.

                 The purchase price consisted of a $25.0 million  subordinated
promissory  note,  the issuance of 1.0 million shares of Unilab  common  stock
and  approximately  $8.6  million  of cash.  In addition, Unilab acquired $8.8
million of tangible assets, the majority of which were trade accounts
receivable,  and assumed  liabilities of approximately $3.5 million.

                 Within  approximately six months after closing the transaction,
the Company had  substantially  integrated the Bio-Cypher  business and realized
much of the significant synergies available in the consolidation.

Kelso Transaction

                  Effective November 23, 1999, Unilab completed a merger with
and into an affiliate of Kelso.  As a result, Kelso acquired approximately 93%
of the Company's common stock, which had previously been widely held and traded
on the American Stock Exchange.  Upon completion of the Kelso Transaction, the
Company's common stock ceased to trade on the American Stock Exchange. The Kelso
Transaction did not, however, result in any material change to the Company's
operations, except that the Company's previous Chairman and CEO, David Weavil,
relinquished his position as CEO and Robert E. Whalen was appointed to that
position.

The Clinical Laboratory Industry

Overview and Trends

                 Unilab believes,  based on published industry reports, that the
total U.S. clinical  laboratory market during 1999 was approximately $30 billion
in annual revenue, of which the California market accounted for approximately $4
billion.  Even after years of industry  consolidation,  the clinical  laboratory
testing market nationally,  and particularly in California, is highly fragmented
and composed of three  segments:  (i)  laboratories  located in hospitals;  (ii)
laboratories  located in physicians' offices and  physician-owned  laboratories;
and (iii)  independent  clinical  laboratories.  Industry  sources estimate that
there are  currently  fewer than 4,500  independent  clinical labs in the United
States,  with as many as 600 located in  California.  The Company  believes that
approximately 55% of clinical  laboratory  testing revenues in California result
from tests  performed by  hospitals,  15% from tests  performed by physicians in
their offices and  physician-owned  laboratories and 30% from tests performed by
independent  laboratories.  The Company believes that the consolidation trend of
the last  several  years is likely to continue,  resulting in fewer  independent
clinical labs both nationally and in California.

                 Clinical laboratory testing continues to be an integral part of
the  delivery  of health care  services in the United  States due to a number of
factors, including: (i) the aging of the U.S. population, resulting in increased
utilization of testing services; (ii) an increase in the number of routine tests
and esoteric tests due to advances in technology and scientific knowledge; (iii)
increased  automation in testing  procedures  due to the  development  of highly
automated   laboratory   testing   equipment   which  has  resulted  in  greater
efficiencies in testing  operations;  (iv) increased  awareness among physicians
and the general  public  concerning  the  importance of preventive  medicine and
early  detection;  and (v)  increased  use of tests by  physicians as protection
against potential  malpractice suits. Unilab believes that there will be further
opportunities  for independent  laboratories to capture certain testing from the
market  currently  served by  hospital  and  physician  office  laboratories  by
focusing on the cost and service advantages which large independent laboratories
like Unilab have with respect to high volume,  non-emergency  testing.  However,
the number of clinical  laboratories  has declined as hospitals  and  physicians
have exited the clinical  laboratory  business and consolidation has occurred in
the  independent  laboratory  segment.  Moreover,  as a result of certain recent
required  changes  in the  billing  and  collecting  of  Medicare  and  Medicaid
payments, more detailed procedures have been required,  complicating the billing
and collection process and making such processes more expensive.

California Market

                 California  is the single  largest  state  clinical  laboratory
market in the U.S., accounting for approximately 12% of the country's laboratory
testing  revenues.  The Company  believes that  consolidation  in California has
occurred and will  continue  for reasons  similar to those which have caused the
industry  nationwide to  consolidate,  such as: (i) the cost of compliance  with
increasingly  stringent  regulatory  requirements;  (ii) the  cost  efficiencies
afforded  by  large-scale  automation  of  routine  testing;  (iii)  legislative
developments,  such as restrictions on physician self-referrals and ownership of
laboratories;  (iv) reductions in Medicare and other third-party reimbursements;
(v) the growth of HMOs and other  managed  care groups which  require  efficient
testing services from high-capacity laboratories; (vi) the increasing demand for
sophisticated  equipment  and  management  information  systems  that tend to be
prohibitively expensive for small laboratories;  and (vii) the competition for a
limited supply of qualified laboratory personnel. The Company has focused on the
California clinical  laboratory market because of (1) its size and density,  (2)
the high degree of fragmentation  and prospects of continued  consolidation  and
(3)  Unilab's  current  leadership  position in the market and the  prospects of
leveraging this status across the state.

Strategy

                 Unilab's objective is to build upon its position as the largest
and low cost provider of clinical laboratory testing services in California both
to provide quality and valued services to its customers and to earn a profitable
return for its stake-holders. The Company's business strategy for achieving this
objective  is to  maintain  superior  quality  and  service,  provide  ancillary
services commensurate with the value which its customers place on them, maintain
its position as a low cost provider,  conduct its billing and business practices
in an appropriate, efficient, effective, and responsible manner and grow through
organic growth and acquisitions.  Similar to the actions taken in 1997, 1998 and
1999, the Company also intends to closely monitor and, where appropriate, reduce
its expense  base,  while  simultaneously  taking  steps to increase its revenue
stream through higher pricing and selected acquisitions.

Governmental Regulation

                 Numerous aspects of Unilab's operations,  including its testing
processes,  its business practices and in some instances, the amount and methods
by which it is paid,  are subject to  governmental  regulation  at the  Federal,
state and/or local levels.

Federal and State Clinical Laboratory Licensing

                 All clinical laboratories  operating in the United States, with
limited  exceptions,  are required to obtain Federal  certification  pursuant to
CLIA and its implementing regulations.  The law and its implementing regulations
impose,  as conditions  for such  certification,  requirements  relating to test
processes,  personnel qualifications,  facilities and equipment,  recordkeeping,
quality control, quality assurance and participation in proficiency testing. The
same regulatory  requirements  also apply as conditions for participation in the
Medicare  and  Medicaid  programs.   CLIA  regulations  vary  depending  on  the
complexity  of the  methodologies  performed by the  laboratory.  Compliance  is
verified  by  periodic  on-site  inspections.  Sanctions  for  failure  to  meet
CLIA/Medicare  certification  requirements  include  suspension or revocation of
certification,  criminal penalties,  injunctive actions to close the laboratory,
civil  penalties or imposition of specific plans of correction to remedy alleged
deficiencies.

                 Licensing  requirements  similar to those  imposed  pursuant to
CLIA also apply at the state level, with similar sanctions for noncompliance. In
1999 California  received deemed  equivalency status under CLIA, which is formal
recognition by the federal government that California quality  requirements meet
or exceed CLIA levels.  Notwithstanding  compliance costs,  Unilab regards these
licensing  requirements  as  beneficial  to the  industry  and  favorable to its
business  because  the  CLIA  certification   requirements  apply  not  only  to
independent  laboratories  but to all  clinical  laboratories,  with only narrow
exceptions  for  those   facilities   performing  a  limited  number  of  simple
procedures.   Additionally,   in   California   specific   proficiency   testing
participation  is required for those  laboratories,  like  Unilab,  that perform
testing to detect the presence of the human immunodeficiency virus ("HIV").

Federal and State Billing and Fraud and Abuse Laws

     General.  The Federal Medicare laws impose specific billing requirements on
clinical  laboratories  and a wide  array of  Medicare/Medicaid  fraud and abuse
provisions apply to those clinical laboratories participating in these programs,
including  Unilab.  These laws prohibit,  among other things,  the submission of
false claims or false  information  to the  programs,  deceptive  or  fraudulent
conduct,  the  provision  of excessive  or  unnecessary  services or services at
excessive prices and the offer or receipt of broadly defined inducements for the
referral of Medicare,  Medicaid or other federal health care program patients or
business.  Penalties for violations of these Federal laws include exclusion from
participation  in  the  Medicare/Medicaid  programs,  asset  forfeitures,  civil
penalties and criminal  penalties.  Civil penalties for a wide range of offenses
may be up to $50,000  per item and treble  the  amount  claimed.  In the case of
certain severe offenses,  exclusion from  participation in Medicare and Medicaid
is a  mandatory  penalty.  These  fraud and  abuse  provisions  are  interpreted
liberally and enforced  aggressively  by the various  enforcing  agencies of the
federal government.

     Governmental  Oversight.  Several  Federal  agencies  are charged  with the
responsibility of investigating allegations of fraudulent and abusive conduct by
health  care  providers.   These  agencies  include,  without  limitation,   the
Department of Justice ("DOJ"),  Federal Bureau of Investigation  ("FBI") and the
Office of  Inspector  General  ("OIG")  of the  Department  of Health  and Human
Services  ("HHS").  Additionally,  Medicare carriers and Medicaid state agencies
now have  certain  fraud  and  abuse  control  authority.  According  to  public
statements by the DOJ, health care fraud has been elevated to the second-highest
priority of the DOJ,  and FBI agents have been  transferred  from  investigating
counterintelligence  activities to health care provider fraud.  The OIG has been
and continues to be actively  involved in such  investigations  and has targeted
certain  laboratory  practices for study,  investigation and prosecution.  These
practices  include,  without  limitation,  (1)  offering  packages  of  tests to
physicians  (referred to as "panels" or  "profiles"  of tests) and  "unbundling"
them into several tests to obtain higher reimbursement;  (2) "upcoding" tests to
realize  higher  reimbursement  than  appropriate;  (3) offering  inducements to
physicians  (for example,  providing  free fax machines or  computers,  free lab
services   to  the   physician,   his  family  and  staff,   paying  rent  to  a
physician-landlord  in  excess  of fair  market  value,  and the  collection  of
hazardous waste from the  physician's  office without charge) in order to induce
the  physician to refer  testing  business  (including  business for Medicare or
Medicaid patients) to the lab; (4) charging for tests not actually performed and
(5)  duplicate  billing.  Such  projects  culminated  during  the  1990's in the
industry-wide  governmental  "LabScam"  investigations  that  have  resulted  in
approximately  $800 million of  aggregate  settlement  payments  being made by a
number of  independent  clinical  labs in the past  several  years.  The LabScam
investigation  appears to be  ongoing  and HHS and HCFA have  announced  several
anti-fraud  initiatives in 1999. The 1999 HCFA anti-fraud initiative responds in
part to a recent OIG report estimating that, in 1998, 7% of Medicare claims were
billed improperly or erroneously.

     Federal Legislation and Regulation.  A Federal "self-referral" law commonly
referred to as the "Stark" law prohibits  Medicare payments for laboratory tests
referred  by  physicians  who,  personally  or through a family  member,  have a
financial   interest,   including   "ownership   interests"  and   "compensation
arrangements," in the testing laboratory. Sanctions for laboratory violations of
the  prohibition  include  denial of  Medicare  payment,  refunds,  civil  money
penalties  of up to  $15,000  for  each  service  billed  in  violation  of  the
prohibition and exclusion from the Medicare  program.  Legislations  relating to
Stark law have been  proposed  in  Congress,  but not yet  adopted,  which could
narrow the scope of the law's applicability.

                  In 1996,  Congress  passed and the  President  signed into law
HIPAA,  frequently  referred  to  as  the  "Kennedy-Kassebaum  Act",  after  its
principal Senatorial  sponsors.  The law made major changes in federal fraud and
abuse laws  applicable to health care  providers.  It  established a new federal
program designed to coordinate federal,  state and local fraud and abuse control
programs.  The  law  permitted  the  DOJ  and  the  OIG to  conduct  audits  and
investigations  relating to the  delivery  of health care in the United  States,
without  limitation to Medicare and Medicaid,  and established a Fraud and Abuse
Trust  Fund.  In  May  1999,  HCFA  announced  the  engagement  of a  number  of
non-governmental  health care audit  organizations  to assist the  government in
tracking and collecting fraudulent billings for healthcare services.  HIPAA also
expanded the federal anti-kickback law so that it applies not only to situations
involving Medicare and Medicaid,  but to almost all federally funded health care
programs.  In addition,  the law for the first time permits  providers to obtain
advisory  opinions  from the  government  concerning  the  legality  of  certain
contemplated   practices  under  the   anti-kickback   law;  the  OIG  published
regulations  implementing  this  advisory  opinion  mandate in February 1997 and
amended those regulations in 1998. The  Kennedy-Kassebaum law also significantly
increased the  penalties  for certain  civil  violations of the Medicare law and
increased  the types of offenses  for which a provider  could be  excluded  from
Medicare/Medicaid.  Finally,  the  law  established  a  number  of new  criminal
provisions applicable to health care fraud.

                  The Balanced Budget Act of 1997 ("BBA '97") contains  numerous
changes  in  Medicare/Medicaid  fraud and  abuse  provisions.  BBA '97  requires
permanent  exclusion  from Medicare and Medicaid for persons  convicted of three
health  care-related crimes and a 10-year exclusion period for persons convicted
of certain  offenses who have one previous  conviction.  The statute permits the
Secretary of HHS to refuse to enter into Medicare participation  agreements with
individuals or entities that have been convicted of felonies.  In addition,  BBA
'97 expands the reach of  Medicare/Medicaid  civil money  penalties  to apply to
persons who arrange or  contract  with  excluded  persons for the  provision  of
covered  services.  Further,  the statute includes a provision  permitting civil
money  penalties of up to $50,000 per violation for certain  specified  types of
violations,  plus damages equal to three times the total amount  offered,  paid,
solicited or received,  for  violations of the  Medicare/Medicaid  anti-kickback
statute.  Finally,  BBA '97  requires  the  Secretary  of HHS to issue  advisory
opinions   regarding   potential   violations  of  the  Stark  law   prohibiting
Medicare/Medicaid  physician  self-referral for designated health services other
than laboratory testing services.

                  It should be noted  that,  among the many  federal  provisions
available to enforcement authorities in connection with health care offenses, an
especially potent remedy is exclusion from Medicare,  Medicaid and other federal
health care  programs.  Particularly  significant  is the  permissive  exclusion
authority  of the OIG,  the  principal  threat  that has brought  many  clinical
laboratories to the settlement table in the LabScam operation. In December 1997,
the OIG released non-binding  guidelines  indicating the criteria it will use in
making permissive exclusion decisions.  These criteria address the circumstances
and  seriousness of the offense,  the defendant's  response to allegations,  the
likelihood of  reoccurrences  of the same or similar  offenses,  and whether the
provider can continue  participating  in federal health care programs  without a
real threat of bankruptcy or to its ability to provide quality care.

     State Legislation and Regulation. At the state level, laboratory operations
are  affected  by billing  requirements  applicable  to all  laboratory  testing
services and state fraud and abuse and anti-inducement laws that similarly apply
to all laboratory testing services. California, where Unilab conducts almost all
of its business,  has adopted especially  stringent laws of this type, including
an  expansive  anti-referral  law that is even  broader than the federal law (CA
Bus. Prof.  Code ss.650) and the Physician  Ownership and Referral Act, known as
the "Speier Bill",  which became effective  January 1, 1995 and which prohibits,
under most  circumstances,  referrals of clinical laboratory testing business by
physicians to  laboratories  in which the physician has a "financial  interest".
Penalties  for  violation  of  these  provisions  can  include  fines,  criminal
penalties and disciplinary  action against  referring  physicians.  In addition,
California  has adopted the  "Calderon"  law, which  prohibits  physicians  from
"marking up"  laboratory  bills for lab services the  physician did not perform.
Unilab believes the Calderon law benefits  independent  laboratories by reducing
the financial incentives for physician-owned laboratories.

     Governmental  Investigations  of Unilab.  In August 1993, Unilab received a
subpoena  from HHS in  connection  with an  investigation  and  internal  review
relating  to the  possible  submission  of false or  improper  claims  under the
Medicare and Medicaid programs.  The HHS subpoena required production of a broad
range of documents,  including those relating to the Company's selling,  pricing
and billing practices. The HHS subpoena concerned fourteen tests, including five
tests that were the  subject of the  Company's  civil  claims  settlements.  See
"Legal   Proceedings--Department   of  Justice  Settlement".   Unilab  completed
production  of these  documents  in  February  1994.  The  Company  did not hear
anything further on the matter thereafter.

                  In August 1995, Unilab received a subpoena from HHS requesting
certain  information  with  respect  to  the  Company's  marketing  and  billing
practices  for CBC,  a  diagnostic  test  which  was not  included  in any prior
subpoena or any of the settlements entered into by Unilab in September 1993 (the
"Settlements").  See, "Legal Proceedings--Department of Justice Settlement". The
Company  promptly  completed  production of all documents in response to the HHS
subpoena  and  cooperated  fully in the HHS  investigation.  Unilab  reached  an
agreement  with the Federal  government in September 1996 to pay $4.0 million to
conclude  this  investigation.  In addition,  in October  1996,  Unilab paid the
California  MediCal  program  approximately  $160,000 to settle all their claims
regarding the same issue. The settlements did not constitute an admission by the
Company  with respect to any  allegation,  issue of law or fact arising from the
investigation and Unilab received a full civil and  administrative  release from
all claims by the government with respect to these billings  through the date of
the settlement agreement.

                  In May 1999,  Unilab  learned of a new  federal  investigation
under the False Claims Act relating to the Company's  billing  practices for the
following four test procedures:  (1) apolipoprotein in conjunction with coronary
risk  panel  assessments;   (2)  microscopic   evaluation  in  conjunction  with
urinalysis; (3) performance of T7 index in conjunction with T3 and T4 tests; and
(4)  fragmenting  billing of  unlisted  panel  codes.  Unilab has  gathered  and
voluntarily  submitted  documentation  to the DOJ  regarding  the two tests with
respect to which the DOJ has requested  information.  The Company cannot at this
time assess what the result of the investigation might be. Remedies available to
the  government   include  civil  and  criminal  penalties  and  exclusion  from
participation  in federal  health care  programs  such as Medicare and Medicaid.
Application  of these  remedies  could have a material  adverse  effect upon the
Company's business, financial condition, results of operations or prospects.

     Unilab's Compliance Program. In recent years, it has been OIG's practice to
require labs that enter into  government  settlements  with respect to marketing
and billing  practices to enter into  corporate  integrity  agreements  ("CIA").
Under the CIA, the lab is required to adopt and comply with  various  procedures
for implementing a compliance program, including training programs,  preparation
of policy and procedure  manuals and  dissemination of educational  materials to
the workforce. OIG in 1997 proposed and publicly disseminated a Model Compliance
Plan,  which it revised  slightly in 1998,  to serve as guidance for  laboratory
compliance programs.

                  Unilab was not  required  to enter into a CIA when the Company
reached  two  government  settlements  in 1993 and  1996.  However,  Unilab  has
voluntarily adopted a compliance program that substantially meets the guidelines
described in the Model Compliance Plan. The Company has established a Compliance
Committee, comprised of its senior officers. The compliance program is run under
the  supervision  of the Director of  Compliance,  who reports to the  Company's
General Counsel.  Both the General Counsel and the Director of Compliance update
the Board of Directors on compliance matters on a regular basis.

                  In November 1998,  Unilab  acquired  substantially  all of the
assets of Meris  Laboratories,  Inc. At that time,  Meris had a CIA with the OIG
arising  from the  settlement  of claims  against  Meris  asserted by the United
States in connection with its LabScam investigations. As part of the purchase of
the Meris  assets  and in lieu of  assuming  the Meris CIA,  Unilab  voluntarily
entered into an agreement with the OIG entitled  "Compliance  Program Disclosure
Agreement" (the "Unilab-Meris/OIG Agreement"). Pursuant to this Agreement Unilab
will maintain its hotline,  undertake special billing audits of the former Meris
facilities,  obtain new CLIA  certifications and provider numbers for the former
Meris   facilities,   and  provide   certain   information   to  the  OIG.   The
Unilab-Meris/OIG Agreement will expire on March 31, 2000.

                  In May 1999,  Unilab acquired  substantially all of the assets
of Bio-Cypher Laboratories.  Bio-Cypher, like Meris, was party to a CIA with the
OIG, resulting from a prior settlement of claims against Bio-Cypher arising from
the LabScam  investigation.  In connection  with the acquisition of Bio-Cypher's
assets,  and in lieu of assuming  Bio-Cypher's  CIA  obligations,  in June 1999,
Unilab again voluntarily entered into a Compliance Program Disclosure  Agreement
(the "Unilab-Bio-Cypher/OIG  Agreement"). The Unilab-Bio-Cypher/OIG Agreement is
substantially  similar  to the  Unilab-Meris/OIG  Agreement  and will last until
August 9, 2000.

   Reimbursement

                  Medicare   reimbursement  for  clinical   laboratory   testing
services  is made  pursuant  to Medicare  fee  schedules,  subject to a national
limitation  amount ("cap") that is based upon the median of all the Medicare fee
schedules.  From the late 1980s to the 1990s, the cap on Medicare  reimbursement
dropped from 115% to 74% of the median of all the Medicare  fee  schedules.  BBA
'97 provides for a freeze on fee schedule  payments for 1998 through  2002.  The
President's FY2000 budget proposed a reduction of the Medicare fee schedule caps
to 72% of the laboratory fee schedule  medians,  beginning  January 1, 2000, but
Congress did not accept this proposal.  In addition, an expert panel considering
changes in Medicare has proposed  reinstatement  of beneficiary cost sharing for
diagnostic clinical laboratory services provided to Medicare patients,  although
it is not known whether the full Medicare Commission will agree to this proposal
or whether  any  congressional  action will be taken with regard to it. To date,
Congress has not adopted any proposed  legislation  regarding  beneficiary  cost
sharing.

     CPT Coding. Current Procedural Terminology ("CPT") codes form the basis for
the  coding  of  tests  billed  to  Medicare  and  Medicaid,  as well as to some
third-party  payors,   and,  thus,  coding  changes  may  substantially   affect
reimbursement  levels. CPT codes are periodically revised by the AMA. One of the
areas of the CPT code revision that has most affected  laboratory  reimbursement
levels is a change in the codes that designate  panel and profile tests, so that
numerous panel codes have been eliminated entirely and those remaining have been
given specific definitions for constituent tests for the first time. This coding
change  reduced  Unilab's  laboratory  reimbursement  and  that of the  clinical
laboratory  testing  industry  generally.  Other codes have been  eliminated  or
superseded by new codes, and codes have been added for new,  previously  uncoded
procedures.

                  A  substantial  CPT  revision  effective  as of April 1,  1998
included  numerous  new and revised  individual  and panel test codes  affecting
several laboratory specialties. The most significant changes again concern panel
codes. The 1998 CPT revision replaced the 19 pre-existing multichannel chemistry
profile codes with four  "clinically  relevant" test panels.  Effective April 1,
1998,  HCFA  directed  that  laboratories  could no longer bill Medicare for the
multichannel  chemistry  profiles,  but must use the new  "clinically  relevant"
panels  exclusively.  This  change  appears  to have had an  adverse  effect  on
revenues  and  operating  costs of the  clinical  laboratory  testing  industry,
including Unilab. Further changes were made in the CPT manual for 1999 and 2000.
It is  currently  unclear what effect,  if any,  these  changes will have on the
Company.

Drug Testing

                  Drug testing for public  sector  employees is regulated by the
Substance Abuse and Mental Health Service Administration  ("SAMHSA"),  which has
established  detailed  performance and quality  standards that laboratories must
meet in order to be approved to perform drug testing on employees of the Federal
government,  Federal government  contractors and certain other entities.  To the
extent  that Unilab  performs  such  testing,  it must be  certified  as meeting
SAMSHSA    standards.    Unilab's   Tarzana   (Los   Angeles)    laboratory   is
SAMSHSA-certified.

Occupational Safety

                  In addition to its  comprehensive  regulation of safety in the
workplace,  the Federal Occupational Safety and Health  Administration  ("OSHA")
has adopted rules that  establish  extensive  requirements  related to workplace
safety for health care employers, including clinical laboratories, whose workers
may be exposed to bloodborne pathogens.  These regulations,  among other things,
require work practice  controls,  protective  clothing and equipment,  training,
medical follow-up, vaccinations and other measures designed to minimize exposure
to, and  transmission of,  bloodborne  pathogens such as HIV and the hepatitis B
virus. OSHA has also adopted rules establishing  safety requirements for the use
of chemicals as reagents and for other purposes.

                 At the state level, California imposes occupational safety and
health requirements administered by the California Occupational Safety and
Health Administration.

Food and Drug Regulation

                 The Federal Food and Drug  Administration  ("FDA")  administers
laws that require  pre-marketing  approval for medical  devices,  including test
kits used in performing clinical laboratory procedures.  The FDA's pre-marketing
approval  requirements  can affect  the  availability  of test kits to  clinical
laboratories such as Unilab.

Controlled Substances

                 The use of controlled  substances in testing for drugs-of-abuse
is regulated by the Federal Drug Enforcement Administration.

Specimen Transportation

                 Regulations  of the  Department of  Transportation,  the Public
Health Service,  and the Postal Service apply to the  transportation of clinical
laboratory specimens.

Radioimmunoassay Testing

                 Radioimmunoassay  testing,  which is  performed  by  certain of
Unilab's  laboratories,  is subject to  regulation  and licensing by the Federal
Nuclear Regulatory Commission.

Environmental Compliance

                 As  with   all   clinical   laboratories,   each  of   Unilab's
laboratories  must comply with the  provisions  of numerous  federal,  state and
local statutes and  regulations  relating to public health and the  environment,
including: practices and procedures regarding the proper storage and labeling of
hazardous and toxic materials or other substances  associated with the operation
of clinical  laboratories and the proper management of medical waste,  hazardous
waste and  low-level  radioactive  waste  generated  by  operation  of  clinical
laboratories;  public  disclosure  requirements  regarding certain hazardous and
toxic  materials or other  substances  associated with the operation of clinical
laboratories;  employee  training  and  notification;  environmental  protection
requirements, such as standards relating to the discharge of pollutants into the
air, water and land; emergency response and remediation or cleanup in connection
with hazardous and toxic materials or other substances associated with operation
of  clinical  laboratories;   operation  and  remediation,   if  necessary,   of
underground  storage tank sites;  the removal,  encapsulation  or disturbance of
asbestos-containing  materials  when such  materials are in poor condition or in
the event of construction,  remodeling,  renovation or demolition of a building;
and other safety and health standards.

                 As  regulated  entities,  Unilab's  facilities  are  subject to
compliance  investigations  from numerous  governmental  agencies.  From time to
time, such  inspections have resulted in a notice of violation being issued to a
laboratory in connection with certain regulatory requirements,  e.g. labeling of
regulated substances.  In each such case, Unilab has responded to the inspecting
agency and the alleged  violation has been  addressed  without the imposition of
substantial  fines or  penalties.  Unilab  is not  aware of any past or  present
violation  which it believes  could have a material  adverse effect on Unilab or
its financial conditions or results of operations.

Competition

                 The  independent  clinical  laboratory  industry  in the United
States and in California is highly  fragmented and is  characterized  by intense
competition.  According  to HCFA,  there  are  approximately  4,500  independent
clinical  laboratories  in the  United  States,  approximately  600 of which the
Company  believes  are  located  in  California.   These  independent   clinical
laboratories fall into two separate categories. The first are the smaller, local
laboratories that generally offer fewer tests and services and have less capital
than  the  larger   laboratories.   These  laboratories  seek  to  differentiate
themselves  by  maintaining a close working  relationship  with their  physician
clients by providing a high level of personal and localized services.

                  The second group, which includes  laboratories such as Unilab,
consists of the larger regional or national  laboratories that provide a broader
range of tests and services.  In  California,  Unilab's two largest  independent
clinical   laboratory   competitors  are  Quest  Diagnostics   Incorporated  and
Laboratory  Corporation of America.  Quest acquired  SmithKline Beecham Clinical
Laboratories,   Inc.  in  1999,  which  had  been  one  of  Unilab's   principal
competitors.  The Company  believes  that it currently has  approximately  a 25%
share of the California  independent  clinical  laboratory testing market,  more
than twice that of its nearest  competitor.  Unilab expects to gain market share
from hospital  laboratories in the coming years. The hospital laboratory segment
accounts  for  approximately  one half of the $4.0 billion  California  clinical
laboratory  testing market and is  characterized  by a large number of primarily
cost center laboratories, as opposed to profit center laboratories, that operate
with low volumes and quick turn around times.

                 Unilab competes primarily on the basis of the following: (1)
service capability and convenience offered by facilities, including
accessibility of PSCs and local STAT testing availability; (2) size and scope
of testing services performed; (3) accuracy, timeliness and consistency in
reporting test results; (4) reputation in the medical community and (5) pricing
of the laboratory's testing services.  Competition for qualified personnel is
also intensifying as statutory requirements for the licensing of personnel
become more stringent.  Unilab believes that its extensive California facilities
provide easy access to its clients and quick reporting of results at competitive
prices.  It is expected that Unilab will be able to provide the full range of
required testing, either through its own testing capabilities or by utilizing
outside reference testing services contracted from third parties.

Employees

                  As of December 31, 1999, Unilab employed approximately 3,230
employees, none of whom were under union contract.  The Company believes
that its relations with employees are good.

Seasonality

                 The Company's  operations  experience  seasonal  trends that it
believes affect all clinical  laboratory  companies.  Testing volume tends to be
lower during  holiday  seasons and  inclement  weather.  As a result,  because a
substantial  portion of the  Company's  expenses are  relatively  fixed over the
short  term,  Unilab'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.

Item 2.          Properties

                 Unilab's corporate headquarters are located in leased offices
at 18448 Oxnard  Street,  Tarzana,  California  91356.  Unilab's  major regional
laboratories  are  located in the  following  metropolitan  areas:  Los  Angeles
(Tarzana), California; San Jose, California; and Sacramento, California.

                 Unilab leases its  laboratory  facilities  and PSCs. All of the
major  laboratory  facilities  have been built or  improved  for the  purpose of
providing  clinical  laboratory  testing  services.  The  Company  believes  its
facilities are suitable,  adequate and have sufficient  production  capacity for
its operations as currently conducted and as anticipated to be conducted. Unilab
believes  that if it were to lose the lease on any of its  facilities,  it could
find alternate space at competitive  market rates and relocate its operations to
such new locations without disruption.

Item 3.          Legal Proceedings

                 Unilab is a party to various legal  proceedings  arising in the
ordinary  course of its  business.  Although the ultimate  disposition  of these
proceedings  is not  determinable,  management  does not  believe  that  adverse
determinations  in any or all of such  proceedings  will have a material adverse
effect upon the  financial  condition,  liquidity  or results of  operations  of
Unilab.

                  In November 1999,  Unilab reached a settlement with a group of
thirteen insurance  companies  regarding claims by the insurance  companies that
Unilab  over-billed  them in the early to mid-1990s in  connection  with several
chemistry  profile  tests  that were  previously  the  subject  of a  settlement
agreement  with the  government.  Unilab paid $600,000 in the  settlement.  Such
amount was reflected as a charge in the  statement of operations  for the second
quarter of 1999.  Since 1993, the Company has also entered into settlements with
three additional insurance companies for an aggregate amount of $825,000.

                  In May 1999,  Unilab  learned of a new  federal  investigation
under the False Claims Act relating to its billing  practices  for the following
four test procedures: (1) apolipoprotein in conjunction with coronary risk panel
assessments;  (2) microscopic  evaluation in conjunction  with  urinalysis;  (3)
performance of T7 index in conjunction  with T3 and T4 tests and (4) fragmenting
billing of  unlisted  panel  codes.  The Company has  gathered  and  voluntarily
submitted documentation to the DOJ regarding the two tests with respect to which
the DOJ has  requested  information.  Unilab cannot at this time assess what the
result of the  investigation  might be.  Remedies  available  to the  government
include civil and criminal penalties and exclusion from participation in federal
health  care  programs  such as  Medicare  and  Medicaid.  Application  of these
remedies could have a material adverse effect upon Unilab's business,  financial
condition, results of operations or prospects.

Item 4.          Submission Of Matters to a Vote of Security Holders

                 On November 23, 1999, a Special Meeting of Stockholders was
held, at which stockholders approved the Kelso Transaction, including a merger
agreement with an affiliate of Kelso and the transactions contemplated by that
agreement.  In the merger:

o        each outstanding  share of the common stock of Unilab (other than those
         shares of certain Unilab  institutional  stockholders and Unilab senior
         management)  was converted  into the right to receive $5.85 in cash and
         each outstanding share of convertible preferred of Unilab was converted
         into the right to receive its liquidation preference of $5.75 in cash;
o        some or all of the shares of certain Unilab institutional  stockholders
         and  members  of Unilab  senior  management  that did not exceed in the
         aggregate 5% of the  outstanding  common stock on a fully diluted basis
         prior to the merger remained outstanding; and
o        Unilab  became a subsidiary  of  affiliates  and  designees of Kelso
         and other investors.

         The count of all votes and ballots cast at the Special  Meeting
         regarding the Kelso Transaction was as follows:

                 For...........................................27,989,173
                 Against or Withheld............................1,110,405
                 Abstained.........................................67,838
                 Broker Non-Votes..............................12,826,552
                 Total Outstanding.............................41,993,968


                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related Stockholder
          Matters

          Until November  23, 1999,  the  Company's  common  stock traded on
the American  Stock Exchange under the symbol "ULB". As of November 23, 1999,
there were 46,780,918 shares of Common Stock  outstanding  held by 3,326 holders
of record,  including shares/options  exercised  after the date of record,  and
which  were  primarily related to the conversion of the $14 million Meris note.

          The Company did not pay any cash dividends with respect to its common
stock during 1999.  Summarized quarterly share price information is as follows:

<TABLE>
<CAPTION>

       Year Ended   December 31, 1999                        Year Ended December 31, 1998
$ Price     First      Second     Third     Fourth     First      Second     Third      Fourth
Range       Quarter    Quarter    Quarter   Quarter    Quarter    Quarter    Quarter    Quarter
-----       -------    -------    -------   -------    -------    -------    -------    -------
<S>        <C>        <C>      <C>          <C>          <C>       <C>       <C>       <C>
High       3.188      6.00     5.688         5.813       3.00      3.125     2.625     2.375
Low        2.313      2.938    5.188         5.50        1.688     2.375     1.75      1.625

</TABLE>

                 As of the consummation of the Kelso Transaction on November 23,
1999, the stock ceased to be publicly traded.

<PAGE>


Item 6.          Selected Financial Data

                 The selected  financial  data for each of the five years in the
period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
----------------------------------------------------------------------------------------------------------
For the Years Ended December 31,              1999          1998           1997         1996         1995
----------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>             <C>         <C>          <C>
Revenue                                    $285,163      $217,370       $214,001     $205,217     $189,042
----------------------------------------------------------------------------------------------------------
Legal, acquisition and restructuring
related charges                                 600          ----           ----       70,595        4,400
----------------------------------------------------------------------------------------------------------
Merger/recapitalization expenses             25,167          ----           ----         ----         ----
----------------------------------------------------------------------------------------------------------
Operating income (loss)                      13,722        24,241         14,604      (72,842)       4,539
----------------------------------------------------------------------------------------------------------
Loss on sale of equity investment/             ----          ----           ----        4,529       36,499
promissory note
----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item                       (5,123)       10,703            536      (89,493)     (40,043)
----------------------------------------------------------------------------------------------------------
Income tax benefit                           11,904          ----           ----         ----         ----
----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item       6,781        10,703            536      (89,493)     (40,043)
----------------------------------------------------------------------------------------------------------
Extraordinary item                           20,773          ----           ----        3,451        1,732
----------------------------------------------------------------------------------------------------------
Net income (loss)                           (13,992)       10,703            536      (92,944)     (41,775)
----------------------------------------------------------------------------------------------------------
Preferred stock dividends                       108           131            138          144          144
----------------------------------------------------------------------------------------------------------
Net income (loss) available to
common shareholders                         (14,100)       10,572            398      (93,088)     (41,919)
----------------------------------------------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------------------------------------------
Total assets                                193,530       142,460        118,700      125,919      196,174
----------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion      310,941       137,170        124,285      126,120       87,207
----------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit)             (158,289)      (21,367)       (32,283)     (34,688)      56,330
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>

Note:   The variations in the year-to-year  comparisons are due primarily to
        the acquisition of substantially all of the assets of Physicians
        Clinical    Laboratories,  Inc., effective May 10, 1999, the acquisition
        of substantially all of the  assets  of Meris  Laboratories,  Inc.,
        effective  November  5,  1998,  and the  acquisition  of MLN  Holding
        Acquisition  Co.,  effective May 16, 1995. In addition,  see Notes 4 and
        5 of the Notes to Consolidated  Financial Statements  at page F-10 for
        a more  detailed  discussion  of the  legal  and  acquisition  related
        charges,  and merger/recapitalization  expenses  recorded  in 1999.
        The $70.6  million  legal,  acquisition  and  restructuring related
        charges recorded in 1996 relate to a goodwill write-off in the amount
        of $61.7 million, $4.9 million paid in government and other settlements,
        and $4.0 million in  restructuring  and severance  costs.  The $4.5
        million loss on the sale of a promissory  note in 1996 is  attributable
        to a $4.0  million  loss in principal  and a $0.5 million write-off of
        accrued and unpaid interest.  The $3.5 million  extraordinary  item in
        1996 was due to a loss on early  extinguishment  of debt.  The $4.4
        million  legal charge  recorded in 1995 relates to a settlement  and
        legal fees paid in connection  with a lawsuit  regarding  the Company's
        sales,  marketing and  distribution  of a product designed for use in
        connection with pap smears.  The $36.5 loss on the sale of equity
        investment  recorded in 1995  relates to the sale of a 40% equity
        investment  the Company had in a European  laboratory  company.  The
        $1.7 million extraordinary item in 1995 was due to a loss on early
        extinguishment of debt.

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations

Year ended December 31, 1999 compared to year ended December 31, 1998

Revenue.  Revenue  increased to $285.2  million for the year ended  December 31,
1999 from $217.4 million for the comparable  prior year period,  representing an
increase of $67.8 million or 31.2%.  Approximately $48.7 million of the increase
was   attributable  to  revenue   generated  from  the   acquisitions  of  Meris
Laboratories, Inc. ("Meris"), effective November 5, 1998 and Physicians Clinical
Laboratory,  Inc. (doing business as Bio-Cypher Laboratories) ("BCL"), effective
May 10,  1999.  Exclusive  of the  acquired  Meris and BCL  businesses,  revenue
increased  $19.1  million,  primarily  the result of increases in  reimbursement
levels of $11.7 million and additional specimen volume generating $7.4 million.

The Company experienced a 5.2% increase, exclusive of the acquired Meris and BCL
businesses,  in the average  reimbursement  received for each specimen processed
during the year ended December 31, 1999 versus the comparable prior year period.
The  increase in  reimbursement  levels is  primarily  due to increases in rates
charged to managed care clients,  replacement of the Company's most unprofitable
accounts  with other  better  priced  business  and  changes in test mix to more
sophisticated  testing  procedures  for HIV and sexually  transmitted  and other
infectious  diseases.  Exclusive of the acquired Meris and BCL  businesses,  the
Company  experienced a 3.4% increase in the number of specimens processed during
the year ended  December 31, 1999 versus the  comparable  prior year period.  In
addition,  while the Company experienced increases in volume over the prior year
through  acquisitions and growth in the core business,  the Company experienced,
over the last several months of 1999, greater seasonal softness than anticipated
and the Company purged more business (primarily lower priced and less profitable
accounts) from the BCL acquisition than originally forecasted.

Salaries,  Wages and Benefits.  Salaries,  wages and benefits increased to $84.5
million  for the year  ended  December  31,  1999  from  $67.7  million  for the
comparable prior year period.  As a percentage of revenue,  salaries,  wages and
benefits  decreased to 29.6% for the year ended December 31, 1999 from 31.2% for
the comparable prior year period.  The decrease primarily reflects the economies
of scale  associated  with  processing a  significantly  higher  specimen volume
(25.2% volume increase  including the effect of the Meris and BCL  acquisitions)
without the same corresponding increase in headcount.

Supplies.  Supplies  expense  increased  to $41.5  million  for the  year  ended
December 31, 1999 from $30.7 million for the comparable prior year period.  As a
percentage of revenue,  supplies  expense  increased to 14.6% for the year ended
December 31, 1999 from 14.1% for the comparable prior year period.  The increase
was attributable to bringing certain more costly testing in-house,  mandated use
of more costly safety needles and  inefficiencies of running two laboratories in
the Sacramento area during the integration period of BCL. The Company closed the
BCL laboratory in mid-August, 1999.

Other Operating  Expenses.  Other operating  expenses increased to $70.4 million
for the year ended December 31, 1999 from $53.6 million for the comparable prior
year  period.  As  a  percentage  of  revenue,  other  operating  expenses  were
consistent at 24.7% for the years ended December 31, 1999 and 1998.

Legal Charge.  In 1999, the Company reached a settlement for $0.6 million with a
group of insurance  companies  regarding claims by the insurance  companies that
the Company  over-billed  them in the early to  mid-1990's  in  connection  with
several chemistry profile tests that were previously the subject of a settlement
agreement with the government.

Merger/Recapitalization  Expenses.  On May 24, 1999, the Company entered into an
agreement with UC Acquisition  Sub, Inc.,  which is owned by affiliates of Kelso
under which UC  Acquisition  Sub,  Inc.  merged with and into the  Company.  The
merger  was  completed  on  November  23,  1999  and  was  accounted  for  as  a
recapitalization.  As  part  of the  Kelso  Transaction,  the  Company  incurred
expenses of $25.2 million related  primarily to financial  advisory fees,  other
financing  fees  and  expenses,  legal  and  accounting  fees,  printing  costs,
severance costs, and other miscellaneous items.

Amortization and Depreciation.  Amortization and depreciation increased to $10.2
million  for the  year  ended  December  31,  1999  from  $7.6  million  for the
comparable  prior year period.  The increase was primarily due to the additional
amortization  expense incurred from the goodwill recorded in connection with the
Meris and BCL acquisitions.  In addition, based upon the final review of certain
assets  acquired  in the Meris and BCL  acquisitions,  the  Company  changed its
estimate of goodwill  amortization  arising from those acquisitions to a 10-year
period  effective  July 1,  1999.  The  effect  of the  change  was to  increase
amortization expense by $1.2 million for the year ended December 31, 1999.

Selling,   General   and   Administrative   Expenses.   Selling,   general   and
administrative  expenses  increased to $39.1 million for the year ended December
31,  1999  from  $33.5  million  for the  comparable  prior  year  period.  As a
percentage of revenue, selling, general and administrative expenses decreased to
13.7% for the year ended December 31, 1999 from 15.4% for the  comparable  prior
year  period.  Such  decrease  continued  the  trend  realized  by  the  Company
throughout  1998 and 1999 from cost  reduction  efforts and also  reflected  the
economies of scale and efficiencies gained from the Meris and BCL acquisitions.

EBITDA.   Earnings  before  interest,   taxes,   depreciation  and  amortization
("EBITDA")  were $3.1 million for the year ended  December 31, 1999  compared to
$31.8 million for the  comparable  prior year period.  Without the effect of the
$0.6  million  legal  charge  recorded  in the  second  quarter  of 1999 and the
merger/recapitalization  expenses recorded in the fourth quarter of 1999, EBITDA
for the year ended  December 31, 1999 would have been $49.7  million or 17.4% of
sales,  and would have  represented  an increase of  approximately  56% over the
comparable prior year period.

Interest Expense.  Interest expense, net increased to $18.8 million for the year
ended December 31, 1999 from $13.5 million for the comparable prior year period.
The increase was primarily due to the additional  interest  expense  incurred on
the $14.0 million  convertible  subordinated  note issued in connection with the
Meris acquisition, the $25.0 million subordinated note issued in connection with
the BCL  acquisition  and the additional  interest  expense from the significant
increase in leverage due to the Kelso Transaction.

The Company's  interest expense will increase  significantly in the year 2000 as
the effect of the additional  interest expense from the increase in leverage due
to the Kelso  Transaction  completed in late 1999,  which will be incurred for a
full year period.

Tax Benefit.  The Company  establishes a valuation  allowance in accordance with
the  provisions  of the  Statement of Financial  Accounting  Standards  No. 109,
"Accounting for Income Taxes". The Company  continually  reviews the adequacy of
the valuation allowance and recognizes the benefits from its deferred tax assets
only when an analysis of both positive and negative  factors indicate that it is
more likely than not that the benefits will be realized.  Based on the Company's
improved    operating    performance    in   1998   and   1999    (before    the
merger/recapitalization  expenses) and,  having fully  integrated both the Meris
and BCL  acquisitions,  the  Company  believed it would have  sufficient  future
taxable income and therefore  reduced its valuation  allowance by  approximately
$16.6 during the third quarter of 1999.

Approximately $4.7 million of the tax asset recorded during the third quarter of
1999 reduced the amount of goodwill  recorded from certain  acquisitions and the
remaining  amount of the benefit was  recognized as an income tax benefit in the
statement of  operations.  If the Company does not further  reduce its valuation
allowance in the future,  the Company  expects to have an effective  tax rate of
approximately 42% on a going forward basis.

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

Revenue.  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,  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 due to 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  could not  achieve
significant economies of scale.

Salaries,  Wages and Benefits.  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. 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.  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.  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.   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.

EBITDA.  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.

Interest Expense.  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.

Liquidity and Capital Resources

Net cash used by operating  activities  during the year ended  December 31, 1999
was $8.4  million.  However,  such  amount  was  significantly  affected  by the
expenses  incurred by the Company to complete the Kelso  Transaction in November
1999. Excluding the effect of the merger/recapitalization  expenses, the Company
would have had net cash provided by operating activities of $31.6 million, which
would have reflected an  improvement of $17.6 million over the comparable  prior
year period when net cash provided by operating  activities  was $14.0  million.
Such pro forma  increase  in 1999 was  primarily  due to an  improvement  in the
Company's operating performance and timing of payments for accounts payable.

Net cash provided by financing  activities was $15.7 million for the year ending
December 31, 1999. As part of the Kelso Transaction,  44.9 million shares of the
Company's  common  stock were  converted  into cash at $5.85 per share,  364,000
shares of preferred  stock were  converted  into cash at $5.75 per share,  stock
options were cancelled for cash consideration of $15.4 million,  and the Company
retired  $144.5  million of debt. In order to finance,  among other things,  the
conversion into cash of the common stock, preferred stock, stock options and the
retirement  of debt,  the Company  received a new common  equity  investment  of
$139.5  million from  affiliates of Kelso,  borrowed  $160.0 million under a new
senior bank credit  facility and issued $155.0  million of new senior notes.  In
order to secure the new financing,  the Company paid $8.6 million  primarily for
financing  fees to the  underwriters  of such debt.  In addition,  the Company's
financing  activities in 1999 consisted of scheduled principal  repayments under
capital lease  obligations of $1.2 million,  issuance of preferred  dividends of
$0.1 million and proceeds from the exercise of stock options of $0.3 million.

Net cash used by  investing  activities  was $14.9  million  for the year  ended
December  31,  1999,  resulting  from an $8.6  million  cash  payment in partial
consideration  of the purchase price for the BCL acquisition and $6.3 million of
fixed  asset  additions.  The  Company  expects  that  its  capital  expenditure
requirements,  excluding any amounts related to  acquisitions,  will approximate
$6.0 million in 2000.

As part of the Kelso  Transaction,  the Company  completed an offering of $155.0
million of senior notes (the "New Senior  Notes") in September  1999 and entered
into a credit  agreement (the "Credit  Agreement") with a syndicate of banks and
other financial  institutions  for a $185.0 million credit facility (the "Credit
Facility").

Interest  on the New  Senior  Notes is 12.75%  and is  payable  on April 1st and
October  1st of each year.  The New Senior  Notes are due  October  2009 and the
Company is not  obligated  to make any  mandatory  redemption  or  sinking  fund
payment with respect to the New Senior Notes prior to maturity.

The New Senior Notes are not  redeemable  prior to October 1, 2004,  after which
the New  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 New Senior Notes (the  "Indenture"),  plus accrued and
unpaid  interest,  if any, to the date of redemption.  In addition,  at any time
prior to October 1, 2002,  the Company  may redeem up to 35% of the  outstanding
notes with the net  proceeds of one or more public  offerings of common stock of
the Company,  at a redemption  price of 112.75% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the redemption date.

The $185.0  million  Credit  Facility  consists of $160.0  million in term loans
($50.0  million Term A and $110.0 million Term B) and $25.0 million in revolving
loans.  Any borrowings  under the revolving line of credit are due October 2005.
The Term A loan is due in quarterly  principal payments of $1.3 million starting
on December 2000 and increasing to $1.9 million in December  2001,  $2.5 million
in December  2002,  $3.1  million in December  2003 and $3.8 million in December
2004.  The Term B loan is due in  quarterly  principal  payments of $0.3 million
starting December 1999 through September 2005 and increasing to $25.9 million in
December 2005 through November 2006. In addition,  the Credit Agreement requires
mandatory repayments for various items,  including a percentage of annual excess
cash flows, as defined.  The amounts  outstanding  under the Credit Facility are
subject to certain  restrictive  comments.  The covenants  include,  but are not
limited to,  requirements that the Company maintain  specified  financial ratios
and stay within  defined  limitations  on capital  expenditures  and  additional
indebtedness.  The  Company  also  cannot  declare  or pay  any  dividends.  All
obligations  under the Credit Facility are secured by  substantially  all of the
Company's assets.

If the Company's ratio of net total debt to EBITDA (as defined in a capital call
agreement) for the year 2000 is greater than 5.0 times, Kelso and its affiliates
will be required,  pursuant to a capital call agreement, to make (or cause their
designees to make) an equity  investment  in the Company.  The proceeds from the
equity  investment  will be used to  retire  the term  loans  under  the  Credit
Facility.  To the extent all such  proceeds are not fully used to repay the term
loans,  the commitment under the revolving credit facility will be reduced by an
amount equal to the lesser of (a) the amount necessary to cause the ratio of net
total debt to EBITDA, after giving effect to the equity investment, to equal 5.0
times and (b) $50.0 million.

As part of the Kelso Transaction,  the Company tendered for $120.0 million (face
value)  of  senior   notes  ("Old   Senior   Notes")   existing   prior  to  the
recapitalization.  99.6% of the  holders of the Old Senior  Notes  accepted  the
Company's  tender offer;  however,  0.4% of holders did not tender and therefore
$0.5 million of the Company's Old Senior Notes remain  outstanding.  Interest on
the Old Senior  Notes is 11% and is payable on April 1st and October 1st of each
year.  The Old Senior Notes are due April 2006 and are not  redeemable  prior to
April 1, 2001,  after which the Old 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  notes,  plus  accrued and unpaid
interest, if any, to the date of redemption.

The New and Old Senior 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 pay
dividends or  distributions  on capital  stock or  repurchase  capital stock and
incur additional indebtedness, under certain circumstances.

The Company had $12.6 million of cash and cash  equivalents  on hand at December
31,  1999.  Management  believes  that the  amount of cash and cash  equivalents
available  at  December  31,  1999,  cash flows  expected to be  generated  from
operations and  additional  borrowing  capabilities  under the revolving line of
credit of $25.0 million will be adequate 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 Update

The Company did not experience  any  significant  malfunctions  or errors in its
operating or business  systems when the date changed from 1999 to 2000. Based on
operations  since January 1, 2000,  the Company does not expect any  significant
impact to its ongoing business as a result of the "Year 2000 issue". However, it
is possible that the full impact of the date change, which was of concern due to
computer  programs  that use two digits  instead of four digits to define years,
has not been fully  recognized.  For example,  it is possible  that Year 2000 or
similar  issues  such as leap  year-related  problems  may occur  with  billing,
payroll,  or financial  closings at month,  quarterly,  or year end. The Company
believes  that any such  problems  are  likely to be minor and  correctable.  In
addition,  the Company  could still be  negatively  affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The Company
currently is not aware of any  significant  Year 2000 or similar  problems  that
have arisen for its customers and suppliers.

The Company  expended $0.5 million on Year 2000  readiness  efforts from 1997 to
1999. These efforts included replacing some outdated,  noncompliant hardware and
noncompliant software as well as identifying and remediating Year 2000 problems.

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.

Item 7A. Quantitative and Qualitative Disclosure of Market Risk

As of December 31, 1999,  the Company had  borrowings of $159.7  million under a
$185.0 million Credit Facility.  The Credit Facility  consists of $160.0 million
in term loans ($50.0  million Term A and $110.0  million Term B) and $25 million
in revolving  loans.  Interest on amounts  borrowed under the Credit Facility is
subject  to  adjustment   determined   based  on  certain  levels  of  financial
performance.  For LIBOR  borrowings,  the  applicable  margin added to LIBOR can
range from 2.00% to 3.375% for Term A and revolving  loans,  and 3.50% to 3.875%
for Term B loans.  At any time,  a sharp  rise in  interest  rates  could have a
material  adverse impact upon the Company's cost of working capital and interest
expense.  For every  one-half  percent rise in interest  rates on the  Company's
variable  note  obligations  held at December 31, 1999,  interest  expense would
increase by $0.8 million annually.

Item 8.    Financial Statements and Supplementary Data

           Please see pages F-1 through F-23.

Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.

           None.

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant

     The following table sets forth certain information regarding the directors,
executive officers and key management personnel of our company.

  Name                  Age   Position

David C. Weavil         48    Chairman of the Board

Robert E. Whalen        57    President, Chief Executive Officer and Director

Brian D. Urban          37    Executive Vice President, Chief Financial Officer
                              and Treasurer

David W. Gee            39    Executive Vice President, Secretary and General
                              Counsel

Mark L. Bibi            41    Executive Vice President

Ian J. Brotchie         59    Executive Vice President and Division President,
                              Unilab Northern

R. Jeffrey Lanzolatta   46    Executive Vice President and Division President,
                              Unilab Southern

C. Michael Hanbury      35    Senior Vice President, Chief Scientific Officer

Paul T. Wertlake        63    Vice President, Chief Medical Officer

Michael B. Goldberg     52    Director

David I. Wahrhaftig     42    Director


   David C. Weavil served as Chairman,  President and Chief Executive Officer of
Unilab  from  January  1997  to  November  1999.   Effective  as  of  the  Kelso
Transaction,  Mr.  Weavil  serves only as  Chairman  of the Board.  He served as
Executive  Vice  President  of  Laboratory   Corporation  of  America   Holdings
("LabCorp")  from the April 1995 merger of Roche Biomedical  Laboratories,  Inc.
("RBL") and National Health Laboratories,  Inc. ("NHL"),  which created LabCorp,
until December 1996. He was  additionally  appointed Chief Operating  Officer of
LabCorp  in  September  1995.  Previously,  Mr.  Weavil  served as  Senior  Vice
President and Chief Operating  Officer of RBL from 1989 to April 1995. From 1988
through 1989, Mr. Weavil was Regional Senior Vice President-Mid-Atlantic of RBL.
Prior to that, he served as Senior Vice President and Chief Financial Officer of
RBL from 1982 to 1988.

   Robert E.  Whalen was  appointed  President,  Chief  Executive  Officer and a
director  of  Unilab  effective  as of the  recapitalization.  From  May 1997 to
September 3, 1999,  Mr.  Whalen  served as Executive  Vice  President  and, from
September  1998 to September 3, 1999,  as Chief  Operating  Officer of Scripps's
Clinic,  a  320-physician  multi-specialty  medical  group  located in  Southern
California.  From the April 1995 merger of RBL and NHL until  August  1996,  Mr.
Whalen served as Executive Vice President of LabCorp. Prior to his employment at
LabCorp,  Mr.  Whalen held various  senior level  positions  with NHL,  which he
joined in 1976. He served as Executive  Vice President of NHL from 1993 to 1995,
as Senior Vice President from 1991 to 1993 and as Vice President--Administration
from 1985 to 1993. From 1979 to 1985, he was Vice President--Division Manager of
NHL. At NHL and later  LabCorp,  Mr.  Whalen  oversaw  human  resources,  client
service and major regional  laboratories in California,  Washington,  Nevada and
Utah. Mr. Whalen was a member of the management committee at NHL and LabCorp.

   Brian D. Urban has been Executive Vice President, Chief Financial Officer and
Treasurer of Unilab since May 1998. He served as Vice President, Chief Financial
Officer and Treasurer  from  September 1997 to April 1998. He was Vice President
and Controller of Unilab from November 1993 to September  1997. Mr. Urban served
as Assistant  Controller  of Unilab from October 1992 to November  1993.  He was
Manager of External  Reporting of MetPath from July 1992 to October 1992.  Prior
thereto,  Mr. Urban was senior audit manager at Price Waterhouse where he worked
from November 1986 to July 1992.

   David Gee was  appointed  Executive  Vice  President,  Secretary  and General
Counsel of Unilab March 1, 2000.  Prior to his employment  with Unilab,  Mr. Gee
was with the Seattle,  Washington law firm of Garvey, Schubert & Barer from June
1998  through  February  2000.  Prior  thereto,  he  served  as  Associate  Vice
President,  Counsel,  and Assistant  Secretary  for  Laboratory  Corporation  of
America  ("LabCorp")  from May 1995 to June  1998.  He served  as the  Associate
General  Counsel and  Assistant  Secretary  of LabCorp's  predecessor,  National
Health Laboratories  Incorporated from 1991 to 1995. Prior thereto,  Mr. Gee was
with the law firm of Pillsbury, Madison & Sutro in its Los Angeles and San Diego
offices.

   Mark L. Bibi has been  Executive  Vice  President  since March  2000.  He was
Executive Vice President,  Secretary and General Counsel of Unilab from May 1998
through  February  2000.  He served as Vice  President,  Secretary  and  General
Counsel from June 1993 through  April 1998.  Mr. Bibi was with the New York City
law firm of Schulte Roth & Zabel from May 1989 through June 1993. Prior thereto,
he was with the law firm of Sullivan & Cromwell, New York, New York, from August
1985 to April 1989.

   Ian J. Brotchie has been Executive  Vice President and Division  President of
Unilab  Northern  California  since May 1998. He served as Division  President
of Unilab Northern  California from August 1997 to April 1998. He was Division
President of Unilab San Jose from February 1994 to August 1997.  He was
President of Associated  Laboratories,  Inc. from November 1991 to September
1995. Mr.  Brotchie served as President of Lab Concepts Inc. from February 1990
to November 1991.  Prior thereto,  Mr.  Brotchie served as Business Development
Director with SmithKline  Bio-Science  Laboratories in Dublin,  California from
January 1989 to February 1990.

     R.  Jeffrey  Lanzolatta  has been  Executive  Vice  President  and Division
President of Unilab  Southern  California  since May 1998. He served as Division
President of Unilab  Southern  California  from July 1996 to April 1998.  He was
Senior Vice President,  Sales and Marketing of Unilab  Southern  California from
December 1994 to July 1996. He served as Vice President, Sales and Marketing for
Unilab from November 1993 to December 1994. He served as Vice  President,  Sales
and Marketing of MetWest from January 1993 to November  1993.  Prior thereto Mr.
Lanzolatta  served as Regional Vice  President and General  Manager of MetWest's
Southern California  operations from July 1990 to December 1992. From April 1990
to June 1990,  Mr.  Lanzolatta  served as  Director of Sales and  Marketing  for
MetWest's  Northern  California  operations.  Mr. Lanzolatta was Vice President,
Business Development of International  Clinical Laboratories' Western Operations
from July 1985 through January 1989.

     C. Michael  Hanbury,  Ph.D.,  Senior Vice  President and Chief  Scientific
Officer,  has been with Unilab since April 1998. Prior to joining Unilab,  from
April 1996 to April 1998, Dr. Hanbury managed Regulatory  Affairs for Roche
Diagnostics,  Inc., an international  diagnostic company  representing their
interests to the US Food and Drug Administration for a variety of molecular
diagnostic  tests for  infectious  disease.  Prior  thereto,  Dr.  Hanbury
served from  September 1994 to March 1996 as National Technical  Director of an
international  clinical  diagnostic  manufacturer and as a clinical chemist for
Roche Biomedical Labs from April 1988 to September 1994. Dr. Hanbury is a
registered  clinical  pathologist with over 14 years experience in laboratory
testing services and in vitro diagnostic manufacturing.

     Paul T.  Wertlake,  M.D.,  has been Vice  President  and Chief Medical
Officer of Unilab since January 1994.  Since October 1989,  Dr.  Wertlake has
served as the Senior  Medical  Officer for  Southern  California  and  Medical
Director of our Tarzana laboratory. Prior thereto, Dr. Wertlake has served in
the academic, hospital and reference laboratory sectors.

     Michael B. Goldberg has been a Managing  Director of Kelso since  October
1991 and became a director of Unilab  effective as of the  recapitalization.
Mr. Goldberg served as a Managing Director and jointly managed the merger and
acquisitions  department at The First  Boston  Corporation  from 1989 to May
1991.  Mr.  Goldberg was a partner at the law firm of Skadden,  Arps,  Slate,
Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of Consolidated
Vision Group,  Inc.,  Endo  Pharmaceuticals,  Inc., Hosiery Corporation of
America,  Inc. and Netspeak  Corporation.  Mr. Goldberg is also a director of
the Phoenix House Foundation and the Woodrow Wilson Council.

     David I.  Wahrhaftig has been a Managing  Director of Kelso since April
1998. Mr.  Wahrhaftig has been affiliated with Kelso since 1987, and became a
director of Unilab  effective as of the  recapitalization.  Mr.  Wahrhaftig also
serves as a director of Consolidated Vision Group, Inc., Endo Pharmaceuticals,
Inc. and Humphreys, Inc.

     Haywood D. Cochrane, Jr., Kirby L. Cramer, William Gedale, Richard A.
Michaelson, and Gabriel B. Thomas served as Directors during 1999 until
completion of the Kelso Transaction on November 23, 1999.

Item 11.       Executive Compensation

The  following  table sets forth the annual and long-term  compensation  paid or
accrued by Unilab for services  rendered in all  capacities to Unilab during the
years ended  December 31, 1999,  1998 and 1997,  of those  persons who were,  at
December  31,  1999,  (i) the Chief  Executive  Officer and (ii) the other Named
Executive  Officers of Unilab whose total  annual  salary and bonus for the year
ended December 31, 1999 exceeded $100,000 (Messrs.  Weavil,  Whalen,  Lanzolatta
and  Brotchie  collectively  are  referred  to  herein as the  "Named  Executive
Officers").

<TABLE>
                           Summary Compensation Table
<CAPTION>

                                         Annual                         Long-Term
Name and Title                  Year     Salary     Bonus    Def Comp   SERP Plan    Other
                              --------   --------   -------  --------   ---------    ---------
<S>                             <C>    <C>        <C>        <C>       <C>         <C>
David C. Weavil                 1999   $358,889   $400,000   $60,711   $828,299     $ 4,888,898(3)
Chairman (1)                    1998    400,000    425,000    66,000    106,137          12,000
                                1997    400,000    200,000    40,000     24,560         139,659(4)

Robert E. Whalen                1999     41,111       --       3,289       --           92,222 (5)
President & CEO (2)

R. Jeffrey  Lanzolatta          1999    225,000    175,000    32,000    384,653       2,217,537(6)
Executive Vice President and    1998    225,000    125,000    28,000     49,113          13,163

Ian Brotchie                    1999    225,000    110,000    26,800    614,001       1,304,850(7)
Executive Vice President and    1998    225,000     57,500    22,600    102,923          11,772
President, Northern Division
<FN>

(1) Mr. Weavil served as Chairman, President and CEO of the Company from January
    20, 1997 to November 23, 1999.  He has been Chairman  since  November 23,
    1999.

(2) Mr. Whalen has served as President and CEO since November 23, 1999.

(3) Represents (a)$2,500,000 payment in consideration for Mr. Weavil's agreement
    not to compete with the Company in certain  circumstances  following  his
    departure as President and CEO, (b) $2,378,125 realized upon exercise and
    payment of stock options in the Kelso  Transaction  and (c) $10,773 for a
    car allowance.

(4) Represents the benefits  from a car allowance, expenses paid by the company
    related to Mr.  Weavil's  relocation to and residence in California,  the
    benefit from the Company  providing group term life insurance and related
    tax gross-up  payments on such amounts (such tax gross-up  payments being
    $60,955).

(5) Represents consulting payments to Mr. Whalen for the period from September
    1, 1999 to November 22, 1999.

(6) Represents (a)  $1,237,025 realized upon exercise of options during the year
    and the payment of stock options in the Kelso Transaction, (b) $9,600 for
    a car allowance,  (c) $877,500 from the sale of 150,000 restricted shares
    of Unilab  common  stock that had  previously  been granted to him by the
    Company,  (d)  forgiveness  of a $50,000  loan,  (e) imputed  interest of
    $2,580 on an interest free loan and (f) tax gross-up benefits of $40,827.
    Mr. Lanzolatta assumed his current position in 1998.

(7) Represents (a)  $1,295,250  realized upon exercise and payment of stock
    options in the Kelso  Transaction,  (b) $9,600 for car allowance.  Mr.
    Brotchie assumed his current position in 1998.

</FN>
</TABLE>


Option Grants

                 The  following  table sets  forth the  grants of  non-qualified
stock options  during the year ended  December 31, 1999, to the Named  Executive
Officers:

<TABLE>
<CAPTION>

                       Option Grants in Last Fiscal Year (1999)

                   Options Granted  % of Total   Ex. Price   Market Price   Exp. Data
<S>                 <C>             <C>          <C>         <C>            <C>
D. Weavil              ---            ---            ---        ---            ---
R. Whalen              ---            ---            ---        ---            ---
J. Lanzolatta (1)   50,000          7.03%         $2.3125     $2.3125         1/4/09
I. Brotchie (1)     50,000          7.03%         $2.3125     $2.3125         1/4/09

<FN>

(1)In  January  1999  pursuant to the  Company's  Stock  Option and Performance
   Incentive Plan, Messrs. Lanzolatta and Brotchie were each granted options
   to purchase  50,000 shares of Unilab Common Stock at an exercise price of
   $2.3125 per share,  the closing price per share of Unilab Common Stock as
   reported on the American Stock Exchange on the date of the grant (January
   4). All such  options were cashed out in the Kelso  Transaction  at a per
   share price of $5.85.
</FN>
</TABLE>

Other Stock Options

The terms of the new stock option plan have not yet been finalized, though it is
anticipated that 3.8 million options  (besides those options being  rolled-over)
will be  available  for  grants at an  option  exercise  price of  $5.85.  It is
anticipated  that part of the options  will vest  through  length of service and
part will vest  subject  to  various  performance  criteria.  In  addition,  all
outstanding  options (besides those being rolled-over) became immediately vested
and were  cancelled  for cash  consideration  of  $15.4  million  as part of the
recapitalization.

Option Exercises and Fiscal Year-End Values

The following  table  reflects the options to purchase  Unilab Common Stock that
were  exercised  by the Named  Executive  Officers  during the fiscal year ended
December 31, 1999 and lists the number and value of the  unexercised  options to
purchase  Unilab Common Stock held by the Named  Executive  Officers at December
31, 1999.

<TABLE>
<CAPTION>

                             Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values

                                                                   Number of Securities       Value of Unexercised
                                                                  Underlying Unexercised    In-the-Money Options at
                                                                 Options at FY-End (#)(2)        FY-End ($)(2)
                                                                 ------------------------           ----------
                             Shares Acquired
    Name                     on Exercise (#)    Value Realized($)   Exercisable/Unexercisable  Exercisable/Unexercisable
<S>                          <C>               <C>                       <C>                        <C>
    David C. Weavil (1)       500,000           2,378,125                 ---                        ---
    Robert E. Whalen              ---                 ---                 ---                        ---
    Jeff Lanzolatta           299,000           1,237,025                 ---                        ---
    Ian Brotchie              340,000           1,295,250                 ---                        ---
<FN>

(1)    Pursuant to Mr. Weavil's employment agreement he received in January 1997
       options to purchase  250,000 shares of Common Stock,  which vest in equal
       installments  over five years,  beginning January 1998 and ending January
       2002.  He also  received  in  January  1998  pursuant  to his  employment
       agreement  additional options to purchase 250,000 shares of Unilab Common
       Stock at an exercise  price equal to the $1.75 per share  closing  market
       price of Unilab  common  Stock on the date of grant,  which vest in equal
       installments  over five years,  beginning January 1999 and ending January
       2003.

(2)    All  options  (except  certain  options,  valued  at  approximately  $0.5
       million, elected to be rolled-over by the option holders into a new stock
       option  plan)  to  acquire  shares  of  Unilab  common  stock  that  were
       outstanding  in 1999 were  cashed out in the Kelso  Transaction  at a per
       share price of $5.85.
</FN>
</TABLE>

Executive Retirement Plan

Effective  as of  January 1,  1995,  the  Company's  stockholders  approved  the
adoption of the Executive  Retirement  Plan (the "SERP").  The SERP provides for
issuance to certain selected officers and other senior executives of the Company
("Executives")  of up to  1,000,000  shares in the  aggregate  of Unilab  Common
Stock.  Shares of Unilab Common Stock to be issued in  connection  with the SERP
will be made available from treasury or authorized and unissued shares of Unilab
Common Stock. An Executive  participating  in the SERP is entitled to receive an
annual allocation of Awards.  An Award is a unit of measurement  equivalent to a
share of Unilab Common Stock. The number of Awards allocated each year will have
a fair  market  value  equal to the annual  expense of a  projected  single life
annuity  commencing at age 65, providing an Executive with a benefit equal to 2%
of the  Executive's  "Final  Compensation"  multiplied by the number of years of
service (not to exceed 25) the "Target  Benefit").  For purposes of  determining
the annual expense under the SERP, an Executive's  "Final  Compensation"  equals
the  projected  average  compensation  of the  Executive  for the 5  consecutive
calendar  years  preceding and including the  Executive's  attainment of age 65.
Initially,   based  on  recommendations  from  the  actuary  for  the  SERP,  an
Executive's  compensation  will be  projected to increase at the rate of 5 1/2 %
per year.

As soon as  practicable  following  the death,  disability  or  retirement of an
Executive  after  attaining age 65 (the "Payment  Date"),  the Executive (or his
Beneficiary,  as the case may be) will be issued a certificate  or  certificates
for a number of shares of Common  Stock equal to the vested  number of Awards in
the Account of the Executive.  In addition,  an Executive shall be entitled to a
distribution  of his Account upon his  termination of employment for Good Reason
or without  Cause (as defined in the SERP),  in each case only after a Change in
Control.  Any  other  amounts  in  an  Account,  other  than  Awards,  shall  be
distributed in a single cash lump sum payment.

During 1999,  three of the Company's four Named  Executives  participated in the
SERP   receiving  the  aggregate   contributions   specified  in  the  Executive
Compensation  table  set  forth on Page 31. In  addition,  two  other  employees
participated  in the  SERP,  receiving  aggregate  contributions  equivalent  to
$527,857.

Board of Directors'
Report on Executive Compensation

                 Until  consummation  of the Kelso  Transaction on November 23,
1999,  the  Compensation  Committee  consisted of Messrs.  Kirby L. Cramer
(Chairman)  and Gabriel B.  Thomas.  Since  November 23, 1999 the Board has
functioned  in the role of Compensation Committee, given its small size
(four persons).

                                   Philosophy

                 The Company has developed an overall  compensation  program and
specific compensation plans which are designed to enhance corporate performance,
and thus  stockholder  value,  by aligning the financial  interest of executives
with those of its  stockholders.  The Company  believes  that this  alignment of
interests is still important, even in light of the fact that the Company has far
fewer  stockholders  as a result of the Kelso  Transaction.  In pursuit of these
overall  objectives,  the  structure  and  scope of the  Company's  compensation
program are  designed to attract  key  executives  to the Company and retain the
best possible  executive talent; to reinforce and link executive and stockholder
interests through equity-based plans; and to provide a compensation package that
recognizes   individual   performance  in  conjunction  with  overall  corporate
performance.

                 Principal Components of Executive Compensation

                 The principal elements of the Company's executive  compensation
program  consist of both annual and long-term  programs and include base salary,
annual cash and/or stock bonus if performance objectives are achieved, and it is
expected, at appropriate intervals, long-term incentive compensation in the form
of stock option  grants  and/or  awards of  restricted  stock.  The Company also
provides  medical  and other  fringe  benefits  generally  available  to Company
employees  and,  for  certain  of its  selected  senior  executives,  a deferred
compensation plan and the SERP.

                 Base salaries for  executives  are  determined by evaluation of
the  responsibilities of the position held and the experience of the individual,
with reference to the competitive marketplace for executive talent,  including a
comparison to base salaries for positions having comparable  responsibilities at
other companies in the clinical  laboratory  industry.  In addition to comparing
base  salary  compensation  of other  companies,  consideration  is given to the
relative  overall  corporate  performance  of the  Company  in  relation  to its
competitors  in the  industry,  with the  objective of achieving  standards  and
setting base  executive  salaries in the Company  somewhat above the market rate
paid for comparable positions in the clinical laboratory industry.

                 The Company's  executive  officers and other key persons may be
eligible for an annual cash and/or stock bonus under their individual employment
agreements.  Individual  performance objectives formulated by Company management
are recommended by the Chief Executive Officer for approval by the Board and are
awarded upon the discretionary  recommendation  of the CEO. Eligible  executives
may  receive  bonus  awards  based upon  certain  percentages  of base salary at
threshold and maximum levels  appropriate to the nature of their position in the
Company.  Whether any bonus is awarded,  and, if so, the amount thereof  depends
upon  actual  performance   against   predetermined   individual  and  corporate
objectives established by the CEO or the Board. Additionally,  cash bonuses were
awarded for 1999 to certain  senior  officers of the Company in connection  with
consummation of the Kelso Transaction.

                 Historically, awards of stock options and restricted stock have
been made periodically to executive  officers and certain other employees of the
Company upon consultation with and recommendation of the Chief Executive Officer
and approval of the  Compensation  Committee or in the absence of a Compensation
Committee, which may, under certain circumstances, be submitted for ratification
by the Board of Directors. Such options have been granted with an exercise price
equal to the market value of Unilab Common Stock on the date of grant. The Board
intends  to issue  stock  options  in 2000 on the  basis of the  $5.85 per share
purchase price in the Kelso Transaction.

                 The  purpose of these  awards has been to provide a  meaningful
equity interest in the Company to Company employees in a format that is designed
to retain and align the  financial  interests of these  employees  with those of
stockholders. The Board believes that this program has been and will continue to
be  instrumental  in  focusing  the  Company's  senior  management  on  building
long-term  value for  stockholders.  It has been the historical  practice of the
Company to make grants of stock  options with a staggered  vesting  schedule and
forfeiture  of shares  if not  exercised  within a  specified  period  following
separation from the Company's employ. The restricted stock grants similarly have
contained  certain  restrictions on vesting and transfer tied to the recipient's
continued  employment by the Company.  These restrictions on stock option awards
and  restricted  stock grants are designed to encourage  recipients to remain in
the  Company's  employ in order to recognize  the full value of the awards.  The
term over which these  restrictions  have applied typically is one to five years
in the case of stock  options  and two to five  years in the case of  restricted
stock.

                 In  addition,  the Company  provides  health care  benefits and
profit sharing for senior  executives  and other key persons on terms  generally
available to all Company  employees.  The Board  believes that such benefits are
comparable to those offered by other clinical  laboratory  companies.  Except as
specified in the Executive  Compensation  Table,  the value of  perquisites,  as
determined  in  accordance  with  the  rules  of  the  Securities  and  Exchange
Commission relating to executive compensation,  did not exceed $50,000 or 10% of
the total salary and bonus of an executive officer in the last fiscal year.

                 The Company's  former  chairman and CEO,  David C. Weavil,  and
four other executive  officers,  may have received  compensation for purposes of
Section 162(m) of the Internal Revenue Code in excess of $1 million during 1999,
as a result of which not all compensation  paid to such executive  officers will
qualify  for  deductibility  under  Section  162(m),  which  limits  in  certain
circumstances  the deductibility of compensation in excess of $1 million paid to
certain executive officers,  except for  "performance-based  compensation" which
complies with requirements imposed under Section 162(m).

                     Chief Executive Officer's Compensation

                 For 1999, David C. Weavil, the Chairman, President and Chief
Executive Officer of the Company during such period, was paid a base annual
salary of $400,000, as specified in his employment agreement and the same as in
1997.  The Compensation Committee considered Mr. Weavil's salary to be
appropriate in light of (i) the need to recruit Mr. Weavil in January 1997 with
an attractive compensation package, (ii) Mr. Weavil's compensation at his prior
employer, (iii) the compensation of other senior executives in the clinical
laboratory industry and (iv) the fact that the base salary was the same as Mr.
Weavil's base salary in 1997.  Mr. Weavil received a $400,000 cash bonus in
November 1999 in consideration for 1999 performance and his efforts towards
closing the Kelso Transaction.  Mr. Weavil also received deferred compensation
equal to 8% of his 1999 cash compensation (valued at $60,711), plus
participation in the Company's Executive Retirement Plan (valued at $828,299 in
1999), which brought his annual cash compensation for 1999 to $1,647,899.

                 Upon consummation of the Kelso Transaction,  Mr. Weavil entered
into a  consulting  agreement  with the  Company,  under  which he is to receive
$220,000 per year for 5 years. He also executed a non-compete agreement with the
Company, for which he received additional consideration.

                 Robert E. Whalen became President and Chief Executive Officer
of the Company upon consummation of the Kelso Transaction on November 23, 1999.
Mr. Whalen has a base annual salary of $400,000, the same as his predecessor.
Mr. Whalen also received deferred compensation equal to 8% of his 1999 cash
compensation (valued at $3,289), which brought his cash compensation for 1999
to $44,400.

   Compensation of Other Named Executive Officer and Key Management Personnel

                 The Company has also entered into  employment  agreements  with
certain of the Company's other Named Executive Officers (Messrs.  Lanzolatta and
Brotchie) and other key management  personnel.  Each  agreement  provides a base
salary plus potential bonus, if certain performance objectives are achieved, and
other incentive  compensation  at the discretion of the chief Executive  Officer
(approved  by the  Compensation  Committee  or the  Board  in  the  case  of the
Company's other Named Executive Officers).

                 The Board believes that significant  stock  ownership,  through
grants of stock  options,  restricted  stock,  loans to finance the  purchase of
Common Stock and other forms of equity-based incentive compensation, are a major
incentive in aligning the interests of employees,  including senior  management,
and  stockholders.  The Board  therefore  intends to continue to explore various
methods of assuring  such  commonality  of interest in the  Company's  long-term
performance.

                                  Michael B. Goldberg
                                  David I. Wahrhaftig
                                  David E. Weavil
                                  Robert E. Whalen
                                  Members of the Board

Item 12.         Security Ownership of Certain Beneficial Owners and Management

                 The  following  table sets forth  information  concerning  each
person  believed  to be a  beneficial  owner of more than 5% of the  outstanding
shares of Unilab common stock and beneficial ownership of Unilab common stock by
each director,  Named Executive Officer and all directors and executive officers
as a group, in each case as of March 23, 2000.

                                                  Shares         Percentage
Kelso Investment Associates VI, L.P. (1)        18,743,590        72.8%
KEP VI, LLC (1)                                  2,901,709        11.3%
Frank T. Nickell (1)                                        (2)          (2)
Thomas R. Wall IV (1)                                       (2)          (2)
George E. Matelich (1)                                      (2)          (2)
Michael B. Goldberg (1)(3)                                  (2)          (2)
David I. Wahrhaftig (1)(3)                                  (2)          (2)
Frank K. Bynum, Jr. (1)                                     (2)          (2)
Philip E. Berney (1)                                        (2)          (2)
Robert E. Whalen (4)(5)                             50,000         0.2%
Brian D. Urban (4)(6)                               50,000         0.2%
All Directors and Executive Officers               100,000         0.4%
of Unilab as a Group (10 persons)
-----------

(1)       The business  address for these  persons is Kelso & Company,
          320 Park Avenue,  24th Floor,  New York,  New York  10022.
(2)       Messrs.  Nickell,  Wall,  Matelich,  Goldberg,  Wahrhaftig,  Bynum and
          Berney may be deemed to share beneficial ownership of shares of common
          stock owned of record by Kelso Investment  Associates VI, L.P. and KEP
          VI, LLC, by virtue of their status as managing  members of KEP VI, LLC
          and the  general  partner  of Kelso  Investment  Associates  VI,  L.P.
          Messrs.  Nickell,  Wall,  Matelich,  Goldberg,  Wahrhaftig,  Bynum and
          Berney share investment and voting power with respect to the shares of
          common stock owned by Kelso Investment Associates VI, L.P. and KEP VI,
          LLC but disclaim beneficial ownership of such shares.
(3)       Messrs. Goldberg and Wahrhaftig are directors of Unilab.
(4)       Business address:  18448 Oxnard Street, Tarzana, California 91356.
(5)       Mr. Whalen is President and Chief Executive Officer and a director.
(6)       Mr. Urban is Executive Vice President, Chief Financial Officer and
          Treasurer.


Item 13.         Certain Relationships and Related Transactions

                  Whalen Employment Agreement. The Company expects to enter into
an employment agreement with Robert E. Whalen, retroactively effective as of the
time of his appointment as President and Chief Executive Officer.

                  Weavil Employment Agreement and Consulting  Agreement.  Unilab
entered into an employment agreement with David C. Weavil on January 20, 1997 to
serve as Chairman of the Board, President and Chief Executive Officer of Unilab.
With the completion of the Kelso Transaction,  Mr. Weavil's employment agreement
was terminated  and the Company  entered into a five-year  consulting  agreement
with Mr. Weavil. Pursuant to this agreement, Mr. Weavil is entitled to an annual
consulting  fee of  $220,000,  a seat on the board of  directors  and options to
purchase common stock of Unilab on terms that are  substantially  similar to the
options  granted to management  and other  employees  following the merger.  Mr.
Weavil  also  received  a  bonus  of  $400,000.   Unilab  also  entered  into  a
non-competition  agreement  pursuant  to which Mr.  Weavil was  compensated  for
limiting his ability to compete with the Company following the completion of the
Kelso Transaction.

Transactions with Kelso

                  Under the terms of the  merger  agreement  covering  the Kelso
Transaction  and Unilab,  the Company paid to Kelso a one-time fee of $6 million
upon the completion of the merger plus out of pocket  expenses of  approximately
$130,000. In addition, under the merger agreement,  Unilab is required to do the
following:

    o    pay to Kelso annual financial advisory fees of $600,000;

    o    reimburse Kelso for its expenses incurred in providing Unilab with
         financial advisory services; and

    o    indemnify  Kelso and  certain  related  parties  with  respect  to the
         transactions  contemplated  by the merger,  including the financing of
         the merger and any  services  to be  provided  by Kelso or any related
         party to Unilab going forward.

                  Unilab has already  begun paying  financial  advisory  fees to
Kelso and has already reimbursed Kelso for some expenses.

                  Company  directors  that  are  affiliated  with  Kelso  do not
receive any compensation for serving on the board.


                                     PART IV
<TABLE>
<CAPTION>

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
            <S>                                                                         <C>

             (a)1. Financial Statements

                Report of Independent Public Accountants................................F-1

                Statements of Operations for the Years Ended December 31, 1997,
                December 31, 1998 and December 31, 1999 ................................F-2

                Balance Sheets at December 31, 1998 and December 31, 1999...............F-3

                Statements of Shareholders' Equity (Deficit)  for the Years Ended
                December 31, 1997, December 31, 1998 and December 31, 1999..............F-4

                Statements of Cash Flows for the Years Ended December 31, 1997,
                December 31, 1998 and December 31, 1999.................................F-5

                Notes to the Consolidated Financial Statements..........................F-6

              (a)2. Financial Statement Schedules

                Report of Independent Public Accountant on
                Financial Statement Schedule............................................F-22

                Schedule II - Valuation and Qualifying Accounts.........................F-23

             (a)3. Exhibits required to be filed by Item 601 of Regulation S-K.

                The information called for by this paragraph is incorporated
                herein by reference to the Exhibit Index of this report.
</TABLE>
<PAGE>


                                    SIGNATURE


                 Pursuant to the requirements of the Securities Exchange Act of
1934, Unilab Corporation has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.

Dated:   3/24/00                 UNILAB CORPORATION



                                  By:   /s/    Brian D. Urban
                                       ----------------------
                                  Name:  Brian D. Urban
                                  Title: Executive Vice President,
                                         Chief Financial Officer and
                                         Treasurer


                  In Accordance with the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                           Title                                         Date
<S>                                <C>                                           <C>
/s/ Robert E. Whalen                President and Chief Executive Officer,        March 24, 2000
--------------------                Director (Principal Executive Officer)
Robert E. Whalen

/s/ Brian D. Urban                  Executive Vice President,                     March 24, 2000
------------------                  Chief Financial Officer and
Brian D. Urban                      Treasurer (Principal Financial
                                    and Accounting Officer)


/s/ Michael D. Goldberg             Director                                      March 24, 2000
-----------------------
Michael D. Goldberg

/s/ David Wahrhaftig                Director                                      March 24, 2000
--------------------
David Wahrhaftig

/s/ David C. Weavil                 Director                                      March 24, 2000
-------------------
David C. Weavil

/s/ By Brian D. Urban
Brian D. Urban, Attorney-in-Fact                                                  March 24, 2000

</TABLE>

<PAGE>


                    Index

Exhibit No.         Description of Exhibit

 2.1                Asset Purchase Agreement,  dated as of September 16, 1998,
                    by and between Unilab Corporation, as  Buyer,  and  Meris
                    Laboratories,   Inc.  Debtor  and  Debtor-in-Possession, as
                    Seller (Incorporated  by  Reference to Exhibit 2.1 to the
                    Company's  Amendment on Form 8-K(A) dated January 18, 1999).

 2.2                $14  million  Convertible  Subordinated  Note,  dated
                    November  5,  1998,  payable by Unilab Corporation to Meris
                    Laboratories,  Inc.  (Incorporated  by Reference to Exhibit
                    2.2 to the Company's Amendment on Form 8-K(A) dated
                    January 18, 1999).

 2.3                Registration Rights Agreement,  dated November 5, 1998, by
                    and between Unilab Corporation and Meris  Laboratories, Inc.
                    (Incorporated  by  Reference  to  Exhibit  2.3 to  the
                    Company's Amendment on Form 8-K(A) dated January 18, 1999).

 2.4                Asset Purchase  Agreement,  dated as of April 5, 1999, by
                    and between the Company,  as Buyer, and Physicians Clinical
                    Laboratories,  Inc. doing business as Bio-Cypher
                    Laboratories,  as Seller  (Incorporated by Reference to
                    Exhibit 2.1 to the Company's Current Report on Form 8-K
                    dated May 10, 1999).

 2.5                Registration   Rights   Agreement  by  and  between  the
                    Company  and  Physicians   Clinical Laboratories,  Inc.
                    doing business as Bio-Cypher Laboratories,  (Incorporated
                    by Reference to Exhibit 2.3 to the Company's Current Report
                    on Form 8-K dated May 10, 1999).

 2.6                Agreement and Plan of Merger,  dated as of May 24, 1999,
                    as amended  between the Company and UC Acquisition Sub, Inc.
                    (Incorporated by Reference to Exhibit 2.1 to the company's
                    Current Report on Form 8-K dated May 24, 1999).

 2.7                Letter agreement,  dated as of July 8, 1999, between the
                    Company and UC Acquisition Sub, Inc.(Incorporated  by
                    Reference to Exhibit 2.1 to the Company's  Current Report
                    on Form 8-K dated  July 8, 1999).

 2.8                Letter  Agreement,  dated as of July 30, 1999,  between the
                    Company and UC  Acquisition  Sub, Inc.  (Incorporated  by
                    reference to Exhibit 2.2 to the Company's  Current Report
                    on Form 8-K dated July 8, 1999).

 2.9                Letter  Agreement,  dated as of August 10, 1999,  between
                    the Company and UC Acquisition Sub, Inc.  (Incorporated by
                    reference to Exhibit 2.3 to the Company's  Current Report
                    on Form 8-K dated August 13, 1999).

 3.1                Amended   and   Restated    Certificate   of
                    Incorporation  of the Company  (Incorporated
                    by Reference to Exhibit 3.1 to the Company's
                    Registration  Statement  on Form S-1,  dated
                    November 30, 1993).

 3.2                Amendment to the Company's Certificate of Incorporation,
                    dated May 14, 1996 (Incorporated by  Reference  to Exhibit
                    3.1 to the  Company's  Quarterly  Report on Form 10-Q for
                    the  Quarter ended June 30, 1996, dated August 6, 1996).

  3.3               Second  Amended and  Restated  By-laws of the  Company,
                    as amended as of  February  27, 1996 (Incorporated  by
                    Reference to Exhibit 3.1 to the Company's  Current Report
                    on Form 8-K dated March 19, 1996).

 4.1                Indenture,  dated as of September  28, 1999,
                    between  Unilab  Finance Corp. and HSBC Bank
                    USA relating to the company's 12 3/4% Senior
                    Subordinated    Notes    due    2009    (the
                    "Indenture")  (Incorporated  by Reference to
                    Exhibit  4.1 to the  Company's  Registration
                    Statement  on Form S-4  dated  December  30,
                    1999).

 4.2                Supplemental Indenture, dated as of November
                    23, 1999, among the Company,  Unilab Finance
                    Corp.  and  HSBC  Bank  USA,   amending  the
                    Indenture   (Incorporated  by  Reference  to
                    Exhibit  4.2 to the  Company's  Registration
                    Statement  on Form S-4  dated  December  30,
                    1999).

 4.3                Assumption  Agreement,  dated as of November 23, 1999,
                    between the Company and Unilab Finance Corp.  (Incorporated
                    by Reference to Exhibit 4.3 to the Company's  Registration
                    Statement on  Form S-4 dated December 30, 1999).

 4.4                Credit  Agreement,  dated as of November 23, 1998,  among
                    the Company and the several lenders  named  therein
                    (Incorporated  by  Reference  to Exhibit  4.4 to the
                    Company's  Registration Statement on Form S-4 dated
                    December 30, 1999).

 4.5                Capital Call  Agreement,  dated as of November 23, 1999,
                    by and among Kelso & Company,  L.P.,  the  Company and
                    Bankers  Trust  Company  (Incorporated  by  Reference  to
                    Exhibit 4.5 to the  Company's Registration Statement on
                    Form S-4 dated December 30, 1999).

10.1                Consulting  Agreement,  dated as of September  17,  1997,
                    between the Company and Richard A. Michaelson (Incorporated
                    by Reference to Exhibit  10.15 to the  Company's  Annual
                    Report on  Form 10-K for the year ended December 31, 1997).

10.2                Employment  Agreement, dated as of January 20, 1997 between
                    David C. Weavil and the Company  (Incorporated by Reference
                    to Exhibit  10.12 to the  Company's  Annual  Report on Form
                    10-K, dated March 21, 1997).

10.3                Amendment to Employment  Agreement, dated November 23, 1999,
                    by and between, the company and  David C. Weavil
                    (Incorporated by Reference to Exhibit  10.3 to the Company's
                    Registration Statement on Form S-4,dated December 30, 1999).

10.4                Consulting  Agreement,  dated as of December 1, 1999,  by
                    and between David C. Weavil and the  Company (Incorporated
                    by Reference to Exhibit 10.4 to the Company's  Registration
                    Statement  on Form S-4, dated December 30, 1999).

10.5                Non Compete  Agreement,  dated  November 23, 1999, by and
                    among the Company,  UC  Acquisition  Sub,  Inc., and
                    David C. Weavil  (Incorporated by Reference to Exhibit 10.5
                    to the Company's  Registration Statement on Form S-4,
                    dated December 30, 1999).

10.6                Letter  Agreement,  dated  January  20,  1997,  between
                    Andrew  H.  Baker  and  the  Company  (Incorporated  by
                    Reference to Exhibit  10.17 to the  Company's  Annual
                    Report on Form 10-K, dated March 21, 1997).

10.7                Consulting  Agreement,  dated as of January 20,  1997,
                    between the Company and Hartill  Ltd. (Incorporated  by
                    Reference to Exhibit  10.24 to the  Company's  Annual
                    Report on Form 10-K,  dated March 21, 1997).

10.8                Form of Key Management Personnel  Employment Agreement
                    (Incorporated by Reference to Exhibit  No. 10.5 to
                    Amendment No. 1, dated December 23, 1993, to the Company's
                    Form S-1  Registration  Statement dated November 30, 1993).

10.9                Stockholders  Agreement,  dated as of November 23, 1999,
                    among the Company,  Kelso Investment  Associates VI, LLC
                    KEP VI, LLC and certain other  stockholders  of the Company
                    (Incorporated  by  Reference  to Exhibit  10.9 to the
                    Company's  Registration  Statement  on Form S-4 dated
                    December 30, 1999).

21.1                List of subsidiaries of the Company (the Company has no
                    subsidiaries).

24.1                Power of Attorney of Michael Goldberg

24.2                Power of Attorney of David Wahrhaftig

24.3                Power of Attorney of Robert E. Whalen

24.4                Power of Attorney of David C. Weavil

99.1                Press Release, dated March 7, 2000, announcing 1999 results.


<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,  1999 and 1998,  and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three  years in the period  ended  December  31,  1999.  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 auditing standards generally
accepted in the United States.  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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three  years in the  period  ended  December  31,  1999 in
conformity with accounting principles generally accepted in the United States.


ARTHUR ANDERSEN LLP


Los Angeles, California
March 3, 2000

<PAGE>

<TABLE>

                               UNILAB CORPORATION
                            STATEMENTS OF OPERATIONS
<CAPTION>

                                                                  For the years ended December 31,
                                                                   1999         1998        1997
                                                                  -------   -----------    --------
                                                                       (amounts in thousands)
<S>                                                               <C>          <C>        <C>
Revenue ....................................................       $285,163    $217,370    $214,001
                                                                   --------     --------   --------
Direct Laboratory and Field Expenses:
     Salaries, wages and benefits...........................         84,476      67,742      69,094
     Supplies...............................................         41,532      30,671      29,858
     Other operating expenses...............................         70,443      53,594      56,990
                                                                       ----      ------     -------
                                                                    196,451     152,007    155,942
Legal charges...............................................            600         --          --
Merger/recapitalization expenses............................         25,167         --          --
Amortization and depreciation...............................         10,163       7,592       8,885
Selling, general and administrative expenses................         39,060      33,530      34,570
                                                                      ----       ------     -------
          Total Operating Expenses..........................        271,441     193,129     199,397
                                                                    -------      ------     -------
Operating Income ...........................................         13,722      24,241      14,604
     Interest expense, net..................................         18,845      13,538      14,068
                                                                    -------      ------     -------
Income (Loss) Before Tax Benefit and Extraordinary Item.....         (5,123)     10,703         536
Tax Benefit  ...............................................         11,904         --          --
                                                                    ------       ------     -------
Income Before Extraordinary Item............................          6,781      10,703         536
Extraordinary Item--loss on early extinguishment of debt....         20,773         --          --
                                                                    -------      ------     -------
Net Income (Loss)...........................................      $(13,992)    $ 10,703      $  536
                                                                  ---------     --------     ------

Preferred Stock Dividends...................................            108         131         138
Net Income (Loss) Available to Common Shareholders..........      $ (14,100)   $ 10,572      $  398
                                                                   ==========    =======      ======
<FN>

The accompanying  notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>

<TABLE>

                               UNILAB CORPORATION
                                 BALANCE SHEETS
<CAPTION>

                                                                                   December 31,
                                                                                 1999         1998
                                                                                 -----       ------
                                                                               (amounts in thousands,
Assets                                                                         except per share data)
<S>                                                                             <C>          <C>

Current Assets:
Cash and cash equivalents...................................................     $ 12,557     $ 20,137
Accounts receivable, net of allowance for doubtful accounts
   of $21,250 and $10,813 in 1999 and 1998, respectively                           50,281       41,326
Inventory of supplies.......................................................        4,215        3,055
Prepaid expenses and other current assets...................................        1,710        1,045
                                                                                  -------       ------
     Total Current Assets...................................................       68,763       65,563
                                                                                   ------       ------
Property and equipment, net.................................................       13,125       11,277
Deferred tax asset..........................................................       16,558
Goodwill, net of accumulated amortization of $12,030
   and $7,754 in 1999 and 1998, respectively................................       81,857       56,949
Other intangible assets, net................................................        1,773        2,370
Other assets................................................................       11,454        6,301
                                                                                  -------      -------
                                                                                $ 193,530    $ 142,460
                                                                                =========    =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt...........................................      $ 3,908      $ 1,206
Accounts payable and accrued liabilities....................................       22,468       14,533
Accrued payroll and benefits................................................        8,998        6,892
                                                                                 --------      -------
     Total Current Liabilities..............................................       35,374       22,631
                                                                                   ------       ------
Long-term debt, net of current portion......................................      310,941      137,170
Other liabilities...........................................................        5,504        4,026
Commitments and Contingencies
Shareholders' Equity (Deficit):
Convertible preferred stock, $.01 par value; Authorized--20,000 shares;
   Issued and Outstanding--0 and 364 at December 31, 1999 and 1998, respectively      --             4
Common stock, $.01 par value; Voting--Authorized--100,000 shares;
   Issued and Outstanding--25,758 and 40,708 at December 31, 1999
   and 1998, respectively                                                             258          407
Additional paid-in capital..................................................      149,312      228,395
Accumulated deficit.........................................................     (307,859)    (250,173)
                                                                                 --------     --------
   Total Shareholders' Deficit..............................................     (158,289)     (21,367)
                                                                                 --------     --------
                                                                                 $193,530     $142,460
                                                                                 ========     ========

<FN>

The accompanying  notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>


                                                       UNILAB CORPORATION
                                          STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                      For the years ended December 31, 1999, 1998 and 1997
                                      (amounts in thousands, except per share amounts)
<CAPTION>
                                                                                                              Total
                                                                   Convertible     Additional                Shareholders'
                                                 Common Stock    Preferred Stock   Paid-In     Accumulated     Equity
                                                Shares  Amount   Shares   Amount   Capital        Deficit    (Deficit)

<S>                                           <C>        <C>      <C>    <C>      <C>         <C>           <C>
Balances, December 31, 1996..................    37,285   $ 373     400   $    4   $ 226,078   $(261,143)    $ (34,688)
Restricted shares issued to employees........        15      --     --        --         237         --            237
Restricted shares forfeited by employees.....       (20)     --     --        --         (45)        --            (45)
Issuance of shares for Company's 401(k) plan
   matching contributions                            29      --     --        --          49         --             49
Issuance of shares to certain Board Directors
   for services rendered                             84       1     --        --          63         --             64
Conversion of preferred stock to common stock        36      --     (36)      --          --         --             --
Issuance of shares at $0.625 upon exercise of
   stock options                                     75       1     --        --          46         --             47
Issuance of shares to a former CEO in
   connection with CEO's resignation                500       5     --        --         214         --            219
Shares sold to a former CEO pursuant to
   transition agreements in connection
   with CEO's resignation                           533       5     --        --         295         --            300
Shares sold to a former CeO pursuant to
   an employment agreement                        1,143      12     --        --         488         --            500
Issuance of shares to a former CEO as
   bonus pursuant to an employment
   agreement                                        229       2     --        --          98         --            100
Shares sold to a Board Director pursuant to
   a stock purchase plan                            500       5     --        --         276         --            281
Issuance of shares to employees as special
   year end bonus                                   169       2     --        --         253         --            255
Issuance of preferred stock dividend--$0.36
   per share                                        --       --     --        --          --        (138)         (138)
Net income...................................       --       --     --        --          --         536           536
                                               ------------------------------------------------------------------------
Balances, December 31, 1997..................    40,578   $ 406     364    $   4   $ 228,052   $(260,745)     $ (32,283)

Issuance of shares to certain Board Directors
   for services rendered                             72       1     --        --         159         --            160
Issuance of shares at $0.63--$2.19 upon
   exercise of options                               19       --    --        --          15         --             15
Issuance of shares for Company's 401(k) plan
   matchiing contributions                           14       --    --        --          25         --             25
Restricted shares issued to employees........        17       --    --        --         132         --            132
Issuance of shares to part-time employees as
   special bonus                                      8       --    --        --          12         --             12
Issuance of preferred stock dividend--$0.36 per
   share                                             --       --    --        --          --        (131)         (131)
Net income...................................        --       --    --        --          --      10,703        10,703
                                               ------------------------------------------------------------------------
Balances, December 31, 1998..................    40,708    $ 407    364    $   4   $228,395    $(250,173)     $(21,367)

Issuance of shares to certain Board Directors
   for services rendered                             39       --    --        --        100          --            100
Issuance of shares at $0.44--$2.00 upon
   exercise of options                              391        4    --        --        323          --            327
Miscellaneous issuances/repurchases of stock
   from employees                                   (40)      --    --        --         88          --             88
Issuance of shares in connection with the BCL
   acquisition                                    1,000       10    --        --       3,240         --          3,250
Conversion of note and accrued interest to
   common stock                                   4,683       47    --        --      14,002         --         14,049
Effect of the merger/recapitalization
   transaction...............................   (21,023)    (210)  (364)      (4)    (96,836)    (43,586)     (140,636)
Issuance of preferred stock dividend--$0.36 per
   share                                            --        --    --        --         --         (108)         (108)
Net loss.....................................       --        --    --        --         --      (13,992)      (13,992)
Balances, December 31, 1999..................    25,758    $ 258    --      $ --    $149,312   $(307,859)    $(158,289)
                                                  ---------------------------------------------------------------------
                                                                   --
<FN>

The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>


                                                       UNILAB CORPORATION

                                                    STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                             For the years ended December 31,
                                                                                1999       1998        1997
                                                                            ----------- ---------  --------
                                                                                      (in thousands)
<S>                                                                          <C>          <C>         <C>
Cash Flows From Operating Activities:
Net income (loss)..........................................................   $(13,992)    $10,703       $ 536
Adjustments to reconcile net income (loss) to net cash provided (used)
     Amortization and depreciation.........................................      10,163      7,592       8,885
     Provision for doubtful accounts.......................................      20,572     15,662      15,663
     Deferred tax benefit..................................................     (11,904)        --          --
     Non-cash merger/recapitalization expenses.............................       5,892         --          --
Net changes in assets and liabilities affecting operations, net of
     Increase in Accounts receivable.......................................     (21,636)   (17,154)    (14,967)
     Increase in Inventory of supplies.....................................        (623)      (106)       (207)
     (Increase) decrease in Prepaid expenses and other current assets......       (736)        250         407
     Increase in Other assets..............................................        (140)      (112)     (1,107)
     Increase (decrease) in Accounts payable and accrued liabilities.......       4,489     (4,047)     (7,221)
     Increase (decrease) in Accrued payroll and benefits...................       (820)        800         816
     Other.................................................................         325        408         910
                                                                                --------     --------   ---------
Net cash provided by (used in) operating activities........................      (8,410)    13,996       3,715
                                                                                ------       --------   ---------
Cash Flows From Financing Activities:
Borrowings under third party debt..........................................     310,765         --          --
Payments of third party debt...............................................    (145,993)    (1,720)     (1,776)
Financing costs under the New Senior Notes and Credit Facility.............      (8,635)        --          --
Purchase of old stock and stock options less new equity investment.........    (140,636)        --         581
Proceeds from exercise of options..........................................         327         15          47
Other   ...................................................................        (108)      (131)       (236)
                                                                                ----------   -------- ---------
Net cash provided by (used in) financing activities........................      15,720     (1,836)     (1,384)
                                                                                -----------  -------- ---------
Cash Flows From Investing Activities:
Capital expenditures.......................................................      (6,286)    (3,005)     (1,935)
Payments for acquisitions, net of cash acquired............................      (8,604)      (670)     (1,824)
                                                                                ---------   --------    -------
Net cash used by investing activities......................................     (14,890)    (3,675)     (3,759)
                                                                                ---------   --------   -------
Net Increase (Decrease) in Cash and Cash Equivalents.......................      (7,580)     8,485      (1,428)
Cash and Cash Equivalents--Beginning of Year................................      20,137    11,652      13,080
                                                                                ---------   --------   ------
Cash and Cash Equivalents--End of Year......................................    $ 12,557    $20,137    $11,652
                                                                                ========    =======     =======
<FN>

The accompanying  notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>


                               UNILAB CORPORATION

                          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  affect  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  amounts  reported in the balance  sheets for cash,  accounts
receivable,  accounts  payable and accrued  liabilities  approximate  fair value
because of the immediate or short-term maturity of these financial  instruments.
The Company's  $159.7 million of bank  indebtedness and $155.0 million of senior
notes were  secured in late 1999 and the Company  believes  such  amounts  still
approximate  fair value.  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, 1999,
1998 and 1997 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 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.

     Based upon a final review and valuation of certain  assets  acquired in the
Meris  Laboratories,  Inc. ("Meris") and Physicians  Clinical  Laboratory,  Inc.
(doing  business as Bio-Cypher  Laboratories)  ("BCL")  acquisitions in November
1998 and May 1999, respectively,  (see Note 3), the Company changed its estimate
of goodwill  amortization  arising from these  acquisitions to a ten year period
effective  July 1, 1999.  The effect of this change in estimate  was to increase
amortization expense and the net loss by $1.2 million in 1999.

     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 ("SFAS 109"),  "Accounting for Income
Taxes".

   j. 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,
                                                        1999       1998
                                                        (in thousands)
      Buildings..................................      $3,166     $3,166
      Leasehold improvements.....................       8,023      5,564
      Laboratory and other equipment.............      33,758     30,053
      Furniture and fixtures.....................       3,921      3,459
                                                      -------      -----
                                                       48,868     42,242
      Less-accumulated depreciation and
      amortization                                    $13,125    $11,277

     Depreciation expense was approximately  $4.8 million in 1999, $5.0 million
in 1998 and $6.0 million in 1997.

     Other intangible assets consist of the following:

                                                         December 31,
                                                        1999       1998
                                                        (in thousands)
            Customer lists.....................        $7,675     $7,675
            Covenants not to compete...........           235        235
                                                       -------     -----
                                                        7,910      7,910
            Less-accumulated amortization......         6,137      5,540
                                                       -------     -----
                                                       $1,773     $2,370

     Amortization  expense for  goodwill,  other  intangible  assets and certain
other deferred  costs was  approximately  $5.4 million in 1999,  $2.6 million in
1998 and $2.9 million in 1997.

3.   Acquisitions

     On  September  16,  1998,  the Company and 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 (all of which were paid by December 31, 1999), primarily related
to severance (for the reduction in headcount of approximately 230 employees) and
other employee related liabilities.

     On April 5, 1999,  the Company and BCL signed an asset  purchase  agreement
whereby Unilab acquired  substantially all of the assets of BCL. The acquisition
was completed on May 10, 1999. The purchase  price  consisted of a $25.0 million
subordinated  promissory  note,  the  issuance of 1.0  million  shares of Unilab
common  stock and  approximately  $8.6  million  of cash.  In  addition,  Unilab
acquired  $8.8  million of  tangible  assets,  the  majority  of which are trade
accounts receivable,  and assumed liabilities of approximately $3.5 million. The
acquisition  was accounted for under the purchase  method of accounting  and the
statements of operations include the results of BCL since May 10, 1999.

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

                                                            (in thousands)
   Accounts receivable...................................    $   7,891
   Inventory of supplies.................................          537
   Property and equipment................................          358
   Goodwill .............................................       33,839
                                                                ------
       Assets Acquired...................................       42,625
                                                                ------
   Issuance of note .....................................       25,000
   Accrued payroll and benefits..........................        1,989
   Assumed accounts payable..............................        1,475
   Liabilities associated with integration period........        1,957
   Acquisition fees, primarily legal costs...............          350
   Cash payment .........................................        8,604
   Common stock issued...................................        3,250
                                                                 -----
       Purchase Price/Liabilities Assumed or Incurred....    $  42,625
                                                               =========

     As noted in the table above and in connection  with the  integration of the
acquired BCL operations with those of Unilab,  the Company recorded  liabilities
of $2.0 million,  primarily related to severance (for the reduction in headcount
of over 500  employees),  relocation  and  moving  expenses  and other  employee
related  liabilities.  At  December  31,  1999,  approximately  $0.5  million of
liabilities,  expected  to be  paid  primarily  in the  next  six  months,  were
outstanding.

     The following unaudited pro forma results of operations for the years ended
December 31, 1999,  1998 and 1997 (in  thousands)  have been  prepared as if the
acquisition  of BCL  occurred  on January 1, 1998 and the  acquisition  of Meris
occurred on January 1, 1997:

                          Years Ended December 31,
                        1999       1998       1997
                        ----       ----       ----
                               (Unaudited)
   Revenue          $ 303,688    $ 296,951  $ 243,904
   Net Income           3,432       12,547      5,859


     The  historical  financial  results of Unilab for 1999,  1998 and 1997 have
been adjusted primarily for the historical results of BCL and Meris, an increase
in interest  expense due to the  additional  debt  incurred to purchase  BCL and
Meris,  an  increase  in  amortization  of goodwill  and cost  savings  from the
integration of the BCL and 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.   Recapitalization

     On May 24, 1999, the Company  entered into an agreement with UC Acquisition
Sub,  Inc.,  which is owned by  affiliates of Kelso & Company  ("Kelso"),  under
which UC Acquisition Sub, Inc. merged with and into the Company.  The merger was
completed on November 23, 1999. With the completion of the merger,  93.0% of the
Company's  common stock is owned by Kelso,  its  affiliates  and  designees  and
management and the remaining 7.0% is held by a limited number of investors.  The
transaction was accounted for as a recapitalization.

     Besides the merger,  the other principal features of the recapitalization
included:

o          The conversion into cash of approximately 44.9 million shares
           of common stock at $5.85 per share,  the conversion into cash
           of 364,000  shares of preferred  stock at $5.75 per share and
           the  accelerated  vesting  and  either  the  cancellation  or
           retention of outstanding stock options for cash consideration
           of $15.4 million; and

o          The  retirement  of $144.5  million  of debt,  consisting  of
           $119.5 million of 11% senior notes and the $25.0 million note
           issued in connection  with the BCL  acquisition.  In order to
           retire such debt, the Company paid a premium of $17.2 million
           and additionally wrote-off $3.6 million of deferred financing
           costs.  The  retirement  premium  and  the  write-off  of the
           deferred  financing costs,  which totaled $20.8 million,  has
           been   shown  as  an   extraordinary   loss  for  the   early
           extinguishment of debt in the statement of operations.

     The Kelso  Transaction was primarily  financed  through a new common equity
investment of $139.5 million by affiliates and designees of Kelso and borrowings
of $160.0  million  under a new senior bank credit  facility and the issuance of
$155.0 million of new senior notes.

     In  addition,  as part  of the  Kelso  Transaction,  the  Company  incurred
merger/recapitalization expenses of $25.2 million related primarily to financial
advisory fees,  other  financing fees and expenses,  legal and accounting  fees,
printing costs, severance costs and other miscellaneous items.

5.   Legal and Acquisition Related Charges

     In 1999, the Company  reached a settlement for $0.6 million with a group of
insurance companies regarding claims by the insurance companies that the company
over-billed them in the early to mid-1990s in connection with several  chemistry
profile tests that were  previously  the subject of a settlement  agreement with
the government.

     In May of 1999,  Unilab  learned of a new federal  investigation  under the
False Claims Act relating to Unilab's  billing  practices for the following four
test  procedures:  (1)  apolipoprotein  in conjunction  with coronary risk panel
assignments;  (2) microscopic  evaluation in conjunction  with  urinalysis;  (3)
performance of T7 index in conjunction with T3 and T4 tests; and (4) fragmenting
billing of  unlisted  panel  codes.  Unilab is in the process of  gathering  and
voluntarily submitting  documentation regarding these tests to the Department of
Justice.  The Company accrues for potential  liabilities in matters such as this
as they become known and can be reasonably estimated.  In the Company's opinion,
this investigation is not reasonably likely to have a material adverse effect on
the Company's results of operations or financial position. However, no assurance
can be given as to the ultimate outcome with respect to such investigation.  The
resolution of such  investigation  could be material to the Company's  operating
results for any particular  period,  depending upon the level of income for such
period (see note 10 for additional information on contingencies).

6.   Income Taxes

     For the years ended December 31, 1999, 1998 and 1997,  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 (benefit) and income
taxes  computed by applying the  statutory  Federal  income tax rate to earnings
before income taxes is as follows:
<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                                 1999           1998         1997
                                                                                           (in thousands)
<S>                                                                              <C>             <C>        <C>

     Computed income taxes at U.S. statutory rate............................      $ (9,064)      $3,746      $188
     Amortization and write-off of goodwill and intangible assets disallowed
        for income tax purposes..............................................           411          420       420
     Non-deductible merger expenses..........................................         3,250           --        --
     Change in valuation allowance...........................................        (5,790)      (3,871)       --
     Other...................................................................         (711)        (295)
                                                                                  -----------      -----
                                                                                  $ (11,904)       $  --      $ --
                                                                                  ===========      ======     =====

</TABLE>

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

                                                   December 31,
                                                1999         1998
                                                 (in thousands)
     Bad debt reserve....................       $ 7,147      $ 2,972
     Intangible assets...................        12,313        9,807
     Property and equipment..............           250          383
     Accrued liabilities.................         1,664        1,408
     Net operating loss carryforwards....        25,130       21,166
                                                 -------     ------
                                                 46,504       35,736
     Valuation allowance.................       (29,946)     (35,736)
                                                -------      -------
                                               $ 16,558       $  --
                                               ========       ======

     The  Company  establishes  a valuation  allowance  in  accordance  with the
provisions of Statement of Financial  Accounting  Standards No. 109, "Accounting
for Income Taxes". The Company continually reviews the adequacy of the valuation
allowance and  recognizes the benefits from its deferred tax assets only when an
analysis of both positive and negative  factors  indicate that it is more likely
than not that the benefits  will be realized.  Based on the  Company's  improved
operating  performance  in 1998 and  1999  (before  the  merger/recapitalization
expenses) and having fully integrated both the Meris and BCL  acquisitions,  the
Company  believed it would have  sufficient  future taxable income and therefore
reduced its valuation  allowance by approximately $16.6 million during the third
quarter of 1999.

     Approximately  $4.7  million  of the tax asset  recorded  during  the third
quarter of 1999 reduced the amount of goodwill from certain acquisitions and the
remaining  amount of the benefit was  recognized as an income tax benefit in the
statements  of  operations.  In addition,  approximately  $3.7 million of future
benefit from the  recognition  of deferred tax assets will be an  adjustment  to
additional paid in capital.

     In addition,  the Company has a capital loss of approximately $36.5 million
from the sale of an equity  investment  in 1995.  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, 1999 and 1998.

     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, 1999, available net operating loss
and capital loss  carryforwards for U.S. tax purposes were  approximately  $73.9
million and $36.5 million,  respectively.  Net operating loss  carryforwards for
California state tax purposes were approximately  $33.2 million.  Utilization of
the net operating losses may be subject to an annual limitation due to ownership
change  limitations  provided by the  Internal  Revenue Code of 1986 and similar
state  provisions.  The annual  limitations  may result in the expiration of net
operating losses before utilization.

7.   Long-Term Debt
<TABLE>

     Long-term debt consists of the following:
<CAPTION>

                                                                                        December 31,
                                                                                       1999       1998
                                                                                        (in thousands)
<S>                                                                                  <C>         <C>

     New Senior Notes, interest at 12.75 percent payable semi-annually...........     $150,810    $   --
     Old Senior Notes, interest at 11.0 percent payable semi-annually............          488     119,344
     Six year bank term loan, interest at LIBOR plus 3.125 percent...............       50,000         --
     Seven year bank term loan, interest at LIBOR plus 3.875 percent.............      109,725         --
     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 ...............................................        2,609      2,867
     Obligations under capital leases collateralized by equipment with interest
        due through October 2000.................................................        1,217      2,165
                                                                                        ------     ------
                                                                                       314,849    138,376
     Less-- current portion......................................................        3,908      1,206
                                                                                        ------     ------
                                                                                      $310,941   $137,170
                                                                                      ========   ========

</TABLE>

     As part of the Kelso  Transaction  (see Note 4), the Company  completed  an
offering of $155.0 million of senior notes (the "New Senior Notes") in September
1999 and  entered  into a  credit  agreement  (the  "Credit  Agreement")  with a
syndicate of banks and other financial  institutions for a $185.0 million credit
facility (the "Credit Facility").

     The New Senior  Notes were  issued at a  discount  of 97.27% per note.  The
aggregate  discount on the New Senior  Notes  approximated  $4.2  million and is
charged to operations as  additional  interest  expense over the life of the New
Senior Notes using the  effective  interest  method.  Interest on the New Senior
Notes is 12.75% and is payable on April 1st and  October  1st of each year.  The
New Senior Notes are due October  2009 and the Company is not  obligated to make
any mandatory  redemption or sinking fund payment with respect to the New Senior
Notes prior to maturity.

     The New Senior  Notes are not  redeemable  prior to October 1, 2004,  after
which the New 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 New Senior Notes (the  "Indenture"),  plus accrued and
unpaid  interest,  if any, to the date of redemption.  In addition,  at any time
prior to October 1, 2002,  the Company  may redeem up to 35% of the  outstanding
notes with the net  proceeds of one or more public  offerings of common stock of
the Company,  at a redemption  price of 112.75% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the redemption date.

     The $185.0 million Credit Facility consists of $160.0 million in term loans
($50.0  million Term A and $110.0 million Term B) and $25.0 million in revolving
loans.  Any borrowings  under the revolving line of credit are due October 2005.
The Term A loan is due in quarterly  principal payments of $1.3 million starting
on December 2000 and increasing to $1.9 million in December  2001,  $2.5 million
in December  2002,  $3.1  million in December  2003 and $3.8 million in December
2004.  The Term B loan is due in  quarterly  principal  payments of $0.3 million
starting December 1999 through September 2005 and increasing to $25.9 million in
December 2005 through November 2006. In addition,  the Credit Agreement requires
mandatory  repayment for various items,  including a percentage of annual excess
cash flow, as defined. Interest on amounts borrowed under the Credit Facility is
subject  to  adjustment   determined   based  on  certain  levels  of  financial
performance.  For LIBOR  borrowings,  the  applicable  margin added to LIBOR can
range from 2.00% to 3.375%  for Term A and  revolving  loans and 3.50% to 3.875%
for Term B loans. The amounts  outstanding under the Credit Facility are subject
to certain restrictive covenants. The covenants include, but are not limited to,
requirements  that the  Company  maintain  specified  financial  ratios and stay
within defined limitations on capital expenditures and additional  indebtedness.
The Company also cannot declare or pay any dividends.  All obligations under the
Credit Facility are secured by substantially all of the Company's assets.

     If the Company's ratio of net total debt to EBITDA (as defined in a capital
call  agreement)  for the year 2000 is  greater  than 5.0  times,  Kelso and its
affiliates will be required,  pursuant to a capital call agreement,  to make (or
cause their designees to make) an equity investment in the Company. The proceeds
from the  equity  investment  will be used to retire  the term  loans  under the
Credit Facility. To the extent all such proceeds are not fully used to repay the
term loans,  the commitment  under the revolving credit facility will be reduced
by an amount equal to the remaining  proceeds.  The equity investment will be in
an amount equal to the lesser of (a) the amount  necessary to cause the ratio of
net total debt to EBITDA, after giving effect to the equity investment, to equal
5.0 times and (b) $50.0 million.

     As part of the Kelso  Transaction,  the Company tendered for $120.0 million
(face  value)  of  senior  notes  ("Old  Senior  Notes")  existing  prior to the
recapitalization.  99.6% of the  holders of the Old Senior  Notes  accepted  the
Company's  tender offer;  however,  0.4% of holders did not tender and therefore
$0.5 million of the Company's Old Senior Notes remain  outstanding.  Interest on
the Old Senior  Notes is 11% and is payable on April 1st and October 1st of each
year.  The Old Senior Notes are due April 2006 and are not  redeemable  prior to
April 1, 2001,  after which the Old 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  notes,  plus  accrued and unpaid
interest, if any, to the date of redemption.

     In the event of a change in control,  as defined in the Indenture,  holders
of the New 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 New and Old  Senior  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 pay  dividends or  distributions  on capital  stock or repurchase
capital stock and 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.  The $14.0 million note
plus accrued  interest of $49,000 was converted  into 4.7 million  shares of the
Company's common stock. In accordance with the terms of the note, the conversion
price was $3.00 per share.

     At December 31, 1999, future scheduled principal payments of long-term debt
are as follows (in thousands):

                     Years Ended December 31,
                     2000                          $ 3,908
                     2001                            7,167
                     2002                            9,787
                     2003                           12,431
                     2004                           14,783
                     Thereafter                    266,773
                                                   -------
                                                  $314,849

8.   Capital Shares, Stock Options and Warrants

   a. Convertible Preferred Stock

     As of December 31, 1999,  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, 1999,  19,000,000  shares for
which no series has been designated were authorized and unissued.

     As  part  of  the  Kelso  Transaction  (see  Note  4),  364,000  shares  of
convertible  preferred  stock were redeemed for $5.75 a share.  36,000 shares of
preferred  shares were converted  into common stock during 1997.  Holders of the
convertible  preferred  stock were 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.

   b. Restricted Stock

     The Company granted 17,000  restricted  shares and 15,000 restricted shares
of common stock to certain employees at no cost in 1998 and 1997,  respectively.
Approximately  $132,000 and $192,000 was  amortized to expense in 1998 and 1997,
respectively.  As part of the  recapitalization  (see  Note 4),  all  restricted
shares became fully vested and were redeemed at $5.85 a share.

   c. Stock Options

     Employee Stock Option Plan

     As approved by the Company's shareholders, the Company maintained until the
November 23, 1999 consummation of the Kelso Transaction,  the Unilab Corporation
Stock Option and Performance Incentive Plan (the "Employee Option Plan") and the
Unilab  Corporation  Non-Employee  Directors Stock Plan (the  "Directors  Option
Plan").

     Under the terms of the  Employee  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  could  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 could be granted. No employee could receive
annual awards of or relating to more than 250,000 shares of Unilab common stock.

     Under the terms of the Directors  Option Plan, each outside  director could
received an annual option grant of 10,000 shares and an additional annual option
grant of 10,000  shares was awarded to each  outside  director who serves as the
chairman of a committee or committees of the Board of 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.  500,000 shares were purchased in 1997.
The plan was terminated in 1999.

     All outstanding  options (except certain options,  as described below, that
were elected to be rolled-over by the option holders in a new stock option plan)
under the Employee  Option Plan and the Director  Option Plan were cashed out in
the Kelso Transaction.

     Other

     Prior to the adoption of the Employee Option Plan and the Directors  Option
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, 1997,  1998 and 1999,  and changes  during the
years ending on those dates is summarized as follows:
<TABLE>
<CAPTION>

                                                                              Weighted-
                                                                               Average
                                                                    Shares   Exercise Price
<S>                                                           <C>                 <C>

             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
                                                                ---------           -----
                  Granted.............................            711,000            2.32
                  Exercised...........................          (390,500)            0.84
                  Forfeited...........................           (161,790)           5.34
                  Redeemed/Rolled-over as part of ....
                  the recapitaliation.................         (5,474,209)            --
             December 31, 1999........................                --            $ --
                                                                ---------           -----
</TABLE>


        As part of the Kelso  Transaction  (see Note 4),  certain  executive and
managerial  employees had the option to rollover  their  existing  stock options
instead of having the stock options redeemed in cash at the spread between $5.85
a share and the stock option  exercise  price.  Certain  individuals  elected to
rollover  their stock options,  valued at $0.5 million,  into a new stock option
plan.  As of December 31,  1999,  the terms of the new stock option plan had not
been finalized, though it is anticipated that 3.8 million options (besides those
options being  rolled-over)  will be available for grants at an option  exercise
price of $5.85.  It is  anticipated  that part of the options  will vest through
length of service and part will vest subject to various performance criteria. In
addition,  all  outstanding  options  (besides those being  rolled-over)  became
immediately vested and were cancelled for cash consideration of $15.4 million as
part of the recapitalization.

     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  in connection  with options  awarded to
employees.  Had  compensation  cost for the  Company's  stock  option plans been
determined  consistent with Statement of Financial  Accounting Standards No. 123
("SFAS 123"),  "Accounting for Stock-Based  Compensation",  the Company's actual
net income of $10,703,000 and $536,000 for the years ended December 31, 1998 and
1997,  respectively,  would have been reduced to pro forma net income  (loss) of
$9,423,000  and  ($508,000)  for the years  ended  December  31,  1998 and 1997,
respectively.  Because the SFAS 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. The Rights
were redeemed in connection with the Kelso Transaction.

9.   Related Party Transactions

     The Company  sold  533,333  shares,  valued at $0.3  million at the time of
issuance,  to a 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 a former 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 was repaid  during
1999.  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 a 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, 1999 made by a
bank 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.

     Under the terms of the merger agreement covering the Kelso Transaction (see
Note 4) and the  Company,  the  Company  paid to  Kelso a  one-time  fee of $6.0
million plus out-of-pocket expenses, upon completion of the merger. In addition,
Kelso will earn  annual  financial  advisory  fees of  $600,000,  starting as of
November 23, 1999. Kelso earned financial advisory fees of $65,000 in 1999.

10.   Commitments and Contingencies

     Property and equipment leased under capital leases is as follows:

                                                            December 31,
                                                          1999       1998
                                                          (in thousands)
     Building.........................................    $3,100     $3,100
     Laboratory and other equipment...................     4,103      5,638
     Less--Accumulated amortization....................    4,426      4,934
                                                           -----      -----
     Net leased property under capital leases.........    $2,777     $3,804
                                                          ======     ======

     As of December 31, 1999,  future  minimum  rental  payments  required under
capital and operating leases that have initial or remaining  noncancelable terms
in excess of one year are approximately as follows:

                                                        Capital   Operating
                                                        Leases     Leases
                                                         (in thousands)
       2000                                            $2,038    $ 10,718
       2001                                               782       6,984
       2002                                               822       4,732
       2003                                               863       3,333
       2004                                               594       1,418
       Thereafter..................................        --       1,509
                                                        ------    -------
       Total minimum lease payments................     5,099     $28,694
                                                                  -------
       Less: Amount representing interest..........     1,273
                                                        -----
       Present value of net minimum lease payments.    $3,826
                                                       ======

     Rental expense for operating leases was approximately $15.3 million,  $10.8
million and $10.2 million in 1999, 1998 and 1997, respectively.

     The Company has  employment  agreements  with its  principal  officers  and
certain other key  employees.  Such  agreements  expire at various dates through
February  2003 and  most  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  $2.3 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, of
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 $3.4
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.

11.   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 $0.4 million,  $0.3 million and
$0.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.

     The Company maintains the Unilab Corporation Executive Retirement Plan (the
"SERP"),  an unfunded defined  contribution  plan, for the benefit of designated
key employees.  Prior to the  recapitalization  (see Note 4), the benefit earned
each year was issued into participants' account through memorandum shares, which
represent  rights to receive  stock of the Company at a future  date.  After the
recapitalization,  participants  will  receive an annual  contribution  to their
account as well as earning  interest on their account  balance at prime plus two
percent.  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.  Pension  expense for the SERP was  approximately  $2.7  million (of
which $2.1  million  is  included  in  merger/recapitalization  expenses  in the
Statement  of  Operations),  $407,000  and  $271,000  in 1999,  1998  and  1997,
respectively.  At December 31, 1999, the accumulated  obligation recognized as a
liability in the balance  sheet was  approximately  $2.5  million.  The weighted
average discount rate and rate of increase in future compensation levels used in
determining the present value of benefit obligations were 5.1% and 3.8% in 1999,
6.0% and 3.8% in 1998 and 6.6% and 3.8% in 1997.

12.   Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                              1999      1998       1997
                                                                             ---------------------------
                                                                                  (in thousands)
<S>                                                                          <C>        <C>       <C>
     Cash paid during the year for:
          Interest.......................................................    $ 15,821  $ 13,419   $ 14,063
          Income taxes...................................................         421         2          1
     Supplemental Disclosure of Noncash Investing and Financing Activities:
          Restricted shares of common stock issued to employees..........         --         32         16
          Shares issued for Company's 401(k) plan matching contributions.         --         25         49
          Shares issued to certain Board Directors for services rendered.         --        160         64
     In connection with business acquisitions, liabilities were assumed
       as follows:
          Fair value of assets acquired..................................    $ 42,625  $ 18,734   $    --
          Cash paid......................................................    $  8,604      $ --   $    --
          Value of common stock issued...................................    $  3,250      $ --   $    --
          Liabilities assumed............................................    $ 30,771  $ 18,734   $    --
</TABLE>

     During 1997, the Company issued 500,000  shares,  valued at $0.2 million at
the time of issuance,  to a 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 a  former  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.


<PAGE>


13.   Quarterly Financial Data (unaudited)

     Summarized  unaudited  quarterly  financial  data  for  1999  and  1998 (in
thousands) is as follows:
<TABLE>
<CAPTION>

                                                               Year Ended December 31, 1999
                                                            First     Second    Third     Fourth
                                                           Quarter   Quarter   Quarter   Quarter
<S>                                                        <C>        <C>       <C>      <C>


     Revenue ..........................................     $63,559    $73,727   $76,210   $71,667
     Direct laboratory and field expenses:
          Salaries, wages and benefits.................      18,455     21,831    22,940    21,250
          Supplies.....................................       8,827     10,519    11,307    10,879
          Other operating expenses.....................      15,416     18,983    18,855    17,189
               Total...................................      42,698     51,333    53,102    49,318
     Legal charge .                                              --        600        --        --
     Merger/recapitalization expenses..................          --         --        --    25,167
     Amortization and depreciation.....................       1,897      2,230     3,062     2,974
     Selling, general and administrative expenses......       9,312      9,891    10,120     9,737
     Operating income (loss)...........................       9,652      9,673     9,926  (15,529)
     Net income (loss).................................       6,166      5,893    17,852  (43,903)
     Net income (loss) available to common shareholders       6,133      5,860    17,819  (43,912)
</TABLE>

<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
</TABLE>

 Second Quarter 1999

     Effective  May 10,  1999,  the Company  acquired  substantially  all of the
assets of BCL. In addition,  the Company  reached a settlement  for $0.6 million
regarding claims into the Company's sales and billing practices.

 Third Quarter 1999

     The Company reduced its valuation allowance against its deferred tax assets
by $16.6 million,  with $4.7 million reducing the amount of goodwill  previously
recorded from certain  acquisitions  and $11.9 million being recognized as a tax
benefit in the statement of operations.

Fourth Quarter 1999

     As  part of the  recapitalization  of the  Company,  the  Company  incurred
expenses of $25.2  million and retired  debt that  resulted in an  extraordinary
loss of $20.8 million.

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 1999 and 1998

     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 ON SCHEDULES



To the Board of Directors and Shareholders of Unilab Corporation:

     We have audited in accordance with generally  accepted auditing  standards,
the financial  statements of Unilab  Corporation  included in this Form 10-K and
have issued our report  thereon dated March 3, 2000.  Our audit was made for the
purpose  of forming an  opinion  on the basic  financial  statements  taken as a
whole. The schedule listed in Item 14a(2) for the years ended December 31, 1999,
1998 and 1997 is the responsibility of the company's management and is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not  part of the  basic  financial  statements.  This  schedule  has been
subjected to the auditing procedures applied in the audit of the basic financial
statements  and, in our  opinion,  fairly  states in all  material  respects the
financial  data  required  to be set  forth  therein  in  relation  to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP


Los Angeles, California
March 3, 2000

<PAGE>
<TABLE>

                                   Schedule II

                       UNILAB CORPORATION AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                             (Amounts in thousands)
<CAPTION>

                                                           Balance     Charged
                                                             at        to Costs
                                                          Beginning      and                  Balance
                                                          of Period    Expenses  Deductions  End of Period
<S>                                                       <C>         <C>        <C>         <C>

FOR THE YEAR ENDED DECEMBER 31, 1997;
Allowance for doubtful accounts........................     $9,338    $ 15,663   $(15,182)    $ 9,819
FOR THE YEAR ENDED DECEMBER 31, 1998;
Allowance for doubtful accounts........................     $9,819    $ 15,662   $(14,668)    $ 10,813
FOR THE YEAR ENDED DECEMBER 31, 1999;
Allowance for doubtful accounts........................    $10,813    $ 20,572   $(10,135)    $ 21,250

</TABLE>