He said the baby was small for it's 'age' (as in if it was Dylan's baby it should be bigger) so he just presumed that the date the baby was conceived was later - meaning it was Stingrays.
(Actually a little side note on that, don't know if anyone realised, on either Thursdays/Fridays episode he made another comment about how it is still small - a little hint of what's to come m'thinks!)
Carmella's cousin (forgotten name, sorry!) sets the hospital on fire (i think!!) and tries to nick Sky's baby - Stingray manages to get it, but later passes out, Dylan then gets hold of the baby. After seeing the baby he is convinced that he is the farther, so they all have a DNA test which proves that Dylan is the dad!!
I'm not too sure if Karl quits, someone needs to clarify that for us! But i presume he will be in a lot of trouble!!
-x-