LabOne, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

LabOne, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

See accompanying notes to consolidated financial statements.

LabOne, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 2004
(in thousands,except share data)
(unaudited)

See accompanying notes to consolidated financial statements.

LabOne, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

See accompanying notes to consolidated financial statements.

LabOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

(5) Stock-based Compensation

LabOne is a diagnostic services provider. The services and information LabOne and its subsidiaries provide include: risk assessment information services for the insurance industry; diagnostic healthcare testing; and substance abuse testing services and related employee qualification products. LabOne's business plan is to be the premier provider of certified and accredited, cost effective laboratory and information services to life and health insurance companies, employers, third party administrators, government agencies, hospitals, physician practices and occupational health clinics.

LabOne's risk assessment services comprise underwriting support services to the insurance industry including teleunderwriting, specimen collection and paramedical examinations, laboratory testing, telephone inspections, motor vehicle reports and medical record retrieval. The laboratory tests performed and data gathered 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 services include laboratory testing services for the healthcare industry as an aid in the diagnosis and treatment of patients. LabOne operates highly automated and centralized laboratory facilities, which the Company believes has significant economic advantages over other laboratory competitors. LabOne markets its clinical testing services to managed care companies, insurance companies, self-insured groups, hospitals and physicians.

LabOne's clinical services also include substance abuse testing ("SAT") provided to employers to support their drug free workplace programs. 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. Additionally, the Company can provide background checks, social security number verification and other pre-employment data required by 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 Quarterly Report on Form 10-Q may contain "forward-looking statements," including, but not limited to, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements, and statements of the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future. Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "will be," "intended," "continue," "believe," "may," "hope," "anticipate," "goal," "forecast," "plan," "estimate" or variations thereof. Forward-looking statements are not guarantees of future performance or results. Forward-looking statements are based on estimates, forecasts and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed or implied in such forward-looking statements. The uncertainties, risks and assumptions referred to above include, but are not limited to, those described under "Factors Affecting Future Performance" in Item 7 detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and those described under "Risk Factors" in the Company's S-3 registration statement filed with the Securities and Exchange Commission on September 10, 2004. Investors are cautioned not to put undue reliance on any forward-looking statement.

SELECTED FINANCIAL DATA

THIRD QUARTER ANALYSIS

Revenue for the quarter ended September 30, 2004, was $117.8 million compared to $88.1 million in the third quarter 2003. The increase of $29.7 million, or 34%, was due to increases in clinical healthcare revenue of $19.4 million, risk assessment revenue of $6.7 million and clinical SAT revenue of $3.7 million. Risk assessment revenue increased to $64.6 million from $58.0 million in the third quarter 2003 due primarily to increases of $4.3 million in paramedical services and $2.8 million in other insurance services, partially offset by a decrease in insurance laboratory services of $0.5 million. Paramedical services revenue increased due to an increase in the number of paramedical exams performed from new customer accounts and the acquisition of a Canadian paramedical provider. Other insurance services increased primarily due to growth in teleunderwriting services, motor vehicle reports and medical records retrieval. Insurance laboratory revenue decreased due to a 3% decline in the average revenue per applicant. During the third quarter 2004, healthcare services revenue increased to $42.2 million from $22.8 million in 2003 due to the acquisition of Alliance Laboratory Services in January 2004 and a 19% increase in organic testing volumes. Alliance Laboratory Services accounted for $14.1 million of the revenue increase, and increased sales to new and existing healthcare customers accounted for $5.3 million of the revenue increase. SAT revenue increased $3.7 million to $11.0 million in the third quarter 2004 from $7.3 million in 2003 due to the addition of Northwest Toxicology and an 11% increase in organic testing volumes. Northwest Toxicology accounted for $3.0 million of this increase. Total laboratory services revenue from risk assessment and clinical was $73.9 million as compared to $51.3 million in the third quarter 2003.

Cost of sales increased $20.7 million, or 34%, in the third quarter 2004 as compared to the prior year, due primarily to the acquisitions of Alliance Laboratory Services and Northwest Toxicology, and increases in paramedical collections, motor vehicle report fees and payroll expense. Paramedical services increased primarily due to continued growth of the ExamOne paramedical operations and the acquisition of a Canadian paramedical provider. Motor vehicle report fees increased due to sales growth. Payroll increased due to increased specimen volume in the healthcare and substance abuse laboratory testing segment and growth of teleunderwriting. Risk assessment cost of sales, including all of the above mentioned factors, increased to $46.9 million in 2004 from $41.9 million in the third quarter 2003. Clinical healthcare cost of sales increased to $26.4 million as compared to $13.2 million in the third quarter 2003 primarily due to the addition of Alliance Laboratory Services. Clinical SAT cost of sales expenses increased to $7.5 million as compared to $5.1 million in the third quarter 2003 primarily due to the addition of Northwest Toxicology.

As a result of the above factors, gross profit for the quarter increased $9.0 million, or 32%, from $28.0 million in 2003 to $37.0 million in 2004. Risk assessment gross profit increased $1.7 million, or 10%, to $17.7 million in the third quarter 2004. Clinical healthcare gross profit increased $6.2 million, or 64%, to $15.8 million in 2004 from $9.7 million in 2003. Clinical SAT gross profit increased $1.2 million, or 55%, to $3.4 million in 2004 from $2.2 million in the third quarter last year.

Selling, general and administrative expenses increased $6.8 million, or 36%, in the third quarter 2004 as compared to the prior year. This increase is primarily due to increases in payroll, amortization, depreciation and audit and bank fees. Risk assessment overhead expenditures increased to $5.2 million in 2004 from $4.5 million in the third quarter 2003. Clinical healthcare overhead expenditures increased to $8.2 million as compared to $4.7 million in 2003 due to the acquisition of Alliance Laboratory Services and an increase in payroll expense. Clinical healthcare expenses were reduced in the period by $0.2 million related to a reimbursement form the Health Alliance for certain transition costs incurred by the Company in connection with the laboratory integration. Clinical SAT overhead expenditures increased to $1.5 million as compared to $0.8 million in 2003 due to the acquisition of Northwest Toxicology. Corporate overhead expenses increased to $10.4 million from $8.7 million in the third quarter 2003 primarily due to higher payroll and depreciation, principally related to information technology initiatives and expenses related to compliance with the Sarbanes-Oxley Act of 2002.

Operating earnings increased 25% from $9.3 million in the third quarter 2003 to $11.6 million in 2004. Risk assessment services operating earnings increased 8% to $12.5 million in 2004 as compared to $11.6 million in the third quarter 2003. Clinical healthcare services operating income increased 53% to $7.6 million in 2004 as compared to $5.0 million in 2003. Clinical SAT operating earnings increased 35% to $2.0 million in the third quarter 2004 as compared to $1.5 million in 2003. Corporate operating expenses increased 20% to $10.4 million compared to $8.7 million in the third quarter 2003.

Non operating expenses increased $0.5 million primarily due to higher interest expense from increased borrowings for acquisitions. The effective income tax rate declined to 36% in the third quarter 2004 as compared to 37% in 2003. Income tax expense for the period was favorably impacted by a $0.4 million adjustment related to foreign and state taxes.

The combined effect of the above factors resulted in net earnings of $6.6 million, or $0.38 per diluted share in the third quarter 2004, compared to $5.4 million, or $0.32 per diluted share in 2003. Convertible preferred dividends in the third quarter 2003 were $0.8 million and earnings available to common shareholders were $4.6 million. The preferred stock was converted into LabOne common stock during the third and fourth quarters of 2003.

YEAR TO DATE ANALYSIS

Revenue for the nine month period ended September 30, 2004, was $348.1 million compared to $254.0 million in the first nine months of 2003. The increase of $94.1 million, or 37%, was due to increases in clinical healthcare revenue of $59.6 million, risk assessment revenue of $25.1 million and clinical SAT revenue of $9.4 million. Risk assessment revenue increased to $194.2 million from $169.1 million in the first nine months due primarily to increases of $13.7 million in other insurance services and $12.9 million in paramedical services, partially offset by a decrease in insurance laboratory services of $1.4 million. Other insurance services increased primarily due to growth in medical records retrieval, teleunderwriting services and motor vehicle reports. Paramedical services revenue increased due to an increase in the number of paramedical exams performed from new customer accounts and the acquisition of a Canadian paramedical provider. Insurance laboratory revenue decreased 2% due to a 1% decline in the total number of insurance applicants tested by the Company and a 4% decrease in the average revenue per applicant. During the first nine months of 2004, healthcare services revenue increased to $124.3 million from $64.7 million in 2003 due to the acquisition of Alliance Laboratory Services in January 2004 and a 21% increase in organic testing volumes. Alliance Laboratory Services accounted for $43.7 million of the revenue increase, and increased sales to new and existing healthcare customers accounted for $15.9 million of the revenue increase. SAT revenue increased $9.4 million to $29.7 million in the first nine months of 2004 from $20.2 million in 2003 due to the acquisition of Northwest Toxicology and an 11% increase in organic testing volumes. Northwest Toxicology accounted for $7.5 million of this increase. Total laboratory services revenue from risk assessment and clinical was $219.2 million as compared to $151.6 million in the first nine months of 2003.

Cost of sales increased $65.7 million, or 38%, in the first nine months of 2004 as compared to the prior year, due primarily to the acquisitions of Alliance Laboratory Services and Northwest Toxicology, and increases in paramedical collections and physician statement fees, motor vehicle reports, payroll and lab supplies. Paramedical services increased primarily due to continued growth of the ExamOne paramedical operations. Payroll increased due to increased specimen volume in the healthcare and SAT laboratory testing segment and growth of teleunderwriting and medical records retrieval services. Risk assessment cost of sales, including all of the above mentioned factors, increased to $140.8 million in 2004 from $120.8 million in the first nine months of 2003. Clinical healthcare cost of sales increased to $77.9 million as compared to $38.1 million in the first nine months of 2003 primarily due to the addition of Alliance Laboratory Services. Clinical SAT cost of sales expenses increased to $20.4 million as compared to $14.4 million in the first nine months of 2003 primarily due to the addition of Northwest Toxicology.

As a result of the above factors, gross profit year to date increased $28.4 million, or 35%, from $80.7 million in 2003 to $109.1 million in 2004. Risk assessment gross profit increased $5.2 million, or 11%, to $53.4 million in 2004. Clinical healthcare gross profit increased $19.8 million, or 74%, to $46.4 million in 2004 from $26.6 million in 2003. Clinical SAT gross profit increased $3.5 million, or 60%, to $9.3 million in 2004 from $5.8 million last year.

Selling, general and administrative expenses increased $20.6 million, or 37%, in the first nine months of 2004 as compared to the prior year. This increase is primarily due to increases in payroll, bad debt and amortization expenses. Risk assessment overhead expenditures increased to $15.0 million in 2004 from $13.5 million in the first nine months of 2003. Clinical healthcare overhead expenditures increased to $26.5 million as compared to $14.3 million in 2003 due to the acquisition of Alliance Laboratory Services and an increase in payroll expense. Clinical SAT overhead expenditures increased to $4.2 million as compared to $2.4 million in 2003 primarily due to the acquisition of Northwest Toxicology. Corporate overhead expenses increased to $29.9 million from $24.8 million in the first nine months of 2003 primarily due to higher payroll, expenses related to compliance with the Sarbanes-Oxley Act of 2002, depreciation and insurance expenses.

Operating earnings increased 30% from $25.7 million in the first nine months of 2003 to $33.6 million in 2004. Risk assessment services operating earnings increased 11% to $38.4 million in 2004 as compared to $34.7 million in 2003. Clinical healthcare services operating income increased 61% to $19.9 million in 2004 as compared to $12.4 million in 2003. Clinical SAT operating earnings increased 49% to $5.1 million in the first nine months of 2004 as compared to $3.4 million in 2003. Corporate operating expenses increased 20% to $29.9 million compared to $24.8 million in 2003.

Non operating expenses increased $1.7 million primarily due to higher interest expense from increased borrowings for acquisitions. The effective income tax rate was 37% in the first nine months of 2004 as compared to 37% in 2003.

The combined effect of the above factors resulted in net earnings of $18.8 million, or $1.08 per diluted share in the first nine months of 2004, compared to $15.0 million, or $0.89 per diluted share in 2003. Convertible preferred dividends in the first nine months of 2003 were $2.3 million and earnings available to common shareholders were $12.6 million. The preferred stock was converted into LabOne common stock during the third and fourth quarters of 2003.

LabOne's working capital position increased by $17.5 million to $65.6 million as of September 30, 2004 from $48.1 million as of December 31, 2003 due to an increase in cash and accounts receivable, partially offset by an increase in accounts payable and accrued payroll. Net cash provided by operations was $37.3 million as compared to $19.2 million in the first nine months of 2003. The increase is due to higher net income and non cash items including depreciation, deferred income taxes and the tax benefit from the exercise of stock options.

During the first nine months of 2004, the Company spent $60.1 million on acquisitions and $16.2 million for capital expenditures. Acquisitions included $43.9 million for Alliance Laboratory Services and $12.2 million for Northwest Toxicology. During the first nine months of 2003, the Company spent $7.2 million on acquisitions and $5.9 million for capital expenditures. The Company expects to spend approximately $24 million for the land, building construction, furnishings, equipment and information technology systems for a new laboratory facility in Cincinnati, Ohio to be completed at the end of the second quarter of 2005. To date, the Company has spent $3.7 million related to the new facility.

During June 2004, the Company issued $90 million of 3.50% convertible senior debentures due June 15, 2034 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. During July 2004, the initial purchasers exercised their option to purchase an additional $13.5 million of the debentures. The debentures may be converted, under certain circumstances, into a combination of cash and common stock of the Company at an initial rate equivalent to a conversion price of $39.30 per share of common stock, subject to certain adjustments. Holders may convert the debentures if the common stock price exceeds 130% of the conversion price for 20 trading days in the 30 trading day period ending on the last trading day of the preceding fiscal quarter. Upon conversion, the Company will deliver cash equal to the lesser of the aggregate principal amount of debentures to be converted and the conversion obligation, and common stock in respect of the remainder, if any, of the conversion obligation. The Company may not redeem the debentures prior to June 20, 2009. Holders of the debentures may require the Company to repurchase some or all of the debentures on June 15, 2011, 2014 and 2024 and upon certain specified corporate transactions. The Company used the net proceeds from the offering to reduce borrowings under its credit facility and for general corporate purposes.

As of September 30, 2004, borrowings under the Company's revolving credit facility were $0.8 million. Borrowings had increased from $47.0 million as of December 31, 2003 to $95.7 million as of March 31, 2004 primarily to fund acquisitions. During the third quarter, the Company increased commitments under its revolving credit facility from $150 million to $175 million. The line of credit bears variable interest which, as of October 29, 2004, was 3.8% and requires a commitment fee of 0.5% on the unused portion of the commitment. Based on covenants, $70.3 million of the remaining $174.2 million was available for borrowing as of September 30, 2004.

As of September 30, 2004, the Company had $9.0 million outstanding of industrial revenue bonds issued to finance the construction of the Company's Lenexa facility. Interest on the industrial revenue bonds is based on a taxable seven-day variable rate which, including letter of credit and remarketing fees, was approximately 2.9% as of October 29, 2004.

As of September 30, 2004, LabOne had total cash and cash equivalents of $20.6 million as compared to $4.7 million as of December 31, 2003. The Company expects to fund operations from a combination of cash flows from operations and borrowings under the credit facility.

As of September 30, 2004, LabOne's liability subject to variable interest rates was $9.8 million. The associated market risk exposure is not considered to be material. A foreign currency risk exposure exists due to sales in Canada 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.

The Company maintains disclosure controls and procedures that are designed for information required to be disclosed in the Company's reports filed pursuant to the Securities Exchange Act of 1934, as amended, to be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also are designed for such information to be accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.

Management of the Company, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that the control system's objectives would be met.

There were no changes in the Company's internal controls over financial reporting during the third quarter of fiscal 2004 that materially affected, or that are reasonably likely to materially affect, the Company's internal control over financial reporting.

As previously reported, during the third quarter of 2004, the Company's internal auditors identified a reportable condition in the design and operation of general computer controls related to program changes and access security. The condition is not considered a material weakness. The Company believes it has addressed and remediated the issues concerning program changes. The Company has implemented certain changes in security access, and has plans for completion of remediation during the fourth quarter.

(c) In 2000, the Company's Board of Directors authorized a share repurchase program to purchase up to $10 million of LabOne common stock. The program does not have an expiration date. During 2000, the Company repurchased 841,000 shares of common stock at an average price of $7.07 per share for a total of $5.9 million. The Company has not repurchased any shares of common stock since 2000. Approximately $4.1 million remains available for future treasury stock purchases.

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