QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(dollars in thousands unless otherwise indicated)

15.          COMMITMENTS AND CONTINGENCIES

Minimum rental commitments under noncancelable operating leases, primarily real estate, in effect at December 31, 2003 are as follows:

Year ending December 31,
2004.......................................................................................................................................	$122,596
2005.......................................................................................................................................	96,987
2006.......................................................................................................................................	73,249
2007.......................................................................................................................................	56,690
2008.......................................................................................................................................	44,109
2009 and thereafter.............................................................................................................	136,150
Minimum lease payments..................................................................................................	529,781
Noncancelable sub-lease income.....................................................................................	(763)
Net minimum lease payments............................................................................................	$529,018

Operating lease rental expense for 2003, 2002 and 2001 aggregated $121 million, $97 million and $83 million, respectively.

The Company has certain noncancelable commitments to purchase products or services from various suppliers, mainly for telecommunications and standing orders to purchase reagents and other laboratory supplies. At December 31, 2003, the approximate total future purchase commitments are $75 million, of which $39 million are expected to be incurred in 2004.

In support of its risk management program, the Company has standby letters of credit issued under its letter of credit lines and unsecured revolving credit facility to ensure its performance or payment to third parties, which amounted to $57 million at December 31, 2003, of which $44 million was issued against the letter of credit lines with the remaining $13 million issued against our $325 million unsecured revolving credit facility. The letters of credit, which are renewed annually, primarily represent collateral for current and future automobile liability and workers’ compensation loss payments. During January 2004, $13 million in letters of credit issued against the $325 million unsecured revolving credit facility were cancelled and $17 million of letters of credit were issued under the letter of credit lines.

The Company has entered into several settlement agreements with various government and private payers during recent years relating to industry-wide billing and marketing practices that had been substantially discontinued by the mid-1990s. In addition, the Company is aware of several pending lawsuits filed under the qui tam provisions of the civil False Claims Act and has received notices of private claims relating to billing issues similar to those that were the subject of prior settlements with various government payers. Some of the proceedings against the Company involve claims that are substantial in amount. Some of the cases involve the operations of Unilab prior to the closing of the Unilab acquisition.

Although management believes that established reserves for both indemnified and non-indemnified claims are sufficient, it is possible that additional information (such as the indication by the government of criminal activity, additional tests being questioned or other changes in the government’s or private claimants’ theories of wrongdoing) may become available which may cause the final resolution of these matters to exceed established reserves by an amount which could be material to the Company’s results of operations and cash flows in the period in which such claims are settled. The Company does not believe that these issues will have a material adverse effect on its overall financial condition.

In addition to the billing-related settlement reserves discussed above, the Company is involved in various legal proceedings arising in the ordinary course of business. Some of the proceedings against the Company involve claims that are substantial in amount. Although management cannot predict the outcome of such proceedings or any claims made against the Company, management does not anticipate that the ultimate outcome of the various proceedings or claims will have a material adverse effect on our financial position but may be material to the Company’s results of operations and cash flows in the period in which such proceedings or claims are resolved.

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