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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarter Ended

September 30, 2004

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-4034

DAVITA INC.

601 Hawaii Street

El Segundo, California 90245

Telephone number (310) 536-2400

The Registrant 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 and has been subject to such filing requirements for the past 90 days.

The Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

As of November 1, 2004, there were approximately 97.6 million shares of the Registrant’s common stock (par value $0.001) outstanding.

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DAVITA INC.

INDEX

Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.

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DAVITA INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands, except per share data)

See notes to condensed consolidated financial statements.

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DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)

See notes to condensed consolidated financial statements.

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DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

See notes to condensed consolidated financial statements.

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars in thousands, except per share data)

Unless otherwise indicated in this Quarterly Report on Form 10-Q “the Company”, “we”, “us”, “our” and similar terms refer to DaVita Inc. and its consolidated subsidiaries.

The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments consisting only of normal recurring items necessary for a fair presentation of the results of operations are reflected in these consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, accounting for income taxes and variable compensation accruals. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the operating results for the full year. The consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. All share and per share data has been restated to reflect the effects of a stock split during the second quarter of 2004 (see Note 4).

Stock-based compensation

If the Company had adopted the fair value-based compensation expense provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123 upon the issuance of that standard, net earnings and net earnings per share would have been adjusted to the pro forma amounts indicated below (shares in 000’s):

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

The reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share is as follows (shares in 000’s):

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

For the three and nine months ended September 30, 2003, the calculation of diluted earnings per share assumes conversion of both the 5 ⁵/8% convertible subordinated notes and the 7% convertible subordinated notes. All convertible subordinated notes were redeemed or converted into shares of the Company’s common stock during the second half of 2003.

Shares associated with stock options that have exercise prices greater than the average market price of shares outstanding during the period were not included in the computation of diluted earnings per share because they were anti-dilutive. These excluded shares were as follows:

Long-term debt was comprised of the following:

Scheduled maturities of long-term debt at September 30, 2004 were as follows:

On July 30, 2004, the Company amended its existing credit facilities in order to modify certain restricted payment covenants, principally for acquisitions and share repurchases, and to extend the maturity of the Term Loan B until June 30, 2010. The Company also borrowed an additional $250,000 under a new Term Loan C. The

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

Term Loan C currently bears interest at LIBOR plus 1.75% for an overall effective rate of 3.56% at September 30, 2004. The aggregate annual principal payments for the amended Term Loan B and the Term Loan C are approximately $56,100 and $11,900 in the first five years of the agreement, and $974,200 and $238,100 in the sixth year, respectively, due no later than June 30, 2010.

As of September 30, 2004, the Company had undrawn revolving credit facilities totaling $115,950 of which $22,984 was committed for outstanding letters of credit.

The Company entered into an interest rate swap agreement during 2003 that had the economic effect of fixing the LIBOR-based interest rate at 3.39%, plus the Term Loan B margin which was 2.00% as of September 30, 2004, on an amortizing notional amount of $135,000 matched with the Term Loan B outstanding debt. The agreement expires in November 2008 and requires quarterly interest payments. As of September 30, 2004, the notional amount of the swap was $135,000 and its fair value was a $626 liability, resulting in a charge to comprehensive income in the third quarter of 2004 of $1,015, net of tax.

In January 2004, the Company entered into an interest rate swap agreement that had the economic effect of fixing the LIBOR-based interest rate at 3.08%, plus the Term Loan B margin which was 2.00% as of September 30, 2004, on an additional amortizing notional amount of $135,000 matched with the Term Loan B outstanding debt. The agreement expires in January 2009 and requires quarterly interest payments. As of September 30, 2004, the notional amount of the swap was $135,000 and its fair value was an asset of $658, resulting in a charge to comprehensive income in the third quarter of 2004 of $1,152, net of tax.

On August 25, 2004, the Company entered into an interest rate swap agreement that had the economic effect of fixing the LIBOR-based interest rate at 3.64%, plus the Term Loan C margin which was 1.75% as of September 30, 2004, on a non-amortizing notional amount of $75,000 matched with the Term Loan C outstanding debt. The agreement expires in August 2008 and requires quarterly interest payments. As of September 30, 2004, the fair value of the swap was a $621 liability, resulting in a charge to comprehensive income in the third quarter of 2004 of $379, net of tax.

As a result of these swap agreements, the Company’s effective interest rate on its entire credit facility was 4.33% based upon margins ranging from 1.50% to 2.00% in effect on September 30, 2004.

In May 2004, the Company’s Board of Directors approved a three-for-two stock split of the Company’s common stock in the form of a stock dividend payable on June 15, 2004 to stockholders of record on June 1, 2004. As a result, the outstanding shares of Company common stock increased to 99.8 million shares on June 15, 2004. The Company’s stock began trading on a post-split basis on June 16, 2004. Shares and per share data for all periods presented have been restated to reflect the effects of the stock split.

Under the previously announced Board authorization for share repurchases, the Company repurchased a total of 3,049,800 shares of common stock at an average price of $28.69 per share during the third quarter of 2004. On November 2, 2004, the Company’s Board of Directors authorized the Company to repurchase up to an additional $200,000 of its common stock in the open market or in privately negotiated transactions. The total outstanding Board authorizations for share repurchases are now approximately $250,000.

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed statement, Share-Based Payment, an amendment of FASB Statements No. 123 and 95, that would require companies to account for stock-based compensation to employees using a fair value method as of the grant date for all unvested and new awards. The proposed statement addresses the accounting for transactions in which a company receives employee services in exchange for equity instruments such as stock options, or liabilities that are based on the fair value of the company’s equity instruments or that may be settled through the issuance of such equity instruments, which includes the accounting for employee stock purchase plans. This proposed statement would eliminate a company’s ability to account for share-based awards to employees under APB Opinion 25, Accounting for Stock Issued to Employees but would not change the accounting for transactions in which a company issues equity instruments for services to non-employees or the accounting for employee stock ownership plans. The proposed statement would not be effective before the third quarter of 2005. The potential impact on the Company’s consolidated financial statements will be assessed when the final standard is issued.

The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (1) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (2) differing interpretations of government regulations by different fiscal intermediaries or regulatory authorities; (3) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; (4) retroactive applications or interpretations of governmental requirements; and (5) claims for refunds from private payors.

United States Attorney inquiries

In February 2001, the Civil Division of the United States Attorney’s Office for the Eastern District of Pennsylvania in Philadelphia contacted the Company and requested its cooperation in a review of some of the Company’s historical practices, including billing and other operating procedures and its financial relationships with physicians. The Company cooperated in this review and provided the requested records to the United States Attorney’s Office. In May 2002, the Company received a subpoena from the Philadelphia office of the Office of Inspector General of the Department of Health and Human Services (OIG). The subpoena required an update to the information the Company provided in its response to the February 2001 request, and also sought a wide range of documents relating to pharmaceutical and other ancillary services provided to patients, including laboratory and other diagnostic testing services, as well as documents relating to the Company’s financial relationships with physicians and pharmaceutical companies. The subpoena covers the period from May 1996 to May 2002. The Company has provided the documents requested and continues to cooperate with the United States Attorney’s Office and the OIG in its investigation. As it proceeds, the government could expand its areas of concern. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial.

On October 25, 2004, the Company received a subpoena from the United States Department of Justice, Eastern District of New York. The subpoena covers the period from 1996 to present and requires the production of a wide range of documents relating to the operations of the Company, including DaVita Laboratory Services. The subpoena also includes specific requests for documents relating to testing for parathyroid hormone levels (PTH) and to products relating to vitamin D therapies. The Company believes that the subpoena has been issued in connection with a joint civil and criminal investigation. Three of the Company’s competitors as well as other companies in related fields have also announced the receipt of similar subpoenas from the Department of Justice. To the Company’s knowledge, no proceedings have been initiated against the Company at this time. Compliance

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

with the subpoena will require management attention and legal expense. The Company cannot predict whether legal proceedings will be initiated against the Company relating to this investigation or, if proceedings are initiated, the outcome of any such proceedings. If a court determines that there has been wrongdoing, the penalties under applicable statutes could be substantial.

Florida laboratory

The Company’s Florida-based laboratory subsidiary has been under an ongoing third-party carrier review for Medicare reimbursement claims since 1998. Prior to the third quarter of 2002, no Medicare payments had been received since May 1998. Following a favorable ruling by an administrative law judge in June 2002 relating to review periods from January 1995 to March 1998, the carrier began releasing funds for lab services provided subsequent to May 2001. During the fourth quarter of 2002, the carrier also released funds related to review periods from April 1998 through May 2001. During the second half of 2002, the carrier paid the Company a total of $68,778, of which $58,778 related to prior years’ services. The carrier’s hearing officer subsequently rendered partially favorable decisions relating to review periods from April 1998 to May 2000, which resulted in the Company’s recognition of additional recoveries of $24,000 in the fourth quarter of 2003, of which $19,000 was received during the first quarter of 2004. The Company filed requests for appeal for the remaining unsettled claims for these review periods. In the third quarter of 2004, an administrative law judge rendered a favorable decision regarding the majority of these unsettled claims, which resulted in the Company’s recognition of $8,293 in additional recoveries in the quarter. Following this most recent favorable ruling, less than $4,000 in disputed Medicare lab billings remain unresolved.

The carrier is also conducting a study of the utilization of dialysis-related laboratory services to determine appropriate frequencies for tests and supporting documentation. During the course of the study, the carrier has suspended dialysis laboratory prepayment screens. In its initial findings from the study, the carrier had determined that some of its prior prepayment screens were invalidating appropriate claims. The Company cannot determine what prepayment screens, post-payment review procedures, documentation requirements or other program safeguards the carrier may implement as a result of its study or other developments. The carrier has also informed the Company that any claims that it reimburses during the study period may also be subject to post-payment review and retraction if the reimbursements are later determined to have been inappropriate. Medicare lab revenue for current period services is being recognized based on estimated allowances for future claim denials, and changes in estimated Medicare lab revenue will be recognized based on ongoing denial experience trends.

In November 2001, the Company closed a smaller laboratory that it operated in Minnesota and combined its operations with those of the Florida laboratory. The Medicare carrier for the Minnesota laboratory is conducting a post-payment review of Medicare reimbursement claims for the period January 1996 through December 1999. The scope of the review is similar to the review of our Florida laboratory. The Company responded to the most recent request from the carrier for claims documentation in May 2001. At this time, the Company is unable to determine how long it will take the carrier to complete this review. There is currently no overpayment determination with respect to the Minnesota laboratory. Medicare revenues at the Minnesota laboratory, which was much smaller than the Florida laboratory, were approximately $15,000 for the period under review.

Other

In addition to the foregoing, the Company is subject to claims and suits in the ordinary course of business. Management believes that the ultimate resolution of these additional pending proceedings, whether the underlying claims are covered by insurance or not, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars in thousands, except per share data)

The Company has obligations to purchase the interests of its partners in several joint ventures. These obligations are in the form of put options, exercisable at the third-party owners’ discretion, and require the Company to purchase the partners’ interests at either the appraised fair market value or a predetermined multiple of cash flow or earnings. As of September 30, 2004, the Company’s potential obligations under these put options totaled approximately $93,000, of which approximately $58,000 was exercisable within one year. Additionally, the Company has certain other potential working capital commitments relating to managed and minority-owned centers of approximately $15,000 that could be called in the event of non-performance of the centers over the next five years.

The Company holds mandatorily redeemable instruments in connection with certain consolidated partnerships, consisting of obligations to liquidate the minority partners’ interests in these limited-life entities when they dissolve after terms of ten to fifty years. As of September 30, 2004, such distributions would be valued at less than the related minority interests balances in the consolidated financial statements.

In the first nine months of 2004, the Company completed 16 acquisitions of dialysis businesses consisting of 45 centers, for a total of approximately $246,500 in cash, of which the largest was the purchase of the common stock of Physicians Dialysis Inc. (PDI) for approximately $150,000 effective September 1, 2004. All of the other acquisitions were asset purchases. The assets and liabilities for all acquisitions were recorded at their estimated fair market values at the dates of the acquisitions and are included in the Company’s financial statements and operating results from the effective date of the acquisitions.

The initial purchase price allocations are recorded at fair values based upon the best information available for the acquired business and are finalized when identified pre-acquisition contingencies have been resolved and information arranged to be obtained has been received. The valuation of certain long-term assets acquired in the PDI acquisition have not been finalized as of September 30, 2004, however any adjustments to the initial purchase price allocation that may be required are not expected to be material.

The total purchase cost allocations were as follows:

The amortizable intangible assets are amortized using the straight-line method over a weighted-average amortization period of nine years. The total amount of goodwill deductible for tax purposes is approximately $120,000.

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Forward-looking statements

This Quarterly Report on Form 10-Q contains statements that are forward-looking statements within the meaning of the federal securities laws, including statements about our expectations, beliefs, intentions or strategies for the future. These statements involve known and unknown risks and uncertainties, including risks resulting from the regulatory environment in which we operate, economic and market conditions, competitive activities, acquisitions, other business conditions, accounting estimates, and the risk factors set forth in this Quarterly Report on Form 10-Q. These risks, among others, include those relating to the concentration of profits generated from PPO and private indemnity patients and from the administration of pharmaceuticals, possible reductions in private and government reimbursement rates, changes in pharmaceutical practice patterns or reimbursement policies, our ability to maintain contracts with physician medical directors and legal compliance risks, including our continued compliance with complex government regulations and the ongoing review by the U.S. Attorney’s Office and the HHS Office of Inspector General in Philadelphia and the recently announced subpoena from the U.S. Attorney’s Office, Eastern District of New York. Our actual results may differ materially from results anticipated in our forward-looking statements. We base our forward-looking statements on information currently available to us, and we have no current intention to update these statements, whether as a result of changes in underlying factors, new information, future events or other developments.

The following should be read in conjunction with our disclosures and discussions contained in our Annual Report on Form 10-K for the year ended December 31, 2003.

Results of operations

For the quarter ended September 30, 2004, we experienced no significant changes in our business fundamentals or major risk factors. Our operating results for the third quarter of 2004 compared with the prior sequential quarter and the same quarter of last year were as follows:

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Net Operating Revenues

Net operating revenues. Net operating revenues for the quarter increased $74 million, or approximately 14%, compared with the third quarter of 2003, excluding Medicare lab recoveries for prior years’ services of $8 million recognized in the third quarter of 2004. Increases in the number of dialysis treatments accounted for approximately 11% of the increase in revenue and approximately 3% was attributable to an increase in the average reimbursement rate per dialysis treatment. Additionally, lab and other revenues were approximately $6 million higher than in the third quarter of 2003. The increase in the number of dialysis treatments was attributable to non-acquired annual treatment growth of approximately 4.8%, and growth through acquisitions. We continue to expect the non-acquired growth rate to remain in the range of 3% to 5%. The average dialysis revenue per treatment (excluding lab, other ancillary services, and management fee income) was $314 in the third quarter of 2004 compared with $306 for the third quarter of 2003. The increase in average dialysis revenue per treatment was primarily due to commercial reimbursement rates.

Compared with the second quarter of 2004, net operating revenues for the third quarter of 2004 increased by $36 million or approximately 6%, excluding the prior period Medicare lab recoveries. The increase was primarily due to an increase in the number of dialysis treatments. The increase in the average dialysis revenue per treatment in the third quarter of 2004 was approximately $2 per treatment, due primarily to commercial pricing, partially offset by changes in intensity of physician prescribed pharmaceuticals, principally EPO.

As discussed in Note 6 to the consolidated financial statements (Contingencies), our Florida-based laboratory subsidiary has been under an ongoing third-party carrier review for Medicare reimbursement claims since 1998. Prior to the third quarter of 2002, no Medicare payments had been received for approximately four years. Following a favorable ruling by an administrative law judge in June 2002, the carrier began processing billings for current period services in the third the quarter of 2002, at which time we began recognizing current period Medicare lab revenue. Lab revenues for periods prior to the third quarter of 2002 have been recognized when recoveries have been established by favorable rulings by an administrative law judge or the carriers hearing officer. As a result of another favorable ruling by an administrative law judge during the third quarter of 2004, an additional $8.3 million in prior period lab recoveries was recognized. The $8.3 million in recoveries is expected to be paid by the carrier during the fourth quarter. Prior period lab recoveries since third quarter 2002 total $101 million, including $10 million relating to the first half of 2002. Following the most recent favorable ruling, less than $4 million in disputed Medicare lab billings remain unresolved.

Operating Expenses and Charges

Patient care costs. Patient care costs were approximately 68% of current period net operating revenues for all periods presented. On a per-treatment basis, patient care costs increased approximately $6 from the third quarter of 2003 and were approximately the same as compared with the second quarter of 2004. The increase in the third quarter of 2004 compared to the third quarter of 2003 was primarily attributable to labor and related benefits.

General and administrative expenses. General and administrative expenses were approximately 9% of current period net operating revenues in the third quarter of 2004, as compared to 8% for the second quarter of 2004 and the third quarter of 2003. In absolute dollars, general and administrative expenses for the third quarter of 2004 increased by approximately $11 million or 27% compared to the third quarter of 2003, and increased approximately $5 million or 11% from the second quarter of 2004. The increase in the third quarter of 2004 as compared to both previous periods was primarily attributable to increased salaries, professional fees for legal and compliance initiatives, and the timing of certain expenditures.

Depreciation and amortization. The increase in depreciation and amortization in the third quarter of 2004 as compared to both previous periods was primarily due to new center developments and acquisitions.

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Provision for uncollectible accounts receivable. The provisions for uncollectible accounts receivable were approximately 1.8% of current period net operating revenues for all periods presented.

Debt expense. Debt expense of $13.7 million in the third quarter of 2004 increased by $2.5 million compared to the second quarter of 2004, and was $2.4 million lower than the third quarter of 2003. The increase in the third quarter of 2004 as compared to the second quarter of 2004 was due to higher average debt balances related to our Term Loan C, and higher average interest rates due to changes in the LIBOR interest rates and the effects of our swap agreements. The decrease in the third quarter of 2004 compared to the third quarter of 2003 was due to the lower average interest rates and lower average debt balances. The average effective interest rate for the third quarter of 2004 was 4.1% compared to 3.8% for the second quarter of 2004, and 4.3% for the third quarter of 2003.

Minority interests and equity income, net. Minority interests net of equity income increased from approximately $4.8 million in the first three quarters of 2003 to $9.8 million in the first three quarters of 2004. This increase reflects an ongoing trend toward a higher percentage of our new centers having minority partners as well as the revenue growth of joint ventures.

Outlook

Outlook. We expect our fourth quarter operating income to be comparable to the third quarter of 2004. Regarding 2005, the Centers for Medicare and Medicaid Services (CMS) recently released final rules under the 2003 Medicare Modernization Act (MMA) and has proposed policy changes with respect to EPO utilization which will negatively impact our operating income going forward. Also, as part of the 2003 MMA ESRD payment reform, CMS has proposed implementation of a case-mix adjustment in 2005 that could negatively impact our operating income going forward. Taking these factors into account, but without regard to the uncertain outcome of the proposed MMA implementation of the case-mix adjustment, we currently expect 2005 operating income to be flat to 6% higher than the 2004 annual level.

These projections and the underlying assumptions involve significant risks and uncertainties that could cause the actual results to differ materially from these current projections. These risks, among others, include those relating to the concentration of profits generated from PPO and private indemnity patients and from the administration of pharmaceuticals, possible reductions in private and government reimbursement rates, changes in pharmaceutical practice patterns or reimbursement policies, our ability to maintain contracts with our physician medical directors, and legal compliance risks, including our continued compliance with complex government regulations and the ongoing review by the United States Attorney’s Office and the HHS Office of Inspector General in Philadelphia and the recently announced subpoena from the U.S. Attorney’s Office, Eastern District of New York. We undertake no duty to update these projections, whether due to changes in current or expected trends, underlying market conditions, decisions of the United States Attorney’s Office, the Department of Justice or the OIG in any pending or future review of our business, or otherwise.

Liquidity and Capital Resources

Liquidity and capital resources. Cash flow from operations during the third quarter of 2004 amounted to $116 million, compared to $100 million during the third quarter of 2003. Non-operating cash outflows for the third quarter of 2004 included capital asset expenditures of $35 million, including $23 million for new center development, and $214 million for acquisitions (net of divestitures). Non-operating cash outflows for the third quarter of 2003 included capital asset expenditures of $22 million, including $13 million for new center development, and approximately $20 million for acquisitions. During the third quarter of 2004 we acquired a total of 37 dialysis centers including minority interests in 4 centers, opened 7 new dialysis centers and provided administrative services to 2 additional centers. Twenty-four of these centers were associated with our acquisition of Physicians Dialysis, Inc., which was completed on September 1, 2004. During the third quarter of 2003 we acquired 3 new dialysis centers and opened 7 new dialysis centers.

Cash flow from operations during the first nine months of 2004 amounted to $333 million including after-tax Medicare lab recoveries of $12 million, compared to $259 million during the first nine months of 2003.

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Non-operating cash outflows for the first nine months of 2004 included capital asset expenditures of $90 million, including $58 million for new center development, and $245 million for acquisitions (net of divestitures). Non-operating cash outflows for the third quarter of 2003 included capital asset expenditures of $64 million, including $35 million for new center development and $29 million for equipment and information technology projects and $67 million in acquisitions. During the first nine months of 2004, we acquired a total of 45 dialysis centers and opened 25 new dialysis centers. During the first nine months of 2003, we acquired a total of 16 dialysis centers and opened 22 new dialysis centers.

The largest acquisition during the first nine months of 2004 was the purchase of the common stock of Physicians Dialysis, Inc., or PDI for approximately $150 million in cash as of September 1, 2004. All of our other acquisitions have been asset purchases.

On July 30, 2004, we amended our existing credit facilities in order to modify certain restricted payment covenants, principally for acquisitions and share repurchases, and to extend the maturity of the Term Loan B until June 30, 2010. We also borrowed an additional $250 million under a new Term Loan C principally to fund potential acquisitions and share repurchases. The Term Loan C currently bears interest at LIBOR plus 1.75% for an overall effective rate of 3.56% at September 30, 2004. The aggregate annual principal payments for the amended Term Loan B and the Term Loan C are approximately $56.1 million and $11.9 million in the first five years of the agreement, and $974.2 million and $238.1 million in the sixth year, respectively, due no later than June 30, 2010.

Under the previously announced Board authorization for share repurchases, we repurchased a total of 3,049,800 shares of common stock at an average price of $28.69 per share during the third quarter of 2004. On November 2, 2004, our Board of Directors authorized us to repurchase up to an additional $200 million of our common stock, from time to time, in the open market or in privately negotiated transactions. The total outstanding Board authorizations for share repurchases are now approximately $250 million.

We have three interest rate swap agreements, two on our Term Loan B outstanding debt and one on our Term Loan C outstanding debt. Two of the agreements expire in 2008 and one in 2009. As of September 30, 2004, the total notional amount of the swap agreements was $345 million and the interest rates are economically fixed ranging from 3.08% to 3.64% plus margins ranging from 1.75% to 2.00% in effect as of September 30, 2004. The fair value of the swaps was a $0.6 million liability, resulting in a charge to comprehensive income in the third quarter of 2004 of $2.5 million, net of tax.

Accounts receivable at September 30, 2004 amounted to $435 million, an increase of approximately $33 million from June 30, 2004. The increase is primarily due to revenue growth and the acquisition of PDI. The September 30, 2004, and June 30, 2004 accounts receivable balances represented 68 days of revenue.

We believe that we will have sufficient liquidity and operating cash flows to fund our scheduled debt service and other obligations over the next twelve months.

Recent Events

On October 25, 2004, we received a subpoena from the United States Department of Justice, Eastern District of New York. The subpoena covers the period from 1996 to present and requires the production of a wide range of documents relating to our operations, including our Florida lab. The subpoena also includes specific requests for documents relating to testing for parathyroid hormone levels (PTH) and to products relating to vitamin D therapies. We believe that the subpoena has been issued in connection with a joint civil and criminal investigation. Three of our competitors as well as other companies in related fields have also announced the receipt of similar subpoenas from the Department of Justice. To our knowledge, no proceedings have been initiated against us at this time. Compliance with the subpoena will require management attention and legal expense. We cannot predict whether legal proceedings will be initiated against us relating to this investigation or, if proceedings are initiated, the outcome of any such proceedings. If a court determines that there has been wrongdoing, the penalties under the applicable statutes could be substantial.

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Significant New Accounting Standards

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed statement, Share-Based Payment, an amendment of FASB Statements No. 123 and 95, that would require companies to account for stock-based compensation to employees using a fair value method as of the grant date for all unvested and new awards. The proposed statement addresses the accounting for transactions in which a company receives employee services in exchange for equity instruments such as stock options, or liabilities that are based on the fair value of the company’s equity instruments or that may be settled through the issuance of such equity instruments, which includes the accounting for employee stock purchase plans. This proposed statement would eliminate a company’s ability to account for share-based awards to employees under APB Opinion 25, Accounting for Stock Issued to Employees but would not change the accounting for transactions in which a company issues equity instruments for services to non-employees or the accounting for employee stock ownership plans. The proposed statement would not be effective before the third quarter of 2005. We will assess the potential impact on our consolidated financial statements when the final standard is issued.

Interest rate sensitivity

The table below provides information, as of September 30, 2004, about our financial instruments that are sensitive to changes in interest rates.