ITEM 1. BUSINESS

LabOne, Inc., a Missouri corporation, provides laboratory testing, investigative services and paramedical examinations for the insurance industry, laboratory testing services for the healthcare industry and substance abuse testing services for employers. LabOne, Inc., incorporates its wholly-owned subsidiaries Lab One Canada Inc., Systematic Business Services, Inc. (SBSI) and ExamOne World Wide, Inc. (ExamOne), hereinafter collectively referred to as either LabOne or the Company.

On August 10, 1999, the former LabOne, Inc. was merged into its parent corporation, Lab Holdings, Inc. upon the approval of the shareholders of both companies at their respective annual meetings. The combined company's name was then changed to LabOne, Inc.

Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc. and World Wide Health Services of New Jersey, a provider of specimen collection and paramedical examination services to life and health insurers. These subsidiaries are operated under the name ExamOne and are included in the insurance services division of LabOne. This addition allows LabOne to expand the services it offers to its insurance industry clients.

LabOne provides underwriting support services to the insurance industry. The laboratory tests performed by the Company are specifically designed to assist an insurance company in objectively evaluating the mortality and morbidity risks posed by policy applicants. The majority of the testing is performed on specimens of individual life insurance policy applicants. The Company also provides testing services on specimens of individuals applying for individual and group medical and disability policies. Through its subsidiaries, SBSI (acquired in 1998) and ExamOne, the Company provides specimen collection, paramedical examinations, telephone inspections, motor vehicle reports, attending physician statements, and claims investigation services.

LabOne's laboratory testing services are provided to the healthcare industry as an aid in the diagnosis and treatment of patients. LabOne operates only one highly automated and centralized laboratory, which the Company believes has significant economic advantages over other conventional laboratory competitors. LabOne primarily markets its clinical testing services to the payers of healthcare (insurance companies and self-insured groups). The Company does this through exclusive arrangements with managed care organizations and through Lab Card®, a Laboratory Benefits Management program.

LabOne's substance abuse testing services are provided for employers who adhere to drug screening guidelines. LabOne is certified by the Substance Abuse and Mental Health Services Administration to perform substance abuse testing services for federally regulated employers and is currently marketing these services throughout the country to both regulated and nonregulated employers. The Company's rapid turnaround times and multiple testing options help clients reduce downtime for affected employees and meet mandated drug screening guidelines.

This Annual report on Form 10-K may contain "forward-looking statements," including, but not limited to: projections of revenues, income or loss, capital expenditures, the payment or non-payment of dividends and other financial items, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements. Forward-looking statements involve known and unknown risks and uncertainties. Many factors could cause actual results to differ materially from those that may be expressed or implied in such forward-looking statements, including, but not limited to, the volume and pricing of laboratory tests performed by the Company, competition, the extent of market acceptance of the Company's testing services in the healthcare and substance abuse testing industries, intense competition, the loss of one or more significant customers, bad debt expense, general economic conditions and other factors detailed from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission, including the Cautionary Statement filed as Exhibit 99 to this Form 10-K.

Insurance Services:

Insurance companies require an objective means of evaluating the insurance risk posed by policy applicants in order to establish the appropriate level of premium payments, or to determine whether to issue a policy. Because decisions of this type are based on statistical probabilities of mortality and morbidity, insurance companies generally require quantitative data reflecting the applicant's general health. Standardized specimen collection, medical questionnaires and laboratory testing, tailored to the needs of the insurance industry and reported in a uniform format, provides insurance companies with an efficient means of evaluating the mortality and morbidity risks posed by policy applicants.

When an individual applies for insurance through an insurance agent, that agent typically contacts a paramedical company to arrange for collection of a blood or urine specimen. ExamOne's paramedical personnel perform paramedical examinations and collect specimens from individual insurance applicants using LabOne's custom-designed collection kits and containers. Insurance agents also collect oral fluid or urine specimens using LabOne's kits. These kits and containers are delivered to LabOne's laboratory via overnight delivery services or mail, bar-coded for identification and processed according to each insurance company's specifications.

LabOne handles paramedical examination paperwork and assists with administration and tracking of data for applicants as it moves through the information gathering process. The Company can obtain attending physician statements so underwriters can review the complete medical history of applicants. Inspection reports, either by telephone or performed in the field, provide additional applicant information quickly and cost-effectively. Motor vehicle reports can be ordered automatically based on insurance company specifications or on demand by the underwriter. The Company can bundle these various pieces of information and transmit the reports directly to the insurance company's underwriting department. LabOne offers LabOne NET, a combination network/software product that provides a connection for insurance underwriters for ordering and delivery of risk assessment information such as laboratory results, telephone inspections, motor vehicle reports and other applicant information.

LabOne's insurance testing services consist of certain specimen profiles that provide insurance companies with specific information that may indicate liver or kidney disorders, diabetes, the risk of cardiovascular disease, bacterial or viral infections and other health risks. The Company also offers tests to detect the presence of antibodies to human immunodeficiency virus (HIV). Insurance companies generally offer a premium discount for nonsmokers and often rely on testing to determine whether an applicant is a user of tobacco products. Standardized laboratory testing can be used to verify responses on a policy application to such questions as whether the applicant is a user of tobacco products, certain controlled substances or certain prescription drugs. Cocaine use has been associated with increased risk of accidental death and cardiovascular disorders, and as a result of cocaine abuse in the United States and Canada, insurance companies test most policy applicants to detect its presence. Therapeutic drug testing also detects the presence of certain prescription drugs that are being used by an applicant to treat a life-threatening medical condition that may not be revealed by a physical examination.

Healthcare Services:

Healthcare laboratory tests are generally requested by physicians and other healthcare providers to diagnose and monitor diseases and other medical conditions through the detection of substances in blood and other specimens. Laboratory testing is generally categorized as either clinical testing, which is performed on bodily fluids including blood and urine, or anatomical pathology testing, which is performed on tissue. Clinical and anatomical pathology tests are frequently performed as part of regular physical examinations and hospital admissions in connection with the diagnosis and treatment of illnesses. The most frequently requested tests include blood chemistry analyses, blood cholesterol level tests, urinalyses, blood cell counts, PAP smears and AIDS-related tests.

Healthcare specimens are collected at the physician's office or other specified sites. The Company's couriers pick up the specimens and deliver them to local airports for express transport to the Kansas laboratory. Specimens are bar-coded for identification and processed. The Company's testing menu includes the majority of tests requested by its clients. Tests not performed in-house are sent to reference laboratories for testing, and results are transmitted into the Company's computer system along with all other completed results.

The Company has established the Lab Card® Program as a vehicle for delivering outpatient laboratory services. The Lab Card Program is marketed to healthcare payers (self-insured groups and insurance companies), allowing them to avoid price mark-ups by the physician. The Lab Card Program provides laboratory testing at reduced rates as compared to traditional laboratories. It uses a unique benefit design that shares the cost savings with the patient, creating an incentive for the patient to help direct laboratory work to LabOne. Under the Program, the patient incurs no out-of-pocket expense when the Lab Card is used, and the insurance company or self-insured group receives substantial savings on its laboratory charges.

LabOne has several exclusive arrangements with managed care organizations, including Coventry Healthcare of Kansas City, BlueCross BlueShield of Tennessee, BlueCross BlueShield of Kansas City and Kaiser Permanente of Kansas City. With these arrangements the Company contracts with the managed care organizations, and they direct testing for their members through LabOne.

Substance Abuse Testing Services:

LabOne markets substance abuse testing to large employers, third party administrators and occupational health providers. Certification by the Substance Abuse and Mental Health Services Administration enables the Company to offer substance abuse testing services to federally regulated industries.

Specimens for substance abuse testing are typically collected by independent agencies who use LabOne's forms and collection supplies. Specimens are sealed with bar-coded, tamper-evident seals and shipped overnight to the Company. Automated systems monitor the specimens throughout the screening and confirmation process. Negative results are available immediately after testing is completed. Initial positive specimens are verified by the gas chromatography/mass spectrometry method, and results are generally available within 24 hours. Results can be transmitted electronically to the client's secured computer, printer or fax machine, or the client can use LabOne's LabLink Dial-In software to retrieve, store, search and print its drug testing results.

During 2000, LabOne announced the introduction of the Intercept™ drug testing service, a laboratory-based service that identifies commonly-used illicit drugs in oral fluid samples. The Intercept™ test menu is used to detect the NIDA-5 drug panel (THC, cocaine, opiates, PCP and amphetamines). It is the first laboratory-based oral fluid drug testing system to be made commercially available in North America. (See TRENDS Section for further discussion.)

The following table summarizes the Company's revenues from services provided to the insurance, healthcare and substance abuse testing markets (dollars in thousands):

(See Note 7 of Notes to Consolidated Financial Statements for operating
income and identifiable assets by segment.)

The Company's operations are designed to facilitate the testing of a large number of specimens and to report the results to clients, generally within 24 hours of receipt of the specimens. The Company has internally developed, custom-designed laboratory and business processing systems. It is a centralized network system that provides an automated link between LabOne's testing equipment, data processing equipment and clients' computer systems. This system offers LabOne's clients the ability to customize their initial testing and follow-up testing requirements by several parameters to best meet their needs.

As a result of the number of tests it has performed over the past several years, LabOne has compiled and maintains a large statistical database of test results. These summary statistics are useful to the actuarial and underwriting departments of an insurance client in comparing that client's test results to the results obtained by the Company's entire client base. Company-specific and industry-wide reports are frequently distributed to clients on subjects such as coronary risk analysis, cholesterol and drugs of abuse. Additionally, the Company's statistical engineering department is capable of creating customized reports to aid managed care entities or employers in disease management and utilization tracking to help manage healthcare costs.

The Company considers the confidentiality of its test results to be of primary importance and has established procedures to ensure that results of tests remain confidential as they are communicated to the client that requested the tests.

Substantially all of the reagents and materials used by the Company in conducting its testing are commercially purchased and are readily available from multiple sources.

The objective of the regulatory affairs department is to oversee quality assurance programs to ensure that accurate and reliable test results are released to clients. This is accomplished by incorporating both internal and external quality improvement programs in each area of the laboratory. In addition, quality improvement specialists share the responsibility with all LabOne employees of an ongoing commitment to quality and safety in all laboratory operations. Internal quality and education programs are designed to identify opportunities for improvement in laboratory services and to meet all required safety, training and education issues. These programs help ensure the reliability and confidentiality of test results.

Procedure manuals in all areas of the laboratory help maintain uniformity and accuracy and meet regulatory guidelines. Tests on control samples with known results are performed frequently to maintain and verify accuracy in the testing process. Complete documentation provides record keeping for employee reference and meets regulatory requirements. All employees are thoroughly trained to meet standards mandated by OSHA in order to maintain a safe work environment. Superblind Testing Service® controls are used to challenge every aspect of service at LabOne from account setup to specimen arrival and through final billing. Approximately 500 sample kits are prepared and submitted anonymously each month. These samples have at least 15 different indicators each representing over 7,500 challenges to the testing, handling and reporting procedures. Specimens requiring special handling are evaluated and verified by control analysis personnel. A computer edit program is used to review and verify clinically abnormal results and all positive HIV antibody and drugs-of-abuse records. As an external quality assurance program, LabOne participates in a number of proficiency programs established by the College of American Pathologists, the American Association of Bioanalysts and the Centers for Disease Control.

LabOne is accredited by the College of American Pathologists and licensed under the Clinical Laboratory Improvement Amendments of 1988. LabOne has additional licenses for substance abuse testing from the state of Kansas and all other states where such licenses are required. LabOne is certified by the Substance Abuse and Mental Health Services Administration to perform testing to detect drugs of abuse in federal employees and in workers governed by federal regulations.

Even though only a small portion of LabOne's business encompasses fee-for-service Medicare/Medicaid, LabOne has appointed a Chief Compliance Officer and 13 Co-Compliance Officers. Additionally, the Company has developed the LabOne Compliance Plan, based on the Model Compliance Plan recommended by the Office of Inspector General of the Department of Health and Human Services to ensure compliance with anti-fraud and abuse laws and rules governing federally-financed reimbursement for lab testing services.

Congress recently enacted the Health Insurance Portability and Accountability Act of 1996. As a transmitter of health information, the Company will be required to maintain administrative, technical, and physical safeguards to protect the integrity and confidentiality of healthcare information against unauthorized uses or disclosures. Compliance with these regulations may be required as early as 2002.

LabOne's client base consists of insurance companies, managed care organizations, third party administrators, occupational health clinics and employers primarily in the United States and Canada. The Company believes that its ability to provide prompt and accurate results on a cost-effective basis, and its responsiveness to customer needs have been important factors in servicing existing business.

All of the Company's sales representatives for the insurance market have significant business experience in the insurance industry or clinical laboratory-related fields. These representatives call on major clients several times each year, usually meeting with a medical director or vice president of underwriting. An important part of the Company's marketing effort is directed toward providing its existing clients and prospects with information pertaining to the actuarial benefits of, and trends in, laboratory testing. The Company's sales representatives and its senior management also attend and sponsor insurance industry underwriters' and medical directors' meetings.

The sales representatives for the healthcare industry are experienced in the healthcare benefit market or clinical laboratory-related fields, and each currently work in a specific geographic area. Marketing efforts are directed at insurance carriers, self-insured employers and trusts, third party administrators and other organizations nationwide.

Substance abuse marketing efforts are primarily directed at Fortune 1000 companies, occupational health clinics and third party administrators. The Company's strategy is to offer quality service at competitive prices. The sales force focuses on LabOne's ability to offer multiple reporting methods, next-flight-out options, dedicated client service representatives and rapid reporting of results.

The Company believes that the underwriting services market in the United States and Canada is a $800 million to $1 billion industry. The Company serves approximately 12% of this market. The primary competition in the market includes Hooper Holmes, Inc. and Examination Management Services, Inc. In this market, LabOne has developed long term client relationships and a reputation for providing quality products and services tailored specifically to the insurance industry's needs at competitive prices. The insurance services market continues to be highly competitive with the primary focus of the competition being on pricing and the ability to provide more comprehensive underwriting information services in the market. The continued competition has resulted in a decrease in LabOne's average price per service provided. It is anticipated that prices may continue to decline in 2001. The Company continues to develop innovative data management services that differentiate its products from competitors. These services enable LabOne's clients to expedite the underwriting process, saving time and reducing underwriting costs.

The outpatient clinical laboratory testing market is a $20 billion industry which is highly fragmented and very competitive. The Company faces competition from numerous independent clinical laboratories and hospital- or physician-owned laboratories. Many of the Company's competitors are significantly larger and have substantially greater financial resources than LabOne. The Company is working to establish a solid client base through the use of Lab Card and the establishment of exclusive arrangements with managed care entities to provide laboratory services.

LabOne's business plan is to be the premier low-cost provider of high-quality laboratory services to self-insured employers and insurance companies in the healthcare market. The Company feels that its superior quality and centralized, low-cost operating structure enable it to compete effectively in this market.

LabOne competes in the substance abuse testing market nationwide. There are presently 65 laboratories that are certified by the Substance Abuse and Mental Health Services Administration. The Company's major competitors are the major clinical chains, Laboratory Corporation of America and Quest Diagnostics, which collectively constitute approximately two-thirds of the substance abuse testing market. The Company's focus is fast turnaround with high-quality, low-cost service, with a strategic position of offering the new oral fluid product in the pre-employment market.

Lab One Canada Inc. markets insurance testing services to Canadian clients, with laboratory testing performed in the United States. The following table summarizes the revenue, profit and assets applicable to the Company's domestic operations and its subsidiary, Lab One Canada Inc.

The technology development department evaluates new commercially available tests and technologies, or develops new assays, and compares them to competing products in order to select the most accurate laboratory procedures. Additionally, LabOne's scientists present findings to clients to aid them in choosing the best tests available to meet their requirements. Total technology development expenditures are not considered significant to the Company as a whole.

As of February 28, 2001, the Company had 1,366 employees, including 61 part-time employees, representing an increase of 204 employees from the same time in 2000. None of the Company's employees are represented by a labor union. The Company believes its relations with employees are good.

ITEM 2. PROPERTIES

The Company's principal operations are located on 54 acres in Lenexa, Kansas, approximately 15 miles from Kansas City, Missouri. Its 268,000 square foot, custom-designed facility houses the Company's laboratory, administrative and warehouse functions. The facility is owned by the Company and financed through $16.3 million in industrial revenue bonds issued by the City of Lenexa, Kansas. The testing laboratory has certain enhancements that improve the efficiency of operations. Conveyor systems transport inbound test kits from the receiving area to the laboratory and remove waste after the opening process. All automated testing equipment requiring purified water is linked directly to a centralized water-purification system. Over 50,000 square feet of raised flooring allows laboratory instruments and PCs to be arranged or moved quickly and easily. The security system includes proximity card readers to control access and a ceiling detector system to prevent foreign substances from being thrown into the laboratory. In addition, three diesel generators and a UPS battery system are on-line in the event of electrical power shortage. These back-up power sources allow specimen testing and data processing to continue until full power is restored, thus assuring LabOne's clients of continuous laboratory operation.

SBSI utilizes three facilities in Independence, Missouri under leases expiring in 2001 and 2003. ExamOne has a five year lease expiring in 2004 for a facility used as office space in Voorhees, New Jersey and leases 14 locations in the eastern United States as regional paramedical offices. LabOne leases 10 locations in Northern California and 9 in the Midwest which serve as LabOne Service Centers. These facilities provide specimen collection services for patients and are typically located in medical office buildings. Lab One Canada Inc. leases office space in Ontario Canada, which is used for sales and client services. This lease expires in 2003. Additionally, Lab One Canada Inc. leases space in Quebec Canada for assembly and distribution of specimen collection kits for Canadian insurance testing. This lease expires in 2002.

ITEM 3. LITIGATION

In the normal course of business, LabOne had certain lawsuits pending at December 31, 2000. During 2000, LabOne became a co-defendant in several cases challenging the processes and science underlying the determination of substituted or adulterated specimens submitted for toxicology testing. The Company believes that it has properly applied regulatory guidelines required for such testing and that the resolution of these claims will have no material adverse impact on the Company's financial results.

The Comptroller of the State of Texas conducted an audit of LabOne for sales and use tax compliance for the years 1991 through 1997 and contended that LabOne's insurance laboratory services are taxable under the Texas tax code. The original assessment of $1.9 million was reduced to only include sales of services for applicants who were residents of Texas. LabOne paid the revised assessment of $521,000 under protest in 2000 and is petitioning the Court for recovery of these amounts, including an additional $47,000 filed and paid in protest during 2001 for the period 1998 through August 1999.

The Internal Revenue Service has performed a review of the reported tax paid by ExamOne World Wide of New Jersey, Inc., and has proposed an increase of the tax reported of $45,000 for the quarters beginning March 31, 1992 through December 31, 1994. LabOne is contesting the claim which has been returned to the Internal Revenue Service examination division for further consideration. No consideration of the potential outcome can be made at this time.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Registrant's common stock trades on The Nasdaq Stock Market® under the symbol LABS. As of March 1, 2000, the outstanding shares were held by approximately 4,500 shareholders of record.

During 1999, the Company paid quarterly dividends of $0.20 per common share in the first two quarters and $0.18 per common share in the third and fourth quarters. The Company did not pay a dividend during 2000. The Board of Directors eliminated the quarterly dividend to retain cash flow to finance the Company's debt obligations and growth plans. Additionally, the Company's expanded line of credit with Commerce Bank, N.A. currently prohibits the payment of dividends under the terms of the line of credit. The Board of Directors will review the dividend policy on a periodic basis.

The following are the high and low prices of the stock for each quarter of 2000 and 1999 (split adjusted):

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial information and operating data regarding the Company. This information should be read in conjunction with Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Item 14. (a) (1) and (2), CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE. The balance sheet data as of December 31, 2000, 1999, 1998, 1997 and 1996, and the statement of operations data for each of the years in the five-year period ended December 31, 2000, have been derived from the Company's Consolidated Financial Statements, which have been audited by KPMG LLP, the Company's independent certified public accountants.

Years Ended December 31,
(in thousands, except per share amounts)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenue for the year ended December 31, 2000 was $169.2 million as compared to $119.7 million in 1999. The increase of $49.5 million, or 41%, was due to increases in insurance services revenue of $31.7 million, healthcare revenue of $10.5 million and SAT revenue of $7.3 million. The insurance services segment revenue increased from $77.7 million in 1999 to $109.3 million due primarily to increases of $25.9 million in paramedical testing and an increase of $5.5 million in SBSI revenue. Insurance laboratory testing decreased 2% due to a 1% decrease in average revenue per applicant and a slight decrease in total applicants tested. Healthcare laboratory revenue increased from $24.8 million in 1999 to $35.3 million in 2000 primarily due to a 46% increase in testing volumes. SAT revenue increased from $17.2 million in 1999 to $24.5 million in 2000 primarily due to a 54% increase in testing volumes, partially offset by lower revenue per specimen.

Cost of sales increased $42.7 million, or 60%, for the year as compared to the prior year. This increase is primarily due to increases in paramedical collections, payroll and the cost of motor vehicle and physician statements due to the acquisition and subsequent growth of ExamOne and growth in the healthcare and SAT markets. Insurance segment cost of sales expenses increased to $72.7 million as compared to $41.9 million during 1999 due to the growth of ExamOne and SBSI. Healthcare cost of sales expenses were $23.6 million as compared to $17.1 million during 1999. SAT cost of sales expenses were $18.0 million as compared to $12.6 million during 1999. The increases in the healthcare and SAT segments are due primarily to increased testing volumes.

As a result of the above factors, gross profit increased $6.8 million, or 14%, from $48.1 million in 1999 to $54.9 million in 2000. Insurance gross profit increased $0.9 million, or 2%, to $36.7 million in 2000. Healthcare gross profit improved $4.0 million, from $7.7 million in 1999 to $11.7 million in 2000. SAT gross profit increased $1.9 million from $4.6 million last year to $6.5 million in 2000.

Selling, general and administrative (SGA) expenses increased $11.1 million, or 28%, in 2000 as compared to 1999 primarily due to increases in payroll and benefits, depreciation and amortization expenses. Payroll expenses increased $5.6 million or 30% for the year due to a 33% increase in SGA employees related to growth in the healthcare and SAT divisions and the addition of ExamOne. Depreciation expense increased $1.3 million as compared to last year primarily related to information systems. Amortization expense increased $1.0 million primarily due to a full year of merger goodwill and ExamOne purchase goodwill. Insurance overhead expenditures, including allocated overhead, increased to $26.6 million as compared to $20.3 million in 1999 primarily due to the addition of ExamOne. Healthcare overhead, including allocated overhead, was $14.5 million as compared to $12.2 million in 1999. SAT overhead, including allocated overhead, increased from $5.4 million to $6.9 million. These increases are due to the revenue growth in each segment. The allocation of corporate overhead to the healthcare and SAT segments increased to $7.2 million for the year, as compared to $6.4 million in 1999. Overhead allocated to the insurance segment was $13.3 million for the year.

Operating income decreased from $8.0 million in 1999 to $3.7 million in 2000. The insurance services segment, including overhead allocations, had operating income of $10.1 million as compared to $15.5 million in 1999. The healthcare segment, including overhead allocations, experienced an operating loss of $2.8 million for 2000 as compared to an operating loss of $4.5 million in 1999. The SAT segment, including overhead allocations, had an operating loss of $0.4 million in 2000 as compared to a loss of $0.8 million in 1999. Unallocated operating expenses for the year were $3.2 million related to amortization and corporate expenses. Unallocated operating expenses in 1999 were $2.2 million primarily due to merger expenses, partially offset by gains on the sale of the former laboratory and administrative facilities.

In the fourth quarter 2000, operating income was reduced $2.1 million due to the Company increasing its allowance for doubtful accounts and recognizing other additional expenses. During the quarter, one of the largest SAT clients became delinquent on its trade payments, resulting in the Company reaching an agreement to exchange the trade receivable for a short-term note receivable. As part of the agreement, the balance due from the client was reduced by $0.2 million (See TRENDS) . The Company increased its allowance for doubtful accounts by $0.8 million, due to the specific SAT client and an additional allowance for healthcare receivables. Other additional expenses include $0.7 million in one-time payroll charges, due primarily to severance expense and certain employees' bonus arrangements entered into and in connection with the expansion of ExamOne and SAT.

Non operating expense increased $1.3 million in 2000 as compared to 1999, primarily due to increased interest expense on the line of credit borrowings. Average income tax expense was 138% of pretax income in 2000 as compared to 48% in 1999. The increase is due to the combination of lower pretax earnings and full-year merger amortization expense which is not deductible for tax purposes.

The combined effect of the above factors resulted in a net loss of $0.5 million, or $0.05 per share as compared to net earnings of $2.9 million, or $0.27 per share, in 1999.

Revenue for the year ended December 31, 1999 was $119.7 million as compared to $102.2 million in 1998. The increase of $17.4 million, or 17%, was due to increases in insurance services revenue of $8.5 million, healthcare revenue of $6.2 million and SAT revenue of $2.7 million. The insurance services segment revenue increased from $69.1 million in 1998 to $77.7 million due to an increase in non laboratory services, including revenue of $7.4 million from the October 1998 acquisition of SBSI and revenue of $3.3 million from the November 1999 acquisition of ExamOne, partially offset by a 4% decrease in insurance laboratory revenue. This decrease is due to a 3% decrease in total applicants tested and a 1% decrease in the average revenue per applicant. Healthcare laboratory revenue increased from $18.6 million during 1998 to $24.8 million in 1999 primarily due to a 36% increase in testing volumes. SAT revenue increased from $14.5 million in 1998 to $17.2 million in 1999 primarily due to a 26% increase in testing volumes, partially offset by lower revenue per specimen.

Cost of sales increased $14.8 million, or 26%, for the year as compared to the prior year. This increase is primarily due to increases in payroll, paramedical collections and the cost of motor vehicle and physician statements due to the addition of SBSI and ExamOne. Insurance segment cost of sales expenses were $41.9 million as compared to $32.3 million during 1998. Healthcare cost of sales expenses were $17.1 million as compared to $14.5 million during 1998. SAT cost of sales expenses were $12.6 million as compared to $9.9 million during 1998. These increases in the healthcare and SAT segments are due primarily to increased testing volumes.

As a result of the above factors, gross profit increased $2.6 million, or 6%, from $45.5 million in 1998 to $48.1 million in 1999. Healthcare gross profit improved $3.7 million, from $4.1 million in 1998 to $7.7 million in 1999. SAT gross profit stayed at $4.6 million. Insurance gross profit decreased $1.1 million, or 3%, to $35.8 million in 1999.

Selling, general and administrative expenses increased $6.8 million, or 20%, in 1999 as compared to 1998 primarily due to increases in depreciation and amortization expenses, payroll expenses and bad debt accruals. Depreciation expense increased primarily due to placing the Company's new facility in service during 1999, and amortization expense increased primarily due to merger goodwill. Payroll expenses increased 9% for the year due to a 29% increase in selling, general and administrative employees at year end as compared to last year. Bad debt expense increased primarily due to the revenue growth in the healthcare and SAT segments which also have higher bad debt experience than the insurance segment. Healthcare overhead was $12.2 million as compared to $10.3 million in 1998. SAT overhead increased from $4.3 million in 1998 to $5.4 million in 1999. These increases are due to the growth in each segment. The allocation of corporate overhead to the healthcare and SAT segments increased to $6.4 million for the year, as compared to $5.3 million in 1998, due to the increased share of total revenue for those segments. Insurance overhead expenditures increased to $20.3 million as compared to $16.8 million in 1998 primarily due to the addition of SBSI.

Operating income including overhead allocations decreased from $11.4 million in 1998 to $8.0 million in 1999. The insurance services segment had operating income of $15.5 million as compared to $18.6 million in 1998. The healthcare segment experienced an operating loss of $4.5 million for 1999 as compared to an operating loss of $6.2 million in 1998. The SAT segment had an operating loss of $0.8 million in 1999 as compared to a gain of $0.2 million in 1998. Unallocated operating expenses for the year were $2.2 million related to corporate and merger expenses, partially offset by gains on the sale of the former laboratory and administrative facilities. Unallocated operating expenses in 1998 were $2.7 million.

Non operating expense increased $1.8 million in 1999 as compared to 1998, primarily due to interest expense on the industrial revenue bonds and lower investment income due to less funds available for investment. Average income tax expense was 48.1% of pretax income in 1999 as compared to 46.2% in 1998. The increase is due to an increase in amortization expenses incurred from the Lab Holdings merger which are not deductible for tax purposes.

The combined effect of the above factors resulted in net earnings of $2.9 million, or $0.27 per share, in 1999 as compared to $4.9 million, or $0.50 per share, in 1998.

The following is management's analysis of certain existing trends that have been identified as potentially affecting the future financial results of the Company. Due to the potential for a rapid rate of change in any number of factors associated with the insurance, SAT and healthcare laboratory testing industries, it is difficult to quantify with any degree of certainty LabOne's future volumes, sales or net earnings.

Amortization expense during 2000 was $4.3 million. Amortization expense in the future, excluding any adjustments or future goodwill from additional acquisitions, is scheduled to be $4.2 million in 2001, $3.5 million in 2002, $2.2 million in 2003 and $1.7 million in 2004. The majority of the amortization expense is not deductible for tax purposes and has the effect of increasing the average income tax rate.

The insurance underwriting services market continues to be highly competitive. The primary focus of the competition has been on pricing and on the integration of additional services such as paramedical services or connectivity. LabOne continues to maintain its market leadership by providing quality products and services at competitive prices. Prices may continue to decline during 2001 due to competitive pressures. This trend may have a material impact on earnings from operations.

Effective November 5, 1999, LabOne acquired World Wide Health Services, Inc. and World Wide Health Services of New Jersey, a provider of specimen collection and paramedical examination services to life and health insurers. These subsidiaries are operated under the name ExamOne World Wide (ExamOne) and included in the insurance services division of LabOne. The paramedical industry is a low gross margin industry. A substantial percentage of the revenue from a specimen collection is paid back to the contracted phlebotomist or physician. As the revenue from ExamOne grows as a percentage of total LabOne revenue, its lower gross margins will add to the total profitability of LabOne but will reduce the average gross profit margin percentage.

In the healthcare division, the Company continued its trend of growth through the Lab Card Program, aggressive marketing to the physician community and new managed care agreements. The Lab Card Program now has more than 3 million members. In 2000, the program added its largest client to date, Coventry Health Care (formerly Principal Life Insurance Company). The program continued to expand through new members as well as increased participation from existing members.

In addition to its Lab Card covered lives, the healthcare division signed exclusive managed care outpatient laboratory service contracts with Blue Cross and Blue Shield of Kansas City and Kaiser Permanente of Kansas City in early 2000. Including these organizations, LabOne services over 750,000 managed care lives. Managed care organizations and the physicians who are under their contracts continue to choose LabOne for its high-quality testing, disease management data capabilities, and responsive customer service and support.

In addition to its urine drug testing, the SAT division of LabOne has introduced the Intercept ™ drug testing service, a laboratory-based service that identifies commonly used illicit drugs in oral fluid samples. The oral fluid collection avoids the process of collecting and handling of urine samples which has been criticized for being invasive, demeaning and expensive. The collection with the Intercept device is directly observable and efficient. LabOne markets this new service to employers nationwide.

A specific bad debt risk exposure exists in the SAT division. In February 2001, the Company entered into an agreement with one of its largest SAT clients whereby the Company exchanged its trade receivable from the SAT client for a short-term note receivable. In conjunction with the exchange, the Company obtained additional guarantees and more favorable terms under a related services agreement with the SAT client. At the exchange date, the book value of the trade receivable was $2.3 million before an allowance for doubtful accounts of $0.5 million. The note receivable is payable by the SAT client to the Company in weekly installments through June 2001. The SAT client has met its payment commitments through March 23, 2001. The remaining balance of the note receivable at March 23, 2001 was $1.5 million. For trade receivables generated after January 2001, the agreement requires the SAT client to pay its trade liability within 30 days of its receipt of the Company's monthly invoice. There may be an adverse and material financial effect on the Company in the event of default on this agreement by the SAT client.

In addition, there is a general bad debt risk exposure in the SAT and healthcare divisions. The Company has estimated the exposure based on historical information and expected collection rates, and has reserved an appropriate allowance for doubtful accounts.

The Company's new facility was financed through the City of Lenexa, Kansas, with industrial revenue bonds. In conjunction with the bonds, LabOne received income tax credits through the State of Kansas High Performance Incentive Plan to be applied against state income taxes for up to 10 years, or until the credit is completely used. The amount of the credit exceeds $4 million.

LabOne's working capital position increased from $19.4 million at December 31, 1999, to $24.6 million at December 31, 2000. This increase is primarily due to cash provided by operations and line of credit borrowings exceeding capital additions and debt payments. Net cash provided by operations decreased from $12.0 million in 1999 to $4.4 million in 2000 due primarily to the reduction in net earnings (loss) and an increase in accounts receivable. The increase is partially attributable to revenue growth and a SAT client who became delinquent (See TRENDS). Accounts receivable grew from $26.3 million as of December 31, 1999 to $33.9 million as of December 31, 2000, due primarily to an increase in revenue growth from all three segments. Total cash and investments at December 31, 2000, were $1.6 million, as compared to $3.0 million at December 31, 1999. Management expects to be able to fund operations from a combination of cash flow from operations and borrowings.

During 1999, LabOne paid dividends of $0.20 per common share (split adjusted) in the first and second quarter. The Company paid dividends of $0.18 per common share in the third and fourth quarter. The total amount of dividends paid during 1999 was $0.76 per share, or $8.0 million. During the first quarter 2000, the Board of Directors eliminated the quarterly dividend to retain cash flow to finance the Company's growth plans and for other corporate purposes.

During 2000, the Company spent $9.1 million for capital investments, as compared to $12.8 million in 1999 and $28.5 million in 1998. Capital expenditures for 2000 were primarily related to expansion of all three business segments, including $3.9 million for information systems improvements and $2.0 million in additional laboratory equipment. Of the amount spent in 1999, $5.2 million was spent on completion of the Company's new facility and $2.1 million was spent on the purchase of ExamOne. Of the amount spent in 1998, approximately $21.6 million was for construction of the Company's new facility, and $3.0 million net cash was used in the purchase of SBSI. Future capital asset expenditures, excluding strategic expansions, are expected to be approximately $6 million annually.

On August 10, 1999, the former LabOne, Inc. was merged into its parent corporation, Lab Holdings, Inc. upon the approval of the shareholders of both companies at their respective annual meetings. The combined company's name was then changed to LabOne, Inc. The merger provisions included a 3 for 2 stock split for all Lab Holdings common shares, the par value of the common shares was changed from $1.00 per share to $0.01 per share, and the authorized number of common shares was increased to 40 million. The Company paid $12.6 million, including transaction costs, to complete the merger and purchase 0.8 million shares of LabOne stock. The minority 2.6 million shares of former LabOne stock were exchanged on a one for one basis for the combined company stock. The transaction was recorded under purchase accounting and resulted in $24.1 million in goodwill which is being amortized over 20 years.

Interest on the industrial revenue bonds issued to finance the construction of the Company's new facility is based on a taxable seven-day variable rate which, including letter of credit and remarketing fees, is approximately 6.1% as of March 1, 2001. The bonds mature over the next nine years in increments of $1.85 million per year plus interest. The second principal payment of $1.85 million was paid in September 2000. Interest on the Company's line of credit is currently based on the 30-day LIBOR rate plus 125 basis points and including bank fees is approximately 6.7% as of March 1, 2001.

During the first quarter 2000, the Board of Directors approved a stock repurchase program pursuant to which LabOne is authorized to repurchase up to $10 million of its common stock. During 2000, the Company repurchased 841,000 shares at a cost of approximately $5.9 million. The Company increased in its available line of credit from $15 million to $25 million to accommodate stock repurchases.

During the fourth quarter, the Company adjusted its allowance for doubtful accounts and recognized other additional expenses. These adjustments resulted in the Company not meeting all of the financial covenants on its line of credit and letter of credit. The Company obtained waivers on both deficiencies. The financial impact resulting from paying additional bank fees is considered immaterial.

ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A foreign currency risk exposure exists due to billing Canadian subsidiary revenue in Canadian dollars and the direct laboratory expenses associated with this revenue being incurred in US dollars. This exposure is not considered to be material. Any future material Canadian currency fluctuations against the US$ could result in a decision to hedge future foreign currency cash flows, or to increase Canadian prices.

An interest rate risk exposure exists due to LabOne's liability of $16 million in industrial revenue bonds and $23 million borrowing on its line of credit. The interest expense incurred on the bonds is based on a taxable seven-day variable rate, which including letter of credit and remarketing fees, is approximately 6.1% as of March 1, 2001. The interest expense on the line of credit is based on the 30-day LIBOR rate plus 1.25% and is currently approximately 6.7%. Any future increase in interest rates would result in additional interest expense which could be material and could result in a decision to enter into a long-term interest rate swap transaction.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement was amended in June 2000 with Statement of Financial Accounting Standards No. 138 ("SFAS 138"), Accounting for Certain Derivative Instruments and Certain Hedging Activities". This statement establishes accounting and reporting standards for derivative financial instruments and for hedging activities. LabOne does not currently have any derivative instruments or hedging activities. The adoption of SFAS 133, as amended, did not have a material impact on the Company.

In March 2000, the FASB issued Interpretation No 44 "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" (FIN 44"). FIN 44 clarifies the definition of " employee" for purposes of applying APB Opinion No. 25 "Accounting for Stock Issued to Employees", the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting effects of modifications to the terms of a previously fixed stock option or award, the accounting for an exchange of stock compensation awards in a business combination and other issues. FIN 44 was effective July 1, 2000. The implementation of FIN 44 did not have a material effect on the Company's financial statements.

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB101"), which clarifies certain conditions to be met in order to recognize revenue. The implementation of SAB 101 did not have a material effect on the Company's financial statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See ITEM 14.(a).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information included under the captions entitled "Information Concerning Nominees for Election as Class B Directors," "Security Ownership of Management," "Security Ownership of Certain Beneficial Owners," "Executive Compensation" and "Certain Relationships and Related Transactions" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A with respect to its annual meeting of stockholders to be held May 10, 2001, is incorporated into Items 10, 11, 12 and 13 above by reference.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) (1) and (2) -- The following consolidated financial statements and schedule are attached as a separate section of this report entitled "Consolidated Financial Statements and Schedule":

INDEPENDENT AUDITORS' REPORT

CONSOLIDATED FINANCIAL STATEMENTS:
   Consolidated Balance Sheets, December 31, 2000 and 1999
   Consolidated Statements of Operations, Years Ended
      December 31, 2000, 1999 and 1998
   Consolidated Statements of Stockholders' Equity,
      Years Ended December 31, 2000, 1999 and 1998
   Consolidated Statements of Cash Flows, Years Ended
      December 31, 2000, 1999 and 1998
   Notes to Consolidated Financial Statements

SCHEDULE:
   Schedule II - Valuation and qualifying accounts

All other schedules are omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or the notes thereto.

(b) Reports on Form 8-K

   None.

(c) Exhibits required by Item 601 of Regulation S-K

   (Exhibits follow the Schedule):

* Incorporated by reference pursuant to Rule 12b-23
** Management Compensatory Plan
*** Non-Management Director Compensatory Plan

These exhibits may be obtained by stockholders of Registrant upon written
request to LabOne, Inc., 10101 Renner Blvd., Lenexa, KS 66219.

(d) Not applicable

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.