ITEM 1. BUSINESS

LabOne, Inc., a Missouri corporation, provides risk assessment services for the insurance industry, laboratory testing services for the healthcare industry and substance abuse testing services for employers and third party administrators. LabOne, Inc. and its wholly-owned subsidiaries Osborn Group, Inc. (Osborn), Lab One Canada Inc., Systematic Business Services, Inc. (SBSI) and ExamOne World Wide, Inc. (ExamOne), are hereinafter collectively referred to as either LabOne or the Company.

LabOne's Risk Assessment division provides underwriting and claims support services including teleunderwriting, specimen collection and paramedical examinations, laboratory testing, telephone inspections, motor vehicle reports, claims investigation services and medical information retrieval 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 but also includes specimens of individuals applying for individual and group medical and disability policies.

LabOne's Clinical division includes laboratory testing services for the healthcare industry as an aid in the diagnosis and treatment of patients. LabOne operates a highly automated and centralized laboratory, which the Company believes has significant economic advantages over other conventional laboratory competitors. LabOne markets its clinical testing services to managed care companies, insurance companies, self-insured groups and physicians.

LabOne's Clinical division also includes substance abuse testing services provided to 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 currently markets 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 contains "forward-looking statements," including, but not limited to: projections of revenues, income or loss, margins, capital expenditures, cost savings and synergies, 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, pricing and mix of laboratory tests and other services provided by the Company, the extent of market acceptance of the Company's testing and other services in the healthcare and substance abuse industries, intense competition, the loss of one or more significant customers, bad debt expense, general economic conditions and other factors det ailed 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.

Effective August 31, 2001, LabOne purchased all of the outstanding capital stock of Osborn Group, Inc., (Osborn) a leading provider of laboratory testing and other risk assessment services to the life insurance industry. Intellisys, Inc., Applied BioConcepts Inc. and Osborn Laboratories (Canada) Inc., wholly owned subsidiaries of Osborn Group, were included in the purchase. As a result of the transaction, LabOne was able to consolidate Osborn's testing and other operations to LabOne's Lenexa, Kansas facility. With this acquisition, LabOne has a combined revenue base of $250 million and will annually perform laboratory testing for approximately 10 million individuals for its risk assessment, healthcare and substance abuse. Due to operational overlap, LabOne expects to generate up to $10 million of annual cost savings from the acquisition.

To fund the acquisition and related expenses of the transaction, Welsh, Carson, Anderson & Stowe, IX, L.P. and related purchasers (WCAS) invested a total of $50 million in convertible preferred stock and subordinated debt in LabOne pursuant to a Securities Purchase Agreement dated August 31, 2001. See "Liquidity" for further discussion of the issued securities.

The following table summarizes the Company's revenues and volumes from services provided to the risk assessment and clinical market segments (in thousands):

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

Risk Assessment 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. LabOne utilizes standardized specimen collection, medical questionnaires and laboratory testing, tailored to the needs of the insurance industry and reported in a uniform format. This information provides insurance companies with a consistent and efficient means of evaluating the mortality and morbidity risks posed by policy applicants.

When an individual applies for insurance, a paramedical company is contacted to arrange for collection of a blood and/or urine specimen. ExamOne's paramedical representatives 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 tested according to each insurance company's specifications.

LabOne's insurance laboratory 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 p resence. 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.

CaseView, LabOne's proprietary requirements management software, allows underwriters to order laboratory testing and other services, check the status of those requests, review results electronically, request add-on tests or services based on the results and to manage the underwriting services they order through LabOne and its subsidiaries. With the Osborn acquisition, the Company also offers IntelliNet, a second network/software product that provides connectivity and case management capabilities for insurance clients. The integration of the best features of these products into one superior product should benefit insurance clients and result in cost savings to the Company.

LabOne assists with the administration and tracking of data for applicants during the information gathering process. The Company can obtain medical records or 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 are ordered automatically based on insurance company specifications or on demand by the underwriter. The Company can collect, process and provide imaged reports of these various pieces of information electronically through LabOne NET® directly to the insurance company's underwriting department.

Clinical Services:

Healthcare laboratory tests are generally requested by physicians 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 specimens. Clinical and anatomical pathology tests are frequently performed as part of routine 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. Contracted 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 at LabOne are sent to reference laboratories for testing, and the results of these outsourced tests are transmitted into the Company's computer system for reporting along with the results completed by LabOne.

The Company has established the Lab Card® Program as a method of marketing outpatient laboratory services directly to payors. The Lab Card Program is marketed to self-insured groups and insurance companies, and 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 direct laboratory work to LabOne. Under the Program, the patient generally 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.

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

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 that 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 typically reported within 12 hours of accessioning in the laboratory. Initial positive specimens are verified by the gas chromatography/mass spectrometry method, and results are generally reported within 72 hours of accessioning in the laboratory. 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.

LabOne operates a highly automated and centralized laboratory located in Lenexa, Kansas, a suburb of Kansas City, Missouri. The Company believes the single facility has significant economic advantages over other conventional laboratory competitors.

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 significant 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 assist managed care entities or employers in disease management, for HEDIS reporting and utilization tracking to help manage healthcare costs.

The Company considers the confidentiality of its test results and other personal data processed to be of primary importance and has established procedures to ensure that this information remains secure and confidential.

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

LabOne's business is subject to significant federal and state regulation. Changes in regulation may significantly increase the costs of doing business.

LabOne is licensed under the Clinical Laboratory Improvement Amendments of 1988 and maintains additional licenses for clinical testing with all 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. The Company is subject to federal and state regulation relating to the handling and disposal of medical waste and hazardous waste and federal regulation by the Food and Drug Administration, the Occupational Safety and Health Administration related to workplace safety and several agencies related to the transportation of laboratory specimens.

Congress has enacted the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Pursuant to HIPAA, LabOne will be required to maintain administrative, technical, and physical safeguards to protect the security and confidentiality of healthcare information against unauthorized uses or disclosures. LabOne has appointed both a security officer and a privacy officer who are leading efforts to meet the upcoming requirements, the most significant of which is the April 2003 compliance date for the privacy regulations. Compliance with the HIPAA requirements have already, and will continue to, require significant resources.

LabOne's Regulatory Affairs department oversees 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 specimen arrival to account setup, testing, reporting 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 has appointed a Chief Compliance Officer and 14 co-compliance officers representing corporate security, operations, legal, human resources, regulatory affairs, billing, sales, finance, administration and information systems and technology functions within LabOne. 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 laboratory testing services.

LabOne's client base consists of insurance companies, managed care organizations, third party administrators, occupational health clinics and employers primarily in North America. 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 risk assessment 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 works in a specific geographic area. Marketing efforts are directed at insurance carriers, self-insured employers and trusts, third party benefit administrators, physician practices 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 risk assessment services market in the United States and Canada is a $1 billion industry. The Company serves approximately 20% 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 services at competitive prices tailored specifically to the insurance industry's needs. The risk assessment market continues to be highly competitive with the primary focus on the ability to provide rapid, comprehensive and high quality information services. The Company continues to develop innovative data management services and technological solutions that differentiate its products from competitors. These services and solutions enable LabOne's clients to expedite the underwriting and claims processes, saving time and reducing underwriting costs.

During 2000, LabOne was selected by State Farm Insurance Company to be its national account manager for the collection and testing of specimens from its life and health insurance applicants. In July of 2001, the Company completed the implementation of this unique national account management program in all 50 states. The Company believes the success of this implementation can serve as a validated model for other such programs managed by the Company in the future, and provides a competitive advantage. Due to this arrangement, total revenue recognized by LabOne from State Farm for 2001 exceeded 10% of total revenue. The loss of the State Farm account would have a material adverse effect on the Company.

The outpatient laboratory testing segment of the clinical market is a $25 billion industry, which is highly fragmented and very competitive. The Company faces competition from numerous independent clinical laboratories and hospital-owned or physician-owned laboratories. Many of the Company's competitors are significantly larger and have substantially greater financial resources than LabOne. The Company has established a solid client base through the use of Lab Card® and exclusive arrangements with managed care entities to provide laboratory services and information reporting.

LabOne competes in the substance abuse testing segment nationwide, presently estimated to be a $1.0 billion industry. There are currently 56 laboratories 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 oral fluid based drug screening in the pre-employment market.

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

Lab One Canada Inc. markets insurance testing services to Canadian clients, with laboratory testing performed primarily 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 and efficient 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, 2002, the Company had 1,625 employees, including 77 part-time employees, representing an increase of 259 employees from the same time in 2001. None of the Company's employees is 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 industrial revenue bonds issued by the City of Lenexa, Kansas. The remaining balance on the bonds is $14.5 million. The 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. 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 two facilities in Independence, Missouri under leases expiring in 2003. Effective January 1, 2002, LabOne added a 50,000 square foot facility in Lee's Summit, Missouri under lease until 2011 to perform insurance applicant interviews and to process attending physician statements. ExamOne has a five year lease expiring in 2004 for a facility used as office space in Voorhees, New Jersey and leases 28 locations across the United States as regional paramedical offices. LabOne leases 11 locations 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, 2001. During 2000 and 2001, LabOne became a co-defendant in several cases challenging toxicology results, including the processes and science underlying the determination of substituted or adulterated specimens submitted for toxicology testing. In July 2001, the Company announced that a jury awarded $400,000 in compensatory damages to a flight attendant based upon the drug testing results reported by LabOne. The Company believes that it has properly applied regulatory guidelines required for such testing and has appealed the verdict. The Company is insured for the loss and has reserved for any potential insurance deductibles related to these cases.

On March 5, 2002, a complaint was filed by a paramedical services company against LabOne and others. The suit claims that LabOne interfered with the contractual rights of the paramedical services company with several of its affiliate examiners and wrongfully recruited employees to work for LabOne. The suit seeks injunctive relief and damages. The resolution of this issue is not expected to be material to LabOne.

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.

Although LabOne cannot predict the outcome of such proceedings or any other claims made against it, management believes that the ultimate resolution of these claims will have no material adverse impact on the Company's financial position.

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, 2002, the outstanding shares were held by approximately 5,500 shareholders either directly or in street name.

The Company did not pay a dividend during 2001 or 2000. The Board of Directors eliminated the quarterly dividend in 1999 to retain cash flow to finance the Company's debt obligations and growth plans. Additionally, the Company's 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, but presently has no plans to pay a dividend in the near future.

The following are the high and low prices of LabOne's common stock for each quarter of 2001 and 2000:

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, 2001, 2000, 1999, 1998 and 1997, and the statement of operations data for each of the years in the five-year period ended December 31, 2001, have been derived from the Company's Consolidated Financial Statements, which have been audited by KPMG LLP, the Company's independent certified public accountants.

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

Revenue for the year ended December 31, 2001 was $233.9 million as compared to $169.2 million in 2000. The increase of $64.7 million, or 38%, was due to increases in risk assessment revenue of $50.0 million, healthcare revenue of $11.3 million and SAT revenue of $3.4 million. The risk assessment segment revenue increased from $109.3 million in 2000 to $159.3 million due primarily to increases of $28.1 million in paramedical testing and an increase of $16.8 million in insurance laboratory testing. Insurance laboratory testing increased due to an increase in the base level of LabOne insurance applicants tested and due to $11.9 million of revenue from acquired Osborn clients effective September 2001. Healthcare laboratory revenue increased from $35.3 million in 2000 to $46.6 million in 2001 due to a 23% increase in testing volumes and an increase in the average revenue per patient. SAT revenue increased from $24.5 million in 2000 to $27.9 million in 2001 primarily due to a 11% increase in testing volumes.

Cost of sales increased $51.0 million, or 45%, for the year as compared to the prior year. This increase is primarily due to increases in paramedical collections, payroll and material costs due to the growth of ExamOne and growth in the insurance and healthcare laboratory testing markets. Insurance segment cost of sales expenses increased to $113.1 million as compared to $72.7 million during 2000 due to the growth of ExamOne and the acquisition of Osborn. Healthcare cost of sales expenses were $29.6 million as compared to $23.6 million during 2000. SAT cost of sales expenses were $22.6 million as compared to $18.0 million during 2000. 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 $13.7 million, or 25%, from $54.9 million in 2000 to $68.6 million in 2001. Insurance gross profit increased $9.6 million, or 26%, to $46.2 million in 2001. Healthcare gross profit improved $5.3 million, from $11.7 million in 2000 to $17.0 million in 2001. SAT gross profit decreased $1.2 million from $6.5 million last year to $5.3 million in 2001.

Selling, general and administrative (SGA) expenses increased $13.2 million, or 26%, in 2001 as compared to 2000 primarily due to increases in payroll and benefits and amortization expenses. Payroll expenses increased $5.5 million or 23% for the year due to growth in the risk assessment, healthcare and corporate overhead divisions and the accrual of profit sharing bonuses in 2001. Amortization expense increased $3.9 million due to non cash warrant expenses of $3.2 million related to the WCAS financing and $0.6 million related to warrants issued in exchange for an exclusive marketing arrangement. Insurance overhead expenditures increased to $17.6 million as compared to $13.3 million in 2000 primarily due to the addition of Osborn and growth in ExamOne. Healthcare overhead increased to $13.6 million as compared to $10.2 million in 2000 due to bad debt accruals and payroll expense. SAT overhead increased from $4.0 million to $4.1 million in 2001. Corporate overhead increased from $23.6 million in 2000 to $29.0 million due to the warrant amortization and payroll expenses.

Operating income increased 14% from $3.7 million in 2000 to $4.3 million in 2001. The risk assessment segment had operating income of $28.7 million as compared to $23.4 million in 2000. The healthcare segment operating income increased from $1.4 million in 2000 to $3.5 million in 2001. The SAT segment operating income declined from $2.5 million in 2000 to $1.3 million in 2001. Corporate operating expenses for the year increased from $23.6 million in 2000 to $29.1 million.

Non operating expense decreased $0.2 million in 2001 as compared to 2000, primarily due to lower interest expense. Average income tax expense was 150% of pretax income in 2001 as compared to 138% in 2000. The high average rate is due to amortization expense which is not deductible for tax purposes.

The combined effect of the above factors resulted in a net loss of $1.0 million, or $0.18 per share as compared to a net loss of $0.5 million, or $0.05 per share, in 2000.

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 risk assessment revenue of $31.7 million, healthcare revenue of $10.5 million and SAT revenue of $7.3 million. The risk assessment 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 the goodwill associated with the Lab Holdings merger and the ExamOne acquisition. 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 risk assessment 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. 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.

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 risk assessment and clinical industries, it is difficult to quantify with any degree of certainty LabOne's future volumes, sales, margins or net earnings.

Amortization expense in 2001, comprised of $4.3 million for goodwill and customer list and $3.8 million for the amortization of the WCAS and other warrants issued, was $8.1 million. Amortization expense in 2000 was $4.3 million primarily for goodwill. Effective 2002, the Company will no longer amortize goodwill. (See Recent Accounting Developments.) The majority of the historical amortization expense was not deductible for tax purposes and had the effect of increasing the effective income tax rate.

Effective August 31, 2001, LabOne purchased Osborn, a provider of laboratory testing and other risk assessment services to the life insurance industry. With this acquisition, LabOne will have a combined revenue base of $250 million and will annually perform laboratory testing for approximately 10 million individuals for its risk assessment, healthcare and substance abuse testing clients. Due to the reduction of operational overlap, LabOne expects to generate up to $10 million of annual cost savings from the acquisition.

The risk assessment services market continues to be highly competitive. The primary focus of the competition has been on the ability to deliver integrated services such as total account management and electronic connectivity. LabOne continues to maintain its market leadership by a commitment to customer service, by providing quality products and services at competitive prices and by continuing to develop innovative data management services and technological solutions that differentiate us from competitors.

During 2001, LabOne continued to contract with national insurance carriers to provide teleunderwriting services. Under the terms of these contracts, LabOne personnel conduct telephone interviews relating to the medical histories of new life insurance policy applicants. It is anticipated that there will be a substantial increase in these services provided during 2002.

Revenue from the ExamOne division increased $28.1 million in 2001. The paramedical industry historically returns a lower gross margin than LabOne's other market segments. In most cases, a substantial percentage of the revenue from a specimen collection is paid to a contractor who owns and operates an independent local office which arranges for the collection. As the revenue from ExamOne continues to grow 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, aggressively marketing to physicians and new managed care agreements. The Lab Card Program now has more than 3 million members. The program continued to expand through new members as well as increased participation from existing members.

In the physician marketing and managed care area, the healthcare division continues to service approximately 750,000 members under our exclusive managed care outpatient laboratory service contracts. The Company continues to add network approvals for healthcare plans in focused regional physician markets to increase penetration. 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.

The SAT market segment is more cyclical in nature and sensitive to economic conditions, and levels of employment and labor hiring than LabOne's other market segments. Due to the recent economic downturn, revenue growth in this segment has diminished. If economic activity and levels of employment and labor hiring do not improve, revenues in this segment may continue to lag expectations.

In addition to its urine drug testing, LabOne markets oral fluid drug testing services with a laboratory-based test that identifies commonly used illicit drugs in oral fluid samples. The oral fluid collection avoids the process of collecting and handling of urine samples and the collection with the oral fluid device is directly observable. LabOne markets this service to employers and third party administrators nationwide.

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 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.

In conjunction with the purchase of Osborn, WCAS was issued $35.0 million of convertible preferred stock and $15.0 million of subordinated debt. The preferred stock can be converted into LabOne common stock at a rate of $8.32 per share and earns a paid-in-kind dividend of 8% which is compounded semiannually. In the calculation of earnings per share, the preferred dividend is deducted from net earnings in arriving at earnings available to common shareholders and reduces basic earnings per share. In calculating diluted earnings per share, the dividend is not deducted, but the number of shares outstanding is adjusted by the potential conversion of the preferred stock into common stock and will reduce the calculated earnings per share. The $15.0 million of subordinated debt has a cash coupon of 11%.

LabOne's working capital position increased from $24.6 million at December 31, 2000, to $30.6 million at December 31, 2001. This increase is due to cash provided by net financing activities and cash provided by operations exceeding the acquisition costs of Osborn and capital additions. Net cash provided by operations increased from $4.4 million in 2000 to $14.2 million in 2001. Non-cash expenses included in net earnings, primarily amortization and depreciation, increased $7.2 million as compared to 2000. The net change in non-cash working capital items decreased as compared to last year. Accounts receivable grew from $33.9 million as of December 31, 2000 to $42.1 million as of December 31, 2001, due to the increase in revenue. The allowance for doubtful accounts declined from $4.4 million in 2000 to $3.6 million due to implementing new third party collection procedures, which resulted in writing off old accounts receivable that were fully reserved in prior periods. Total cash and investments at December 31, 2000, were $5.9 million, as compared to $1.6 million at December 31, 2000. Management expects to be able to fund operations from a combination of cash flow from operations and borrowings.

To finance the purchase of Osborn, LabOne issued $35 million of convertible preferred stock and $15 million of subordinated debt to WCAS in exchange for $50 million cash. The preferred stock is convertible into LabOne common stock at a rate of $8.32 per share and earns a paid-in-kind dividend at a fixed rate of 8% compounded semiannually. The convertible preferred stock may be converted at the Company's election after the third anniversary of issuance if the common stock is trading at or above $16.64 per share for 30 out of 45 consecutive trading days. Final redemption of the convertible preferred stock on the seventh anniversary of issuance may be paid in cash or stock at the Company's election. The subordinated debt bears a fixed interest rate of 11% and matures 25% on each of the fifth and sixth anniversaries of issuance and the remaining 50% on the seventh anniversary of issuance.

During 2001, the Company spent $61.8 million for capital investments, as compared to $9.0 million in 2000 and $12.8 million in 1999. The amount spent in 2001 included $50.6 million for the purchase of Osborn and $2.4 million on the acquisition of various paramedical operations. Additionally, $6.3 million was spent for software development and information systems. 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. Future capital asset expenditures, excluding strategic expansions, are expected to be approximately $9 million annually.

Interest on the industrial revenue bonds issued to finance the construction of the Company's facility is based on a taxable seven-day variable rate which, including letter of credit and remarketing fees, is approximately 3.1% as of March 1, 2002. The bonds mature over the next eight years in increments of $1.85 million per year plus interest. The third principal payment of $1.85 million was paid in September 2001. Interest on the Company's line of credit is currently based on the 30-day LIBOR rate plus 225 basis points and including bank fees is approximately 4.1% as of March 1, 2002.

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 currently does not intend to make additional share repurchases.

The Company increased its available line of credit from $15 million to $25 million to accommodate stock repurchases in 2000. During 2001, the Company increased the line of credit to $35 million. The Company is currently in discussions with several banks for a new three year facility that would increase this line of credit in 2002.

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 $14.5 million in industrial revenue bonds and $28 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 3.1% as of March 1, 2002. The interest expense on the line of credit is based on the 30-day LIBOR rate plus 2.25% and is currently approximately 4.1%. An assumed 10% increase in interest rates (representing approximately 40 basis points) would potentially increase interest expense on these instruments by $0.2 million annually.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141) and Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. It also specifies the types of acquired intangible assets that require recognition and reporting separately from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer will be amortized, but instead tested for impairment at least annually in accordance with the provisions in the statement. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their residual values and reviewed for impairment.

The Company has adopted the provisions of SFAS 141 upon its issuance and SFAS 142 effective July 1, 2001. Because the Osborn acquisition occurred after July 1, 2001, the Company did not amortize any of the goodwill generated in the purchase. As of January 1, 2002, the Company will no longer amortize any goodwill, and in accordance with SFAS 142, has performed an evaluation of its goodwill that was acquired in prior business combinations to identify intangible assets that require recognition and reporting apart from goodwill. The Company has concluded that the customer list acquired from the purchase of GIB Laboratories is not goodwill and will recognize the final amortization of this customer list in January 2002. Also, on January 1, 2002, in accordance with SFAS 142, the Company performed a goodwill impairment assessment and concluded that no impairment of goodwill exists at such date.

The Company had unamortized goodwill in the amount of $81.7 million at December 31, 2001. Amortization expense related to goodwill was $3.5 million and $3.4 million for the years ended December 31, 2001 and 2000, respectively.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

While many operational aspects are subject to complex federal, state and local regulations, the accounting for LabOne's business is generally straightforward with revenues primarily recognized upon completion of the testing process or delivery of services provided to the client.

The estimate of reserves for doubtful accounts involves a monthly standardized approach to review the collectibility of receivables based on the aging of accounts receivable. Historical collection and payor reimbursement experience is an integral part of the estimation process related to reserves for doubtful accounts. In addition, the current state of billing functions is assessed in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to bad debt expense within selling, general and administrative expenses. The collection and reserves processes, along with the monitoring of billing processes, helps to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection and reimbursement experience and billing functions.

Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. These capitalized costs are included in property and equipment on the consolidated balance sheets and are subject to amortization, over the estimated useful life of the software, beginning when the software project is complete.

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 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 23, 2002, is incorporated into Items 10, 11, 12 and 13 above by reference, except the information contained in the Proxy Statement under the captions "Board Compensation Report on Executive Compensation" and "Comparison of Five Year Cumulative Total Return Among LabOne, Nasdaq Composite Index and Peer Group" is not incorporated herein 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, 2001 and 2000
   Consolidated Statements of Operations, Years Ended
      December 31, 2001, 2000 and 1999
   Consolidated Statements of Stockholders' Equity,
      Years Ended December 31, 2001, 2000 and 1999
   Consolidated Statements of Cash Flows, Years Ended
      December 31, 2001, 2000 and 1999
   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

A Form 8-K current report dated September 14, 2001 was filed with the Commission reporting under Item 2. Acquisition of assets, the acquisition of the Osborn Group, Inc. in conjunction with the investment in LabOne of $50 million by WCAS. Follow up amendments were filed to include exhibits associated with the acquisition and pro forma financial statements were filed as an amendment on November 13, 2001.

(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.