UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission file number 000-19392
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DIANON Systems, Inc.
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(Exact name of registrant as specified in its charter)

Delaware 06-1128081
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

200 Watson Boulevard, Stratford, Connecticut 06615
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (203) 381-4000
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Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

As of March 20, 2002, the aggregate market value of the voting Common Stock held
by non-affiliates of the registrant was $665,783,530.

Number of shares of Common Stock outstanding as of March 20, 2002: 12,049,942

DOCUMENTS INCORPORATED BY REFERENCE
None

PART I
ITEM 1. BUSINESS

DIANON Systems, Inc. ("DIANON" or the "Company"), incorporated in 1984,
provides a full line of anatomic pathology testing services and a number of
genetic and clinical chemistry testing services to patients, physicians and
managed care organizations throughout the United States. The Company's principal
physician audience for these services includes approximately 50,000 clinicians
engaged in the fields of medical oncology, urology, dermatology, gynecology and
gastroenterology. The Company is one of the leading specialized providers of
anatomic pathology testing services in the United States.

The Company performs all testing at either its main facility in Stratford,
Connecticut or at its other facilities located in Tampa, Florida; New City, New
York; Woodbury, New York or Oklahoma City, Oklahoma (the latter acquired in
November 2001). The Company provides most test results to physicians within
forty-eight hours. In 1996, the Company opened a specimen processing facility at
the hub of its airfreight provider in Ohio in order to prepare certain specimens
for more rapid processing when they arrive in the appropriate laboratory and to
improve overall turnaround time to the physicians.

The business of the Company is subject to a number of risks and
uncertainties that could adversely affect the Company's ability to achieve its
objectives. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Risk Factors: Forward Looking Statements" for a
description of various factors that could have an adverse effect on the
performance of the Company.

MEDICAL TESTING MARKETS

The Company operates in one reportable segment, the medical laboratory
industry. Medical laboratories offer a broad range of testing services to the
medical profession. The Company's testing services are categorized based upon
the nature of the test: Anatomic Pathology, Genetic Testing and Clinical
Chemistry. These testing services are used by physicians in the diagnosis,
prognosis, monitoring and general management of diseases and other clinical
conditions. The tests included in such services generally detect
medically-significant abnormalities and visual patterns in blood, tissue samples
and other specimens.

Below are some of the major differences between the three testing services
offered by the Company:

ANATOMIC PATHOLOGY TESTING GENETIC TESTING CLINICAL CHEMISTRY TESTING
-------------------------- --------------- --------------------------

Type of Specimen Tissue or cells - usually Tissue or cells may be Blood or urine - usually
obtained by a physician from obtained by a physician collected by a nurse
a biopsy, pap smear, urine (bone marrow aspirate, (blood) or by the patient
specimen or surgery amniocentesis) or nurse (urine)
(blood, cheek swab)

Technology Employed Physician interpretation of Ph.D. interpretation of Highly automated blood
tissue slides supplemented results generated by chemistries and
by special antibody stains certified laboratory immunoassays
or genetic tests technologists

2001 DIANON Net Revenues $87.2 million $18.7 million $19.8 million

INFORMATION SERVICES

The Company has developed several proprietary information systems products
over the last 10 years. These products include a Laboratory Information System,
an Anatomic Pathology module to aid the pathologist in creating medical reports,
an accounts receivable and billing system, and the disease management program
(designed for patients, physicians, and managed care organizations) called
CarePath (TM). In addition, many supporting modules have been built to support
such areas as the delivery of medical reports through electronic interfaces and
the Internet and information products designed to better manage the business.

The Company's information services are used principally to assist the
physician in the analysis of test results and to help managed care organizations
by providing disease specific information to members. These services complement
the Company's current service offerings and are not a separate product category;
however, the Company's current information services are an important part of the
Company's marketing program, and the Company believes they provide important
value-added services which help the Company differentiate itself from
competitors. Patient specific reports aid the physician in analyzing multiple
prognostic tests and/or correlative trends in a patient's test results,
treatment and clinical condition. Summary reports on all patients in a
physician's practice allow the physician to compare test results on patients
with similar conditions, review multiple patient histories and compare his or
her experience with that of physicians across the country.

The Company will continue to review and develop its systems to bring
unique, timely and pertinent information to its customers.

QUALITY ASSURANCE

The Company utilizes a unique quality control program for anatomic
pathology which provides a reduced number of equivocal results reported to
clinicians. This program is applied to all anatomic pathology specimens. By
diminishing the number of indeterminate diagnoses and providing the unequivocal
diagnosis as soon as possible, the Company enables clinicians to treat patients
sooner and more effectively while reducing overall health care costs.

The Company's quality assurance program includes adherence by employees to
standard operating procedures, continuing education and technical training of
technologists, statistical quality control of all analytical processes,
instrument maintenance, and regular inspection by governmental agencies and the
College of American Pathologists.

REIMBURSEMENT

In 2001, 2000, and 1999, respectively, approximately 40%, 37% and 31% of
the Company's net revenues were derived from testing performed for beneficiaries
under the Medicare and Medicaid programs. These figures include the 20%
co-payment and deductible normally billed to the patient when anatomic pathology
services are involved. At least 97% of the Medicare and Medicaid net revenues
are derived from the Medicare program. Revenues from testing performed for other
patients are derived principally from other third-party payors, including
commercial insurers, Blue Cross Blue Shield plans, health maintenance and
preferred provider organizations, patients, physicians, hospitals, and other
laboratories (who in turn usually bill non-governmental third-party payors or
patients). For many of the tests performed for Medicare or Medicaid
beneficiaries (except clinical diagnostic laboratory tests for those
beneficiaries being treated by a hospital or, in some instances, by a skilled
nursing facility ("SNF")), laboratories are required to bill Medicare or
Medicaid directly for covered services and to accept Medicare or Medicaid
reimbursement as payment in full for such services. Management has elected, to
date, to accept reimbursement rates set by other third-party payors as payment
in full as well (apart from any co-payment or deductible that the payor has
established).

Reimbursement rates for some services of the type, or similar to the type,
performed by the Company have been established by Medicare, Medicaid and other
third-party payors, but have not been established for all services or by all
carriers with respect to any particular service. While most carriers, including
Medicare, do not cover services they determine to be investigational, or
otherwise not reasonable and necessary for diagnosis or treatment, a formal
coverage determination is made with respect to relatively few new procedures.
When such determinations do occur for Medicare purposes, they most commonly are
made by the local Medicare carrier which processes claims for reimbursement
within the carrier's geographic jurisdiction. The Company receives Medicare
reimbursement primarily through the Medicare carriers for Connecticut, New York,
Florida and Oklahoma. A positive coverage determination, or reimbursement

without such determination, by one or more third- party payors, or clearance for
marketing by the Food and Drug Administration ("FDA"), does not assure
reimbursement by other third-party payors. A few third-party payors have denied
payment for services for which the Company receives reimbursement from other
payors. On occasion, Medicare or other third-party payors have decided to cease
payment for one or more of the Company's services that historically have been
reimbursed by them because such services are performed using test kits or other
products which have not received FDA pre-market clearance or because such
services may otherwise be deemed investigational or for other reasons.
Furthermore, Medicare and other third-party payors have, on occasion, ceased
reimbursement when certain tests are ordered for patients with certain diagnoses
while maintaining reimbursement when tests are ordered for other diagnoses
deemed appropriate by the carrier. This practice recently has become more
prevalent with respect to Medicare.

The Balanced Budget Act of 1997 ("BBA") required the Secretary of the
Department of Health and Human Services ("the Secretary") to divide the country
into no more than five regions and designate a single Medicare carrier for each
region to process laboratory claims (except those performed by independent
physicians' offices) no later than January 1, 1999, and to adopt uniform
coverage, administration, and payment policies for lab tests using a negotiated
rulemaking process by July 1, 1998. However, the Centers for Medicare and
Medicaid Services ("CMS," formerly "HCFA") has not yet redesignated Medicare
carrier regions for lab claims. The clinical lab negotiated rulemaking committee
met periodically during 1998 and 1999, and a proposed rule reflecting the
consensus of the committee members was published on March 10, 2000. The final
rule was published on November 23, 2001. This rule establishes national coverage
policies for many of the most commonly ordered laboratory tests, replacing local
Medicare policies, which sometimes varied, and it establishes other uniform
requirements related to submission of claims for lab tests. Most of the changes
arising from the rule will not be effective until 12 months from the date the
final rule was published. The Company believes these rules will level the
playing field and result in more consistent reimbursement across the country.

In general, reimbursement denials by the various carriers, reductions or
delays in the establishment of reimbursement rates, and carrier limitations on
the insurance coverage of the Company's services or the use of the Company as a
service provider could have a material adverse effect on the Company's future
revenues.

MEDICARE PAYMENT FOR ANATOMIC PATHOLOGY SERVICES. Medicare reimbursement
for anatomic pathology services constituted approximately 40%, 38%, and 34% of
the Company's net anatomic pathology revenues in 2001, 2000, and 1999,
respectively. As of January 1, 1992, all physician services, including anatomic
pathology services, have been reimbursed by Medicare based on a methodology
known as the resource-based relative value scale ("RBRVS"), which was fully
phased in by the end of 1996. Overall, anatomic pathology reimbursement rates
declined during the fee schedule phase-in period, despite an increase in payment
rates for certain pathology services performed by the Company.

The Medicare RBRVS payment for each service is calculated by multiplying
the total relative value units ("RVUs") established for the service by a
conversion factor that is set by statute. The 2002 conversion factor is
$36.1992, a decrease of approximately 5.4% from the 2001 conversion factor. The
number of RVUs assigned to each service is in turn calculated by adding three
separate components: physician work, practice expense, and malpractice expense.
In 1997, there was an overall decrease of 5.7% in payments for pathology
services due to a five-year review of the work value component and a decrease in
the 1997 conversion factor applicable to pathology services, plus an additional
decrease in Connecticut, where the Company's primary operations are located,
because of CMS's reduction of the number of different payment localities
recognized for RBRVS purposes. Another five-year review of the work value
component was completed and was published in the Federal Register on June 8,
2001. The results of this review went into effect on January 1, 2002, but the
changes recommended are not expected to have any effect on payment for pathology
services.

On November 1, 1998, CMS recalculated the physician practice expense
component of the Medicare physician fee schedule to reflect resource consumption
rather than historical charge data. The resulting new practice expense values
are being phased in over the period 1999 to 2002. In the final 2002 physician
fee schedule, published in November 2001, CMS estimated that refinements and
changes in the RVUs for physician work and practice expense would result in a 3%
increase in payments for pathology services in 2002, compared to what would have
occurred in 2002 had the rule not been published, although the reduction in the
conversion factor used to calculate the fee schedule payments offsets the
increase in payments for certain pathology services. However, the net effect of
changes with respect to the most common pathology service currently provided by
Dianon will result in an increase in payments to Dianon in 2002.

CMS announced in the November 2, 1999 physician fee schedule that
effective January 1, 2001, independent labs would no longer be able to bill
Medicare or the patient for the technical component ("TC") of pathology services
furnished to Medicare beneficiaries who were hospital inpatients. Independent
labs would still be permitted to bill and be paid for the TC of pathology
services provided to beneficiaries who were in non-hospital settings, but for
the TC of services provided to a hospital inpatient, the independent lab would
have to make arrangements with the hospital in order to receive payment. CMS
also announced that beginning on January 1, 2001, under new rules for hospital
outpatient reimbursement, independent labs would be limited to billing the
hospital for the TC of any pathology services furnished to hospital outpatients.
In other words, independent laboratories that perform the technical component of
pathology services for hospital outpatient services would no longer be able to
bill Medicare for these services and would be required, instead, to bill the
hospital. However, the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000, ("BIPA"), signed into law on December 21, 2000, included
a "grandfathering" provision allowing independent labs to continue to be paid
for the TC of services provided to hospital inpatients and outpatients for an
additional two years, if the referring hospital had had such an arrangement with
an independent lab in effect on or before July 22, 1999, pending the completion
of a study by the General Accounting Office. Since the Company does only minimal
testing for hospital inpatients and outpatients, these changes are not expected
to have a material financial impact on the Company.

In the past, the Company has been able to offset a substantial portion of
the impact of any reduced Medicare reimbursement rates for anatomic pathology
services through the achievement of economies of scale and the introduction of
alternative technologies that do not depend on reimbursement through the RBRVS
system. While other potential legislative and market changes may have a negative
effect on the Company's average unit price, the Company is not able to predict
the exact nature or effect of any other potential changes affecting its
reimbursement for anatomic pathology services at this time.

MEDICARE FEE SCHEDULE PAYMENT FOR GENETIC LABORATORY SERVICES. The Company
provides a number of services which are characterized as genetic laboratory
testing services by the Medicare program. Medicare reimbursement for genetic
laboratory services constituted approximately 42%, 38%, and 20% of the Company's
genetic revenues in 2001, 2000, and 1999, respectively. There is no separate
Medicare reimbursement methodology for genetic testing. The genetic testing
performed by the Company is reimbursed under the RBRVS method, as is anatomic
pathology, or under the clinical chemistry laboratory fee schedule depending on
the specific test.

MEDICARE FEE SCHEDULE PAYMENT FOR CLINICAL CHEMISTRY LABORATORY SERVICES.
The Company provides a number of services, which are characterized as clinical
chemistry laboratory testing services by the Medicare program. Medicare
reimbursement for clinical chemistry laboratory services constituted
approximately 36%, 31%, and 26% of the Company's clinical chemistry revenues in
2001, 2000, and 1999, respectively. In 1984, Congress adopted legislation
establishing a locality-specific fee schedule reimbursement methodology with
Consumer Price Index ("CPI")-related updates for clinical diagnostic laboratory
testing for non-hospital patients and hospital outpatients under Medicare.
Payment for clinical chemistry laboratory services performed for Medicare
hospital and SNF inpatients is included within the prospectively determined
Diagnosis Related Group rate paid to the hospital and Resource Utilization Group
rate paid to the SNF. In addition, state Medicaid programs are prohibited from
paying more than the Medicare laboratory fee schedule amount.

Beginning with the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA `85"), Congress instituted a national cap on Medicare clinical chemistry
laboratory fee schedules. This national cap has been lowered each year and now
is 74% of the national median. Moreover, the Omnibus Budget Reconciliation Act
of 1987 ("OBRA `87") eliminated the CPI update for 1988, and in succeeding years
Congress has often either limited or eliminated annual updates of Medicare
clinical chemistry laboratory fee schedules. After updates of 3.2% in 1996 and
approximately 2.7% in 1997, the BBA freezes fee schedule payments for the
1998-2002 period. The update limitations and changes in the national cap made to
date have not had, and are not expected by the Company to have, a material
adverse effect on the Company's results of operations. Any further significant
decrease in such fee schedules, however, could have a material adverse effect on
the Company's future revenues.

Beginning in 1998, Medicare began covering screening pap smears for
certain Medicare beneficiaries, and the Balanced Budget Refinement Act of 1999
("BBRA") required the Secretary to establish a national minimum payment amount
equal to $14.60 for diagnostic or screening pap smear laboratory tests furnished
on or after January 1, 2000. Previously, the national payment cap for a pap
smear was approximately $7.15. The BBRA also encouraged CMS to institute an
appropriate increase in the payment rate for new cervical cancer screening

technologies that have been approved by the FDA as significantly more effective
than a conventional pap smear, such as the technologies used by the Company.
Currently, no national payment rate has been set for new pap smear technology,
so each local carrier has established reimbursement independently. CMS is
expected to set a national median for such services by 2002. In any event, as a
result of the BIPA, these new lab tests will receive 100% of the national
median, rather than the 74% that applies to other tests. BIPA required the
Secretary of HHS to establish procedures that permit public consultation for
coding and payment determinations for new clinical laboratory tests, and a
notice was published in the Federal Register on November 23, 2001 announcing a
schedule of public meetings pursuant to this requirement. In addition, this
legislation included a provision changing the frequency of covered screening pap
smears from at least every three years to at least every two years. The
expansion of Medicare coverage for screening pap has provided, and is expected
to continue to provide in 2002, additional revenues for the Company.

In addition, consolidated billing, required under the BBA since 1998 for
laboratory and other services provided to residents of SNFs, has been eliminated
for specific Part B services (including lab services), effective January 1,
2001. Because the Company does only minimal clinical laboratory services for
nursing facility patients, these changes have not materially effected the
Company's business.

Other changes in government and other third-party payor reimbursement
which may result from the enactment of healthcare reform legislation likely will
continue the downward pressure on prices and make the market for clinical
laboratory services more competitive. For example, the BBA revised the Medicare
program substantially to permit beneficiaries to choose between traditional
fee-for-service Medicare and several non-traditional Medicare options, including
managed care plans and provider-sponsored organization plans. These
non-traditional Medicare plans have considerable discretion in determining
whether and how to cover and reimburse clinical laboratory services and to limit
the number of labs with which they deal. In addition, as a result of BIPA,
Medicare managed care organizations will receive an increase of approximately $9
billion in their payments and risk adjustments through 2005, further signifying
a push towards a managed care environment. The BBA also included provisions to
implement competitive bidding for certain Medicare items and services, including
laboratory services, on a three-site demonstration project basis. Thus far,
Medicare has implemented demonstration projects in Polk County, Florida and San
Antonio, Texas. If adopted on a widespread basis, these changes likely would
have an adverse impact on the Company's revenues.

Finally, the BBA also contained measures to establish market-oriented
purchasing for Medicare, including prospective payment systems ("PPS") for
outpatient hospital services, home health care, and nursing home care. All of
these systems have now been implemented. Since the Company does only minimal
clinical laboratory testing for home health care and nursing facility patients,
these changes are not expected to materially affect the Company's business.
Under the outpatient PPS rule, CMS would have carved out clinical laboratory
services from the outpatient PPS rates, but would have included the technical
component of surgical pathology services in the rate. However, as discussed
above, provisions in BIPA postponed implementation of this provision for two
years for hospitals that had in place an arrangement with an independent
laboratory under which the lab billed Medicare separately for the technical
component of pathology services provided to the hospital's patients.

In addition to federal legislative action, reforms may occur at the state
level and changes are occurring in the marketplace as a result of market
pressures, including the increasing number of patients covered by some form of
managed care. In general, these changes are likely to put a downward pressure on
price and also may act to limit access by some laboratories to some managed care
patient groups. Because of the uncertainties about the exact nature, extent, and
timing of any such changes, however, the Company currently is unable to predict
their ultimate impact on the clinical laboratory industry generally or on the
Company in particular.

COMPETITION

The Company provides services in a segment of the healthcare industry that
is intensely competitive. The Company estimates that there are over 10,820
laboratories in the United States, which might be deemed actual or potential
competitors for the testing business of cancer-treating or cancer-diagnosing
physicians.

The anatomic pathology segment is highly fragmented and has just begun to
experience industry consolidation to any significant degree. Competitors include
physician-owned laboratories, specialized commercial laboratories and hospital
laboratories. None of these competitors has a material share of the anatomic
pathology market.

Genetic testing is performed by a relatively small number of large
hospital systems, university medical centers and large commercial laboratories.
Genzyme, Laboratory Corporation of America and Quest Diagnostics are the primary
competitors with appreciable market share. Demand for this type of testing is
growing due to new therapeutic drug treatments for specific genetic conditions.
These drug treatments are often administered after genetic testing is complete
in order to maximize effectiveness. The number of tests and the demand for
existing tests will continue to grow as therapeutic treatments options expand.
We are continually evaluating our test offerings to capitalize on this growth.

In contrast, the clinical chemistry segment has been consolidated to a
large extent, and the two largest national clinical laboratories in the U.S.,
Quest Diagnostics and Laboratory Corporation of America, have a significant
market share in outpatient testing. In 1999, Quest Diagnostics acquired the
clinical laboratory operations of SmithKline Beecham Clinical Laboratories. The
clinical laboratories' product offerings are broader and the two companies have
more substantial financial and operational resources than the Company. Other
competitors in this segment include special-purpose clinical laboratories and
manufacturers of test kits and other diagnostic tools.

In addition to the competition for customers, there is increasing
competition for qualified personnel, particularly in the laboratory. To date,
such competition has not had an adverse impact on the Company's operations.

Significant factors that enhance the Company's ability to compete
effectively include the Company's highly-trained and knowledgeable sales force,
high quality laboratory operations, accurate and consistent test results,
quality of service to physicians, price and speed of turnaround for test
results.

PATENTS AND PROPRIETARY TECHNOLOGY

To date, the Company has not relied heavily on patents or licensed
technology in its business. Some of the tests or related diagnostic products
purchased and used by the Company may be patented. There can be no assurance
that such tests or related products do not infringe patent rights of others. Any
such infringement could give rise to claims against the Company. Typically, the
Company has no contractual right to be indemnified against such risks. There can
be no assurance that any issued patent upon which the Company relies directly or
indirectly will afford protection to the Company in the face of challenges to
the patent's validity.

Other private and public entities, including universities, have filed
applications for (or have been issued) patents in the Company's field and may
obtain additional patents and other proprietary rights to technology that may be
the same as or similar to those utilized by the Company. The scope and validity
of such patents, the extent to which the Company may wish or need to acquire
such rights, and the cost or availability of such rights are presently unknown.
There can be no assurance that others may not obtain access to the Company's
technology or independently develop the same or similar technology to that
utilized by the Company.

EMPLOYEES

As of December 31, 2001, the Company had 1,066 full-time equivalent
employees.

REGULATORY MATTERS

The Company's business is subject to government regulation at the federal,
state and local levels, some of which regulations are described under
"Laboratory Operations," "Anti-Fraud and Abuse," "Confidentiality of Health
Information," "Food and Drug Administration" and "Other" below.

LABORATORY OPERATIONS

The Company's laboratories are located in Connecticut, New York, Florida,
Texas and Oklahoma. Each laboratory is certified or licensed under the federal
Medicare program, the Clinical Laboratories Improvement Act of 1967, as amended
by the Clinical Laboratory Improvement Amendments of 1988 (collectively, "CLIA
`88"), and the respective clinical laboratory licensure laws of the state in
which they are located, where such licensure is required, except for Texas which

is in the process of being certified under the federal Medicare program and CLIA
'88. In addition, the Connecticut, Florida and Oklahoma laboratories are
accredited by the College of American Pathology. The Connecticut laboratory also
is certified to bill the Connecticut and various other state Medicaid programs
and is licensed by the federal Nuclear Regulatory Commission. The Company
believes it has obtained all material laboratory licenses required for its
operations.

The federal and state certification and licensure programs establish
standards for the operation of medical laboratories, including, but not limited
to, personnel and quality control. Compliance with such standards is verified by
periodic inspections by inspectors employed by federal or state regulatory
agencies. In addition, federal regulatory authorities require participation in a
proficiency testing program approved by HHS for many of the specialties and
subspecialties for which a laboratory seeks approval from Medicare or Medicaid
and certification under CLIA `88. Proficiency testing programs involve actual
testing of specimens that have been prepared by an entity running an approved
program for testing by the laboratory.

A final rule implementing CLIA `88, published by HHS on February 28, 1992,
became effective September 1, 1992. This rule has been revised on several
occasions and further revision is expected. The CLIA `88 rule applies to
virtually all laboratories in the United States, including the Company's
laboratories. The Company has reviewed its operations as they relate to CLIA
`88, including, among other things, the CLIA `88 rule's requirements regarding
laboratory administration, participation in proficiency testing, patient test
management, quality control, quality assurance and personnel for the types of
testing undertaken by the Company, and believes it is in compliance with these
requirements. However, no assurances can be given that the Company's
laboratories will pass all future inspections conducted to ensure compliance
with CLIA `88 or with any other applicable licensure or certification laws. The
sanctions for failure to comply with CLIA `88 or state licensure requirements
may be suspension, revocation or limitation of the labs' CLIA `88 certificate or
state license, as well as civil and/or criminal penalties.

ANTI FRAUD AND ABUSE LAWS

Existing federal laws governing Medicare and Medicaid, as well as some
other state and federal laws, also regulate certain aspects of the relationship
between healthcare providers, including clinical and anatomic laboratories, and
their referral sources, including physicians, hospitals and other laboratories.
One provision of these laws, known as the "anti-kickback law," contains
extremely broad proscriptions. Violation of this provision may result in
criminal penalties, exclusion from Medicare and Medicaid, and significant civil
monetary penalties.

Following a study of pricing practices in the clinical laboratory
industry, the Office of the Inspector General ("OIG") of HHS conducted a study
of pricing practices, and in January 1990 issued a report addressing how these
pricing practices relate to Medicare and Medicaid. The OIG reviewed the
industry's use of one fee schedule for physicians and other professional
accounts and another fee schedule for patients/third-party payors, including
Medicare, in billing for testing services, and focused specifically on the
pricing differential when profiles (or established groups of tests) are ordered.

Existing federal law authorizes the Secretary of HHS to exclude providers
from participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual
charges." On September 2, 1998, the OIG issued a final rule in which it
indicated that this provision has limited applicability to services for which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the "substantially in excess" provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician's referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.

The Company sometimes enters into discounting arrangements in billing for
its services. Depending upon the nature of any regulatory or enforcement action
taken or the content of legislation, if any, which might be adopted to address
this issue, the Company could experience a significant decrease in revenue which
could have a material adverse effect on the Company.

Under another federal law, known as the "Stark" law or "self-referral
prohibition," physicians who have an investment or compensation relationship
with an entity furnishing clinical laboratory services (including anatomic
pathology and clinical chemistry services) may not, subject to certain
exceptions, refer clinical laboratory testing for Medicare patients to that
entity. Similarly, laboratories may not bill Medicare or Medicaid or any other
party for services furnished pursuant to a prohibited referral. Violation of
these provisions may result in disallowance of Medicare and Medicaid claims for
the affected testing services, as well as the imposition of civil monetary
penalties. Some states also have laws similar to the Stark law.

The Company seeks to structure its arrangements with physicians and other
customers to be in compliance with the anti-kickback, Stark and state laws, and
to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. The Company also has a
compliance committee which meets on a regular basis to review various operations
and relationships as well as adopt policies. However, the Company is unable to
predict how these laws will be applied in the future, and no assurances can be
given that its arrangements will not become subject to scrutiny under them.

In February 1997 (as revised in August 1998), the OIG released a model
compliance plan for laboratories that is based largely on corporate integrity
agreements negotiated with laboratories that had settled enforcement action
brought by the federal government related to allegations of submitting false
claims. The Company has adopted aspects of the model plan that it deems
appropriate to the conduct of its business. One key aspect of the corporate
integrity agreements and the model compliance plan is an emphasis on the
responsibilities of laboratories to notify physicians that Medicare covers only
medically necessary services. These requirements, and their likely effect on
physician test ordering habits, focus on chemistry tests, especially routine
tests, rather than on anatomic pathology services or the non-automated tests
which make up the majority of the Company's business measured in terms of net
revenues. Nevertheless, they potentially could affect physicians test ordering
habits more broadly. The Company is unable to predict whether, or to what
extent, these developments may have an impact or the utilization of the
Company's services.

Prior to 1998, the Medical Director of the Connecticut Medicare carrier to
whom the Company submits its Medicare claims, orally expressed the view that
some amount of money which the carrier has paid to the Company for certain
pathology services involving DNA measurements in prostate tumor cells
(morphometric analysis of tumor) potentially is recoverable by the carrier. The
carrier Medical Director has never reduced his view to writing or otherwise
asserted a claim. Accordingly, at this time, the Company cannot evaluate any
such possible claim, or the probability of assertion of any such claim.

During 1997, the Company was made aware that an agent based in the
Hartford, Connecticut branch of the U.S. Department of Health and Human Services
Office of the Inspector General ("OIG") was investigating the Company's practice
of supplying pathology specimen collection devices without charge to physician
customers as well as unspecified billing issues that had been raised by the
local Medicare carrier. The Company believes that its practices with respect to
specimen collection devices were proper, and a letter describing the Company's
actions and its views regarding applicable regulations was sent by the Company
to the OIG. That letter also requested information about any billing issues of
concern to the OIG so that the Company could address them. As of the date of
this report, the Company had not received a response from or otherwise been
contacted by the OIG regarding these matters, and has not received any formal
notification regarding the matter.

The Company has received a subpoena dated November 16, 2000, issued by the
United States Attorney's Office for Connecticut, requesting the production of a
variety of documents, with a particular focus on documents relating to billing
for tumor biomarkers, DNA testing and screening tests. The Company is
cooperating with the Department of Justice representatives handling this matter
and has substantially completed its production of documents under the subpoena.

CONFIDENTIALITY OF HEALTH INFORMATION

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions that affect the handling of claims and other patient
information that are, or have been, transmitted electronically. These
provisions, which address security and confidentiality of patient information as
well as the administrative aspects of claims handling, have very broad
applicability and they specifically apply to healthcare providers, which include
physicians and clinical laboratories. Rules implementing various aspects of
HIPAA are continuing to be developed. National standards for electronic

healthcare transactions were published by HHS on August 17, 2000. The
regulations establish standard data content and formats for submitting
electronic claims and other administrative health transactions. All healthcare
providers will be able to use the electronic format to bill for their services
and all health plans and providers will be required to accept standard
electronic claims, referrals, authorizations, and other transactions. Under the
regulation, all electronic claims transactions must follow a single standardized
format. All health plans, providers and clearinghouses must comply with the
standards by October 2003. Failure to comply with this rule could result in
significant civil and/or criminal penalties. Despite the initial costs, the use
of uniform standards for all electronic transactions could lead to greater
efficiency in processing claims and in handling health care information.

On December 28, 2000, HHS published rules governing the use of
individually identifiable health information. The regulation protects certain
health information ("protected health information" or "PHI") transmitted or
maintained in any form or medium, and requires specific patient consent for the
use of PHI for purposes of treatment, payment or health care operations. For
most other uses or disclosures of PHI, the rule requires that covered entities
(healthcare plans, providers and clearinghouses) obtain a valid patient
authorization. For purposes of the criminal and civil penalties imposed under
Title XI of the Social Security Act, the current date for compliance is 2003.
Proposed security standards for electronic health data, published in August
1998, have not yet been finalized. Complying with the Standards, Security and
Privacy rules under HIPAA will require significant effort and expense for
virtually all entities that conduct healthcare transactions electronically and
handle patient health information, but the Company is unable to accurately
estimate the total cost or impact of the regulations at this time. Those costs,
however, are not expected to be material.

In addition to the HIPAA rules described above, the Company is subject to
state laws regarding the handling and disclosure of patient records and patient
health information. These laws vary widely, and many states are passing new laws
in this area. Penalties for violation include sanctions against a laboratory's
licensure as well as civil or criminal penalties. The Company believes it is in
compliance with applicable state law regarding the confidentiality of health
information.

FOOD AND DRUG ADMINISTRATION

The FDA does not currently regulate laboratory testing services, which is
the Company's principal business. However, the Company performs some testing
services using test kits purchased from manufacturers for which FDA premarket
clearance or approval for commercial distribution in the United States has not
been obtained by the manufacturers ("investigational test kits"). Under current
FDA regulations and policies, such investigational test kits may be sold by
manufacturers for investigational use only if certain requirements are met to
prevent commercial distribution. The manufacturers of these investigational test
kits are responsible for marketing them under conditions meeting applicable FDA
requirements. In January 1998, the FDA issued a revised draft Compliance Policy
Guide ("CPG") that sets forth FDA's intent to undertake a heightened enforcement
effort with respect to investigational test kits improperly commercialized prior
to receipt of FDA premarket clearance or approval. That draft CPG is not
presently in effect but, if implemented as written, would place greater
restrictions on the distribution of investigational test kits. If the Company
were to be substantially limited in or prevented from purchasing investigational
test kits by reason of the FDA finalizing the new draft CPG, there could be
adverse effects on the Company's ability to access new technology, which could
have a material adverse effect on the Company's business.

The Company also performs some testing services using reagents, known as
analyte specific reagents ("ASRs"), purchased from companies in bulk rather than
as part of a test kit. In November 1997, the FDA issued a new regulation placing
restrictions on the sale, distribution, labeling and use of ASRs, such as those
used by the Company. Most ASRs are treated by the FDA as low risk devices,
requiring the manufacturer to register with the agency, list its ASRs (and any
other devices), conform to good manufacturing practice requirements, and comply
with medical device reporting of adverse events. A smaller group of ASRs,
primarily those used in blood banking and/or screening for fatal contagious
diseases (e.g., HIV/AIDS), are treated as higher risk devices requiring
premarket clearance or approval from the FDA before commercial distribution is
permitted. The imposition of this regulatory framework on ASR sellers may reduce
the availability or raise the price of ASRs purchased by the Company. In
addition, when the Company performs a test developed in-house, using reagents
rather than a test kit cleared or approved by the FDA, it is required to
disclose those facts in the test report. However, by clearly declining to impose
any requirement for FDA premarket approval or clearance for most ASRs, the rule

removes one barrier to reimbursement for tests performed using these ASRs. To
date, this rule has not had a significant financial impact on the Company's
operations.

OTHER

Certain federal and state laws govern the handling and disposal of medical
specimens, infectious and hazardous wastes and radioactive materials. Failure to
comply with such laws could subject an entity covered by these laws to fines,
criminal penalties and/or other enforcement actions.

Pursuant to the Occupational Safety and Health Act, laboratories have a
general duty to provide a work place to their employees that is safe from
hazard. Over the past few years, the Occupational Safety and Health
Administration ("OSHA") has issued rules relevant to certain hazards that are
found in the laboratory. In addition, OSHA has promulgated regulations
containing requirements healthcare providers must follow to protect workers from
bloodborne pathogens. Failure to comply with these regulations, other applicable
OSHA rules or with the general duty to provide a safe work place could subject
employers, including a laboratory employer such as the Company, to substantial
fines and penalties.

ITEM 2. PROPERTIES

The Company leases approximately 279,715 square feet of office and
laboratory space in Stratford, Connecticut; Wilmington, Ohio; Tampa, Florida;
New City, New York; Woodbury, New York; Oklahoma City, Oklahoma and Plano,
Texas. The leases on the Stratford facilities, representing 64,300 square feet,
expire May 31, 2003, and contain options to renew for up to three years. The
Company also leases a record storage facility in Stratford, Connecticut,
representing 15,100 square feet, which expires May 31, 2004, with no renewal
option. The lease for the Wilmington facility, representing 19,200 square feet,
expires March 31, 2006, and contains renewal options for ten additional years.
The lease on the Tampa office and laboratory facility, representing 18,400
square feet, expires May 31, 2005, with an option to renew for an additional
five-year period. The lease in New City, representing 19,300 square feet,
expires April 30, 2002 and contains an option to renew for one year. The lease
in Woodbury, representing 8,400 square feet, expires March 31, 2003 with no
renewal option. The lease on the Oklahoma office and laboratory, 108,063 square
feet, expires December 31, 2013, subject to early termination provisions. The
Company also leases a warehouse in Oklahoma City, Oklahoma, representing 25,313
square feet, which expires July 31, 2008, with no renewal option. The lease in
Texas, representing 1,600 square feet, expires October 31, 2005 and contains an
option to renew for an additional five-year period. The Company also leases a
small office in Stamford, Connecticut, which expires November 30, 2002 with no
renewal option.

The Company leases a regional sales office located in North Carolina and
one branch office in Connecticut, Illinois and Texas, respectively, and two
branch offices in Massachusetts. The lease for the regional sales office expires
within one year, and has a one-year renewal option. The branch office leases
have remaining terms of up to one year with renewal options for one additional
year.

(See Note 5 to the Company's consolidated financial statements included
herewith).

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in certain legal matters including professional
liability claims which periodically arise in the normal course of business.
Management believes that the outcome of these legal matters will not have a
material adverse effect on the financial position and results of operations of
the Company. Furthermore, management believes the Company maintains adequate
insurance coverage or has established adequate reserves for most contingencies.

As part of the purchase of UroCor, the Company assumed responsibility and
liability for certain pre-acquisition contingencies which include expenses
relating to the previously announced UroCor Department of Justice ("DOJ")
investigation, including without limitation, compliance with the UroCor
corporate integrity agreement and any potential indemnification of legal and
other fees and costs for current and past directors, officers and employees of
UroCor in connection with the criminal investigation related to the UroCor
settlement. The Company currently estimates the probable indemnification
expenses to be $1.0 million, but there is no assurance that this amount will not
increase significantly. Accordingly, the Company has accrued $1.0 million as a
liability in the opening UroCor balance sheet.

See ITEM 1. BUSINESS - Anti Fraud and Abuse Laws and Note 9 to the
Company's consolidated financial statements included herewith for information
regarding certain regulatory investigations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 9, 2001 the Company held its 2001 Annual Meeting of
Shareholders at which the following actions were approved: the Agreement and
Plan of Merger between the Company and UroCor, Inc. and the issuance of shares
of the Company's common stock under the merger agreement referred to above were
approved, directors were elected, the 2001 Stock Incentive Plan was approved,
and the appointment of Arthur Andersen LLP as the Company's independent public
accountants for the calendar year ended December 31, 2001 was ratified. The
directors elected were Messrs. James T. Barry, Bruce K. Crowther, John P. Davis,
E. Timothy Geary, G.S. Beckwith Gilbert, Kevin C. Johnson, David R. Schreiber
and Jeffrey L. Sklar. The table below represents the votes cast:

Director In Favor Against
-------- -------- -------

James T. Barry 6,028,652 255,599
Bruce K. Crowther 6,028,468 255,783
John P. Davis 5,880,769 403,482
E. Timothy Geary 6,028,652 255,599
G.S. Beckwith Gilbert 6,029,599 254,652
Kevin C. Johnson 5,637,045 647,206
David R. Schreiber 5,681,673 602,578
Jeffrey L. Sklar 6,029,310 254,941

Other actions and the results taken at the Company's 2001 Annual Meeting of
Shareholders were as follows:

Unvoted
Action Votes For Votes Against Abstentions Shares
- ------ --------- ------------- ----------- ------

Approval of Merger Agreement 5,055,915 2,403 10,498 1,215,435

Approval of share issuance
relating to merger 5,046,650 19,506 2,660 1,215,435

Approval of 2001 Stock
Incentive Plan 3,002,863 2,059,854 6,099 1,215,435

Ratify appointment of Arthur
Andersen LLP 6,241,178 41,193 1,880 --

PART II

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

DIANON's Common Stock trades on The Nasdaq Stock Market under the symbol
"DIAN." The following table shows the high and low sales prices of the Company's
Common Stock quoted on The Nasdaq Stock Market, for the periods indicated below:

High Low
2000:
First Quarter $ 24-1/4 $ 13
Second Quarter 30-1/4 13-1/4
Third Quarter 47-1/2 25-1/8
Fourth Quarter 46 26

2001:
First Quarter $ 45-1/4 $ 20-1/2
Second Quarter 47-1/4 27
Third Quarter 55-1/2 39-1/6
Fourth Quarter 63-7/16 41-9/16

As of March 20, 2002, the Company had approximately 4,967 shareholders of
record. No dividends have been paid by DIANON and it is not anticipated that any
will be paid in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

STATEMENT OF OPERATIONS:

2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
-------------------------------------

Net revenues $125,678 $95,651 $76,097 $62,182 $60,887

Gross profit 56,621 41,480 32,213 26,511 29,766

Expenses:
Selling, general and 37,277 28,955 24,176 21,029 22,372
administrative
Special provision for bad debts 5,500 -- -- -- --
Amortization of intangible
assets 1,415 796 670 224 236
Research and development 1,216 1,015 572 528 1,646
Impairments and other special
charges 1,465 -- -- 212 324

Income from operations 9,748 10,714 6,795 4,518 5,188

Interest income, net 660 377 267 682 522
Provision for income taxes 4,215 4,492 2,931 2,246 2,412
-------------------------------------------------
Net income $ 6,193 $ 6,599 $ 4,131 $ 2,954 $ 3,298
=================================================

EPS:
Basic $ .77 $ .92 $ .61 $ .44 $ .51
Diluted $ .71 $ .84 $ .59 $ .43 $ .48

Weighted average shares
outstanding:
Basic 8,031 7,155 6,763 6,678 6,430
Diluted 8,756 7,840 7,053 6,902 6,808

BALANCE SHEET DATA:

Working capital $68,836 $32,625 $25,249 $24,327 $21,387
Total assets 287,418 61,551 52,089 36,703 36,889
Long-term obligations 439 2,515 6,361 81 107
Stockholders' equity (1) 265,636 52,259 38,766 31,383 29,046

(1) No dividends were paid by the Company during the periods presented above.

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

RESULTS OF OPERATIONS

o NET REVENUES

Net revenues increased to $125.7 million in 2001 from $95.7 million in
2000 and $76.1 million in 1999, representing annual increases of 31% and 26%,
respectively. The revenue growth reflects increased market penetration including
the impact of the following acquisitions: UroCor, Inc. ("UroCor") and Kyto
Meridien Diagnostics, L.L.C. ("KMD") in November 2001 and May 1999,
respectively. UroCor represented approximately $6.7 million in revenues in 2001
and KMD represented approximately $7.3 million in revenues in 1999.

Anatomic pathology net revenues increased to $87.2 million in 2001 from
$68.7 million in 2000, representing a 27% increase, and increased from $52.6
million in 1999 to $68.7 million in 2000, representing a 31% increase. The
revenue growth reflects increased market penetration in the anatomic pathology
area as well as the UroCor and KMD acquisitions.

Genetic net revenues increased to $19.8 million in 2001 from $13.7 million
in 2000, representing a 45% increase, and increased from $9.9 million in 1999 to
$13.7 million in 2000, representing a 38% increase. The revenue growth reflects
increased market penetration.

Clinical chemistry net revenues increased to $18.7 million in 2001 from
$13.3 million in 2000, representing a 41% increase, and remained flat from 1999
to 2000 at $13.3 million and $13.6 million, respectively. The increase from 2000
to 2001 is primarily related to the UroCor acquisition.

o COST OF SALES

Cost of sales, which consists primarily of laboratory payroll and
supplies, logistics and facility costs, increased to $69.1 million in 2001 from
$54.2 million in 2000 and $43.9 million in 1999. As a percentage of sales, cost
of sales totaled 55%, 57% and 58% in 2001, 2000 and 1999, respectively. As a
percentage of sales, cost of sales decreased from 2000 to 2001 and from 1999 to
2000, as a result of the operating leverage in the business and effective cost
management.

o GROSS PROFIT

Gross profit totaled $56.6 million in 2001 versus $41.5 million in 2000
and $32.2 million in 1999, while gross profit margins were 45%, 43% and 42% in
2001, 2000 and 1999, respectively.

See ITEM 1. BUSINESS - Reimbursement and Regulatory Matters, for a
complete discussion of reimbursement and regulatory matters.

o SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased to $37.3 million in
2001 from $29.0 million in 2000 and from $24.2 million in 1999. The increase
from 2000 to 2001 consisted primarily of increased legal costs relating to the
on-going Department of Justice investigation, bonuses and increased insurance
premiums as well as a result of increased commission expense, which is a result
of increased revenues. The increase from 1999 to 2000 is primarily a result of
increased commission expense, which is a result of increased revenues. As a
percentage of sales, selling, general and administrative expenses totaled 34%,
30% and 31% in 2001, 2000 and 1999, respectively.

o IMPAIRMENTS AND OTHER SPECIAL CHARGES

Non-recurring charges of approximately $7.0 million were recorded in the
fourth quarter 2001 including a $5.5 million special bad debt provision related
to the remaining UroCor accounts receivable and a $1.5 million charge relating
to impairments on certain investments and intangible assets.

In the fourth quarter, management decided to close the Colorado facility
and consolidate testing into the Company's other laboratories. The Company wrote
off the remaining $524,000 of unamortized goodwill and approximately $441,000 of
the customer list to arrive at current fair value based on future expected
discounted cash flows.

The Company also recorded an impairment charge to write off the $500,000
investment in Response Genetics, Inc. due to the uncertainty, in management's
opinion, of the financial position of the investee as a result of the
uncertainty regarding the amount of additional time required for that technology
to gain widespread market acceptance in the oncology community and for
acceptable reimbursement levels to be attained.

o AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense increased to $1.4 million in 2001 from $796,000 in
2000 and from $670,000 in 1999. The increase from 2000 to 2001 is primarily the
result of the amortization of the Response Genetics distribution rights of
$500,000.

o RESEARCH AND DEVELOPMENT

Research and development expenses increased slightly in 2001 to $1.2
million from $1.0 million in 2000, due to the addition of UroCor. The increase
to $1.0 million in 2000 from $572,000 in 1999 was due to the continued
development of the Carepath(TM) program, a disease management information
service for patients, physicians and managed care organizations.

o INCOME FROM OPERATIONS

Income from operations, before the $7.0 million of non-recurring charges,
increased to $16.7 million in 2001 from $10.7 million in 2000 and from $6.8
million in 1999. The increase of $6.0 million from 2000 to 2001 was partially
due to the UroCor acquisition as well as increased sales and cost control
initiatives. The increase of $3.9 million from 1999 to 2000 was primarily due to
increased sales and cost control initiatives.

Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
before non-recurring charges, increased to $21.3 million, in 2001 from $14.7
million in 2000. As a percentage of sales, EBITDA, before non-recurring charges,
increased to 17% in 2001 from 15% in 2000.

EBITDA is defined as income before interest expense, income tax expense
and depreciation and amortization. Adjusted EBITDA excludes non-recurring items
such as the $5.5 million special bad debt provision and the $1.5 million of
impairments and other special charges. These items are excluded from adjusted
EBITDA as these items do not impact operating results on a recurring basis.
Management considers adjusted EBITDA to be one measure of the cash flows from
operations of the Company before debt service that provides a relevant basis for
comparison, and adjusted EBITDA is presented to assist investors in analyzing
the performance of the Company. This information should not be considered as an
alternative to any measure of performance as promulgated under accounting
principles generally accepted in the United States, nor should it be considered
as an indicator of the overall financial performance of the Company. The
Company's calculation of adjusted EBITDA may be different from the calculation
used by other companies and, therefore, comparability may be limited.

Adjusted EBITDA for 2001 and 2000 are as follows:

2001 2000
---- ----
Adjusted EBITDA $21,319,000 $14,720,000
Adjusted EBITDA as a
percentage of sales 17.0% 15.4%

o INTEREST INCOME, NET

Net interest income increased to $660,000 in 2001 from $377,000 in 2000
and from $267,000 in 1999 due to the increased cash and cash equivalent position
of the Company over the period, resulting primarily from cash generated by
operations.

o PROVISION FOR INCOME TAXES

The provision for income taxes decreased to $4.2 million in 2001 from $4.5
million in 2000 and increased to $4.5 million in 2000 from $2.9 million in 1999,
while the effective tax rate was 40.5% for 2001 and 2000 and 41.5% for 1999. The
changes in the effective tax rate were due primarily to decreases in state tax
rates.

o NET INCOME

Net income decreased 6.2% to $6.2 million in 2001, from $6.6 million in
2000 and $4.1 million in 1999. On a Pro forma basis before non-recurring charges
of $7.0 million ($4.1 million after tax), net income increased 56.6% to $10.3
million in 2001, from $6.6 million in 2000. Basic earnings per share decreased
to $0.77 per share in 2001 from $0.92 per share in 2000 and $0.61 per share in
1999. Pro forma basic earnings per share, before non-recurring charges,
increased to $1.29 per share in 2001, from $0.92 per share in 2000. Diluted
earnings per share decreased to $0.71 per share in 2001, from $0.84 per share in
2000, and $0.59 per share in 1999. Pro forma diluted earnings per share, before
non-recurring charges, increased to $1.18 per share in 2001, from $0.84 per
share in 2000. The decreases from 2000 to 2001 were attributable to the
non-recurring charges of $7.0 million in 2001 while the increases in pro forma
net income were due to increased sales and cost control initiatives.

o LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, the Company had total cash and cash equivalents of
$41.2 million, substantially all of which was invested in funds holding U.S.
Treasury securities with original maturities of less than three months. Working
capital was $68.8 million and $32.6 million, as of December 31, 2001 and 2000,
respectively, and the current ratios were 4.2:1 and 5.8:1, respectively.

Accounts receivable totaled $30.0 million and $21.4 million, as of
December 31, 2001 and 2000, respectively, representing approximately 63 days and
77 days of average sales, respectively.

Capital expenditures for 2001 and 2000 were $2.3 million and $3.4 million,
respectively. Expenditures were primarily related to building expansion and
information system enhancements.

Effective February 17, 1998, the Company entered into a three-year, $15
million line of credit agreement with a bank. The agreement includes various
provisions regarding borrowings under the facility, including financial and
negative covenants. In December 2000, the loan was extended to August 2003, and
certain covenants were modified. As of December 31, 2001, no debt was
outstanding on the line of credit.

The Company's Board of Directors authorized the repurchase of
approximately 1.7 million shares of the Company's Common Stock on the open
market or in private transactions. Total expenditures for share repurchases were
limited to $12.0 million. As of December 31, 2001, the Company had repurchased
approximately 336,000 shares of the Company's Common Stock for approximately
$2.8 million.

Effective May 1, 1999, the Company acquired substantially all the assets
of an outpatient OB/GYN laboratory with locations in Woodbury and New City, New
York ("KMD"). The acquisition price was approximately $13.0 million and was
financed through a combination of available cash and drawdowns of the Company's
credit line, as well as through the issuance of Common Stock. The purchase price
was primarily allocated to customer lists ($7.5 million), goodwill ($5.6
million), lab and office equipment ($400,000), and client receivables
($400,000), partially offset by accrued liabilities ($930,000). The acquisition
has been accounted for pursuant to the purchase method of accounting.

Pro forma net revenues (unaudited) for the twelve months ended December
31, 1999, adjusted as if the acquisitions for KMD had occurred January 1, 1999,
was approximately $79.7 million. Pro forma consolidated net income and earnings
per share would not differ materially from the reported amounts.

earn-out agreement. The purchase price was primarily allocated to customer lists
($1.0 million), goodwill ($670,000), lab and office equipment ($73,000), and
client receivables ($67,000), partially offset by accrued liabilities of
($110,000). The acquisition has been accounted for pursuant to the purchase
method of accounting. Pro forma consolidated net income and earnings per share,
had the acquisition occurred January 1, 2000, would not differ materially from
the reported amounts. In the first quarter of 2002, the Company closed this
facility and in the fourth quarter of 2001, wrote off the remaining goodwill of
approximately $524,000 and wrote down the customer list by approximately
$441,000. See Note 3 to the consolidated financial statements.

In the fourth quarter of 2000, the Company purchased preferred shares in
and exclusive sales and distribution rights from Response Genetics, an applied
genomic products and services company for an aggregate purchase price of $1.0
million. The Company allocated the total investment to the distribution rights
($500,000) and the preferred equity ($500,000) based on management's estimates
of future benefits from Response Genetics. During 2001, the distribution rights
were fully amortized. Additionally, during the fourth quarter of 2001, the
Company wrote off the investment due to the uncertainty, in management's
opinion, of the financial position of the investee as a result of the
uncertainty regarding the amount of additional time required for that technology
to gain widespread market acceptance in the oncology community and for
acceptable reimbursement levels to be attained.

In the fourth quarter of 2001, the Company acquired all outstanding shares
of UroCor, Inc., an anatomic pathology laboratory located in Oklahoma City,
Oklahoma, specializing in services related to urology. The primary reason for
the acquisition was to increase our presence in uropathology. The acquisition
price was approximately $202 million (including acquisition costs and assumed
liabilities) and was financed primarily through the issuance of approximately
3.9 million shares of Common Stock and approximately 644,000 options ($192
million) and available cash. The purchase price was allocated to goodwill ($163
million), customer list ($4 million), trade name ($4 million), and the fair
value of net assets acquired ($31 million). Net assets consist primarily of
cash, accounts receivable, inventory, investments and deferred income taxes. The
acquisition has been accounted for pursuant to the purchase method of
accounting.

Subsequent to the acquisition of UroCor, the Company recorded a special
bad debt provision of $5.5 million related to the acquired UroCor accounts
receivable balance. This provision was in recognition of changes in staffing and
collection procedures made after the acquisition. Dianon has billed all new
UroCor business on the centralized Dianon billing system in Connecticut. Any
UroCor receivables related to sales prior to closing are being collected by the
existing UroCor billing and collection staff in Oklahoma. The Company has made,
and will continue to make, extensive reductions in the Oklahoma staff.
Accordingly, Dianon believes that the special bad debt provision is required to
properly state the value of these receivables.

The results of the acquisition of UroCor, Inc. have been included in the
consolidated statements of operations of the Company from the November 9, 2001
acquisition date. The pro forma historical results (unaudited), as if UroCor had
been acquired on January 1, 2001 and 2000, respectively, are estimated as
follows:
2001 2000
---- ----
(in millions, except per share data)
Net revenue $177.00 $146.20
Net income $12.30 $0.70
Diluted earnings per share $1.04 $0.06

The pro forma results stated above exclude the $5.5 million special
provision for bad debts but do include the $1.5 million of investment
impairments and special charges. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had been
completed as of the beginning of each period presented, nor are they necessarily
indicative of future results.

The Company believes that cash flows from operations and available cash
and cash equivalents are adequate to fund the Company's operations for the
foreseeable future.

o RECENT ACCOUNTING PRONOUNCEMENTS

the pooling-of-interests accounting for business combinations. Statement No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach, whereby goodwill amortization will no longer be
required after December 31, 2001. The Statement requires an annual assessment of
goodwill for impairment and more frequent assessments if circumstances indicate
a possible impairment. The initial test for impairment must be completed by June
30, 2002, but any impairment would be reflected as an accounting change recorded
retroactively in the first quarter 2002. The Company does not believe the
adoption of Statement No. 142 will have a material impact on its financial
position.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which is effective in 2003. It requires the recording of an asset
equal to the present value of the estimated costs associated with the retirement
of long-lived assets where a legal or contractual obligation exists. The asset
is required to be depreciated over the life of the related equipment or
facility, and the liability accreted each year based on a present value interest
rate. The Company does not believe that the adoption of Statement No. 143 will
have a material impact on its financial position.

In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement No. 144 supersedes Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". It establishes a single accounting model
for the impairment of long-lived assets to be held and used or to be disposed of
by sale or abandonment and broadens the definition of discontinued operations.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company does not believe
that the adoption of Statement No. 144 will have a material impact on its
financial position.

o SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies and methods used in the preparation of
our consolidated financial statements are described in Note 3 to the
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by us.

Use of Estimates --

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual amounts could differ significantly from these
estimates.

Revenue Recognition --

Revenues are recognized in the period in which services are provided.
Revenues subject to Medicare and Medicaid, direct physician and hospital billing
are based on fixed reimbursement fee schedules. All remaining revenues subject
to third-party reimbursement are recorded at the expected net realizable value.
Such estimates are revised periodically based upon the Company's actual
reimbursement experience.

Intangible Assets --

Intangible assets are amortized on a straight-line basis over the
respective economic life as follows:

Years
-----
Customer lists 7 - 15
Non-compete agreements 4
Tradename Indefinite

The Company periodically reviews the anticipated revenues related to
intangible assets to determine whether any adjustments to their carrying values
are necessary. Based on the guidelines of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of (FAS 121). Impairments are recognized in
operating results when a permanent diminution in carrying value occurs.

Income Taxes --

The Company utilizes the liability method of accounting for income taxes
as set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred income taxes are determined based
on the difference between the financial statement and tax basis of assets and
liabilities using presently enacted tax rates and regulations. The Company
records a valuation allowance against deferred tax assets when it is more likely
than not that the assets will not be realized.

o CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The following table reflects a summary of our contractual cash obligations
and other commercial commitments as of December 31, 2001:

PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
Contractual
Cash Less than 1 to 3 4 to 5 After 5
Obligations Total 1 Year Years Years Years
------------- ----- ------ ----- ----- -----
(Amounts in thousands)
----------------------
Operating
Leases $23,485 $3,267 $4,481 $3,785 $11,952
Capital Leases 798 443 355 -- --
-----------------------------------------------------------
Total $24,283 $3,710 $4,836 $3,785 $11,952
===========================================================

Risk Factors; Forward Looking Statements
- ----------------------------------------
The Management's Discussion and Analysis and the information provided
elsewhere in this Annual Report on Form 10-K contain forward looking statements
regarding the Company's future plans, objectives, and expected performance.
These statements are based on assumptions that the Company believes are
reasonable, but are subject to a wide range of risks and uncertainties, and a
number of factors could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements referred to above. These
factors include, among others: the uncertainties in reimbursement rates and
reimbursement coverage of various tests sold by the Company to beneficiaries of
the Medicare program (see e.g., Item 1 - Business - "Reimbursement"); failure to
comply or being deemed to be not in compliance with Federal or state regulatory
requirements (see e.g., Item 1 - Business - "Regulatory"); the uncertainties
relating to the ability of the Company to convince physicians and/or managed
care organizations to use the Company as a provider of anatomic pathology
testing services; the ability of the Company to maintain superior quality
relative to its competitors; the ability of the Company to maintain its
hospital-based business in light of the competitive pressures and changes
occurring in hospital healthcare delivery; the uncertainties relating to states
erecting barriers to the performance of anatomic pathology testing by
out-of-state laboratories; the ability of the Company to find, attract and
retain qualified management and technical personnel; the uncertainties
associated with competitive pressures from the large national laboratories,
small specialized laboratories and well established local pathologists; and the
uncertainties which would arise if integrated delivery systems closed to outside
providers emerged as the dominant form of health care delivery.

We qualify any forward-looking statements entirely by these cautionary
factors, and readers are cautioned not to place undue reliance on
forward-looking statements.

The words "believe," "may," "will," "could," "should," "would,"
"anticipate," "estimate," "expect," "intend," "project," "objective," "seek,"
"strive," "might," "seeks," "likely result," "build," "grow," "plan," "goal,"
"expand," "position," or similar words, or the negatives of these words, or
similar terminology, identify forward-looking statements.

The forward-looking statements contained in this report only speak as of
the date of this report. The Company disclaims any obligation or undertaking to
provide any updates or revisions to any forward-looking statements to reflect
any change in management's expectations or any change in events, conditions or
circumstances on which the forward-looking statements are based.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements and schedules and the
reports of independent public accountants thereon appear beginning on page F-2.
See index to such consolidated financial statements and schedules and reports on
page F-1.

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following information with respect to the principal occupation or
employment, other affiliations and business experience of each director and
executive officer during the last five years has been furnished to the Company
by such director or executive officer. Except as indicated, each of the
directors and executive officers has had the same principal occupation for the
last five years.

INFORMATION REGARDING DIRECTORS

Set forth below is certain information concerning each director of DIANON
Systems, Inc.

Kevin C. Johnson, age 47, a Director since May 1996, is Chairman of the
Board, President and Chief Executive Officer of the Company. Mr. Johnson joined
the Company as President in May 1996, and was appointed to the additional
position of Chief Executive Officer in February 1997 and Chairman of the Board
in August 2001. Formerly, Mr. Johnson was with Corning Inc., a manufacturer of
specialty materials and a provider of laboratory services, for 18 years, serving
most recently as Vice President and General Manager of Corning Clinical
Laboratories' Eastern region in Teterboro, New Jersey.

James T. Barry, age 40, a Director since June 2001, is Executive Vice
President and Chief Operating Officer of Megadata Corporation. Mr. Barry also
serves as a director of Megadata Corporation. Mr. Barry was a Vice President of
Megadata from 1998 and was named Executive Vice President in 2000. He is also a
Senior Vice President of Field Point Capital Management Company in Greenwich,
Connecticut, a merchant banking firm. From 1989 to 1998 Mr. Barry was employed
by the Company, serving most recently as Vice President of Marketing. Mr. Barry
holds an MBA from the University of New Haven.

Bruce K. Crowther, age 50, a Director since December 1997, is President
and Chief Executive Officer of Northwest Community Healthcare, Northwest
Community Hospital, in Arlington Heights, Illinois and certain of its
affiliates. Mr. Crowther is a Fellow of the American College of Healthcare
Executives, Chairman of the Board of the Illinois Hospital and HealthSystems
Association and serves on the Board of both Chicago Hospital Risk Pooling
Program and Barrington Bank and Trust. Mr. Crowther received an MBA from
Virginia Commonwealth University Medical College in Richmond, VA.

John P. Davis, age 60, a Director since 1984. Mr. Davis served as a
consultant to the Company from October 1998 through August 2000. Mr. Davis was
President and Chief Executive Officer of Infant Advantage, Inc., a child
development company, from December 1997 through June 1998. From May 1995 through
December 1997, Mr. Davis was President and Chief Executive Officer of Calypte
Biomedical Corp., a diagnostic products company. From 1984 to January 1995, Mr.
Davis was an officer of the Company. Mr. Davis joined the Company in January
1984 as President and Chief Operating Officer, and subsequently became co-Chief
Executive Officer in 1992 and Chief Executive Officer in 1994. In January 1995,
Mr. Davis resigned as Chief Executive Officer of the Company and became Vice
Chairman of the Board. From February 1997 to August 2001 Mr. Davis was
non-executive Chairman of the Board. Mr. Davis also serves as Chairman of the
Board of CytoLogix, Inc. and is on the Board of Directors of the Norwalk
Homeless Shelter.

E. Timothy Geary, age 51, a Director since May 1997, had been Chairman,
President and Chief Executive Officer of National Surgery Centers, Inc. of
Chicago, Illinois, the leading independent owner and operator of ambulatory
surgery centers in the country, until its acquisition by HealthSouth Corporation
on July 22, 1998. Mr. Geary is currently a consultant to HealthSouth
Corporation. Prior to founding National Surgery Centers in 1987, Mr. Geary
served as a Vice President with Medical Care International. Mr. Geary holds an
MBA and AB from the University of Chicago.

G. S. Beckwith Gilbert, age 60, a Director since October 1995, is
President, Chief Executive Officer and a Director of Field Point Capital
Management Company in Greenwich, Connecticut, a merchant banking firm. Mr.
Gilbert is also a partner of Wolsey & Co., a merchant banking firm. In addition,
Mr. Gilbert is Chairman and Chief Executive Officer of Megadata Corporation as
well as a Director of Davidson Hubeny Brands, Inc. Mr. Gilbert is a graduate of

Princeton University and holds an MBA from New York University. In February
1997, the Board elected Mr. Gilbert Chairman of the Executive Committee; Mr.
Gilbert retired from this position in August 2001.

David R. Schreiber, age 42, a Director since October 1999, has served as
Senior Vice President, Finance, Chief Financial Officer and Corporate Secretary
since November 1996 when he joined the Company. Formerly, Mr. Schreiber was with
Corning Clinical Laboratories, a provider of laboratory services, for 10 years,
serving most recently as Vice President and General Manager of the laboratory's
Midwest region. Mr. Schreiber holds an MBA from Northern Illinois University.

Jeffrey L. Sklar, age 54, a Director since 1994, is Professor of
Pathology, Harvard Medical School, and Director, Divisions of Diagnostic
Molecular Biology and of Molecular Oncology, Department of Pathology, Brigham
and Women's Hospital. Dr. Sklar has served on numerous editorial boards and has
consulted widely to the biotechnology industry. In addition, Dr. Sklar serves on
the Scientific Advisory Committee for Clinical Science, The Fred Hutchinson
Cancer Center, Seattle, Washington; the Scientific Advisory Committee, New
England Primate Research Center, Harvard University; the External Review
Committee, Dana-Farber Cancer Institute, Boston, and the Pathology B Study
Section, National Institutes of Health. Dr. Sklar also serves as a Director of
Transgenomic, Inc. and holds an MD and Ph.D. from Yale University and an MA
(honorary) from Harvard University.

INFORMATION REGARDING EXECUTIVE OFFICERS

Steven T. Clayton, age 35, is Senior Vice President, Information Systems
and Chief Information Officer. Mr. Clayton joined the Company in December 1996
as Vice President, Information Systems, and was appointed to the additional
position of Chief Information Officer in January 2000 and Senior Vice President
in November 2001. Prior to joining the Company, Mr. Clayton was with Corning
Clinical Laboratories for nine years serving most recently as the Midwest
Regional Director of Information Systems. Mr. Clayton holds an ASM from Thomas
Edison State College.

Steven L. Gersen, age 48, has served as Vice President, Genetics Services
since January 2000. Dr. Gersen joined the Company in December 1993 as Director,
Genetics Services. Prior to joining the Company, Dr. Gersen was with Integrated
Genetics for three years serving most recently as the Associate Director,
Cytogenetics Laboratory. Dr. Gersen holds a Ph.D. in Genetics from Rutgers
University / University of Medicine and Dentistry of NJ.

Thomas L. Kossl, age 49, is Senior Vice President, Chief Counsel and Chief
Compliance Officer. Mr. Kossl joined the Company in January 2002. Prior to
joining the Company Mr. Kossl was in private practice as a healthcare lawyer in
Kinnelon, New Jersey, specializing in healthcare regulatory matters, fraud and
abuse, acquisition due diligence, government investigations and enforcement
actions, negotiation of commercial carrier settlements and legal compliance
programs. Mr. Kossl holds an AB from the University of Chicago, a MS in Foreign
Service from Georgetown Graduate School of Foreign Service and his Juris
Doctorate (J.D.) from Georgetown University Law School.

Valerie B. Palmieri, age 40, has served as Senior Vice President,
Operations since April 2001. She previously served as Vice President, Operations
since December 1999. Ms. Palmieri joined the Company in December 1987 as a
Medical Technologist and subsequently served as Laboratory Supervisor,
Operations Laboratory Manager, Director of Operations - Clinical Pathology,
Director of Service Operations and Vice President, Service Operations. Prior to
joining the Company, Ms. Palmieri was with Park City and Bridgeport Hospital as
a Medical Technologist. Ms. Palmieri holds a BS from Western Connecticut State
University.

Christopher J. Rausch, age 35, is Vice President, Finance and Corporate
Controller. Mr. Rausch joined the Company as Corporate Controller in June 1999,
and was appointed to the additional position of Vice President, Finance in
October 2000. Prior to joining the Company, Mr. Rausch was with Quest
Diagnostics for four years, serving most recently as the Regional Controller for
Quest's Florida operations. Mr. Rausch holds a BS from Rutgers University. Mr.
Rausch was certified as a CPA in 1991.

Martin J. Stefanelli, age 40, has served as Senior Vice President, Sales,
Marketing and Business Development since December 1999. He previously served as
Senior Vice President, Operations and Vice President, Laboratory Operations. Mr.
Stefanelli joined the Company in January 1990 as a Sales Representative and

subsequently served as Logistics Manager, Marketing Manager and Director of
Operations, Anatomic Pathology. Before joining the Company, Mr. Stefanelli was a
captain in the U.S. Army. Mr. Stefanelli holds a BS from the United States
Military Academy.

For information with respect to Messrs. Johnson and Schreiber, who are
also directors, see ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - Information Regarding Directors.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Officers, directors and greater than ten percent shareholders are
required to furnish the Company with copies of all Section 16(a) forms they
file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and representations that no other reports were
required during the fiscal year ended December 31, 2001, all Section 16(a)
reporting requirements applicable to its officers, directors and greater than
ten percent beneficial shareholders were complied with except for the following:
Mr. Barry was late in filing his initial Form 3 when becoming subject to the
Section 16 reporting requirements. Mr. Crowther, Mr. Davis, Mr. Geary, and Dr.
Sklar were late in filing their Form 5 filings. Mr. Johnson, Mr. Schreiber, Mr.
Stefanelli, Ms. Palmieri, Mr. Clayton, Mr. Gersen and Mr. Rausch were each late
in filing their Form 4 relating to their December 2000 stock option grant.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the following
named executive officers: (i) the person who served as Chief Executive Officer
("CEO") during 2001 and (ii) the four most highly compensated executive officers
other than the CEO serving at December 31, 2001 whose total salary and bonus for
2001 exceeded $100,000.

Annual Compensation
------------------- Long Term
Compensation
------------
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options Compensation
------------------ ---- ------ ----- ------------ ----------- ------------

Steven T. Clayton 2001 $185,000 $213,750 $ -- -- $ 13,734 (1)
Sr. Vice President, Information 2000 148,362 23,898 -- 30,000 12,613
Services and Chief Information Officer 1999 128,544 -- -- -- 2,031

Kevin C. Johnson 2001 340,000 480,993 -- -- 43,734 (2)
Chairman, President, Chief Executive 2000 303,958 61,366 -- 60,000 44,216
Officer and Director 1999 300,479 -- -- -- 39,678

Valerie B. Palmieri 2001 190,000 167,500 -- 20,000 13,134 (3)
Sr. Vice President, Operations 2000 142,794 28,381 -- 30,000 11,228
1999 118,261 -- -- -- 3,169

David R. Schreiber 2001 235,000 426,250 -- -- 13,326 (4)
Senior Vice President Finance, 2000 209,846 46,045 -- 45,000 13,170
Chief Financial Officer and 1999 204,516 -- -- -- 9,678
Corporate Secretary and Director

Martin J. Stefanelli 2001 220,000 175,000 -- -- 13,734 (5)
Sr. Vice President, Sales, Marketing 2000 191,423 43,516 -- 45,000 13,561
and Business Development 1999 150,768 -- -- -- 9,571

(1) The $13,734 indicated for Mr. Clayton represents an auto allowance of
$8,400, contributions of $5,100 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $234
paid by the Company.

(2) The $43,734 indicated for Mr. Johnson represents: (i) a loan forgiveness
aggregating $30,000 pursuant to Mr. Johnson's employment agreement; (ii)
an auto allowance of $8,400; (iii) contributions of $5,100 paid by the
Company pursuant to the Company's 401(K) Retirement Plan; and (iv) term
life insurance premiums of $234 paid by the Company.

(3) The $13,134 indicated for Ms. Palmieri represents an auto allowance of
$7,800, contributions of $5,100 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $234
paid by the Company.

(4) The $13,326 indicated for Mr. Schreiber represents an auto allowance of
$7,992, contributions of $5,100 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $234
paid by the Company.

(5) The $13,734 indicated for Mr. Stefanelli represents an auto allowance of
$8,400, contributions of $5,100 paid by the Company pursuant to the
Company's 401(K) Retirement Plan and term life insurance premiums of $234
paid by the Company.

DIRECTOR COMPENSATION

Until December 31, 2001, Directors who were not employees of the Company
were paid $1,500 for each meeting of the Board of Directors attended in person
and $500 for each meeting attended by telephone, and committee members were paid
$500 for each committee meeting attended which did not occur on the same day as
a Board meeting. Directors were also reimbursed for expenses to attend meetings
of the Board and its committees.

Commencing January 1, 2002, Directors who are not employees of the Company
will receive an annual compensation of $25,000, payable in monthly installments
of $2,083. The annual compensation to the Directors will replace payments on a
per meeting basis. However, Directors will continue to be reimbursed for
expenses to attend meetings of the Board and its committees. Also commencing
January 1, 2002, each Chairman of a Committee of the Board will receive an
additional payment of $2,500 per year, with the exception of the Executive
Committee, discussed below.

From January 1, 1998 until August 1, 2001, Mr. Davis and Mr. Gilbert, in
connection with their capacities as non-Executive Chairman of the Board and
Chairman of the Executive Committee, respectively, also received $50,000
annually (payable monthly at $4,166) and an annual grant of 3,000 stock options,
at a price equal to the market value on the date of grant, pursuant to the
Company's Stock Incentive Plans. They each also received a one-time grant of
13,000 stock options in December 1997 pursuant to the Company's 1996 Stock
Incentive Plan, in connection with their services in the aforementioned
positions during 1997.

In addition to his aforementioned duties, commencing October 1, 1998 Mr.
Davis began serving as a consultant to the Company, providing approximately two
days per week of consulting services and maintaining an office at the Company.
He worked closely with the sales and marketing functions of the Company, and was
involved in the planning and development of sales training programs, recruiting,
compensation planning, market segmentation, pricing, and national and managed
care marketing programs. As compensation for these services, Mr. Davis received
$50,000 annually (payable monthly at $4,166), in addition to his director
compensation and in addition to the $50,000 he received in his capacity as
non-Executive Chairman of the Board. In connection with his consulting
arrangement, Mr. Davis was also paid a relocation reimbursement of $123,667 in
February 1999, and received $84,079 in May 2000 for reimbursement of the tax
effect of this relocation payment. Effective August 31, 2000, the consulting
services provided by Mr. Davis were discontinued. The final consulting payment
to Mr. Davis was made in August 2000.

Pursuant to the Company's Stock Incentive Plans prior to the effectiveness
of the 2001 Stock Incentive Plan, Directors who were not employees of the
Company received (i) automatic initial and quarterly grants of stock options
with tandem limited stock appreciation rights beginning July 1995, (ii)
automatic quarterly grants of shares of Common Stock beginning January 1997 and
(iii) additional stock options or other awards to the extent granted by the
Board of Directors in its discretion.

Each initial and quarterly stock option automatically granted under such
plan is exercisable for that number of shares obtained by dividing $5,000 by the
closing price of the Common Stock on the date of grant and is exercisable at
that price. Each such option has a 10-year term and vests with respect to 10% of
the underlying shares on the date which is three months after the date of grant,
and an additional 10% at the end of each three-month period thereafter. Each
such option can be exercised for five years following a director's termination
of service to the extent it had vested prior to termination. Each automatic
quarterly stock grant is for the number of shares obtained by dividing $2,000 by
the closing price of the Common Stock on the date of grant, and is fully vested
at grant.

Pursuant to the Company's 2001 Stock Incentive Plan (the "Plan"), approved
by the Company's stockholders on November 9, 2001, Directors who were not then
employees of the Company ("Outside Directors") received, on November 12, 2001,
an option to purchase 20,000 shares of Common Stock. In addition, each Outside
Director is eligible to receive the following awards, subject to the terms of
the Plan: (i) on each three-year anniversary of November 12, 2001, an option to
purchase 20,000 shares of Common Stock shall be granted automatically to each
Outside Director who is then a member of the Board of Directors; and (ii) each
new Outside Director who was not granted an option on November 12, 2001 or who
has not been granted an option pursuant to (i), upon the first trading day
coincident with or immediately following the effective date of his or her
election as an Outside Director shall be granted an option to purchase a
pro-rated number of shares of Common Stock according to the terms of the Plan.
The option price, in the case of each grant, will be equal to the closing sales
price of the Common Stock on the date of grant. Each such option has a 10-year

term and vests with respect to one-third of the total number of shares on each
of the first, second and third anniversaries of the date of grant. Each such
option can be exercised for five years following a director's termination of
service to the extent it had vested prior to termination, but not beyond their
10-year term.

Messrs. Johnson and Schreiber, who are employees of the Company, receive
no additional compensation for their services as Directors of the Company.

STOCK OPTIONS

The following table shows, as to the named executive officers of the
Company, information about option grants in the last fiscal year. The Company,
as of December 31, 2001, has not granted any Stock Appreciation Rights to
officers.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
-----------------------------------------------------------------

POTENTIAL
% OF REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS EXERCISE RATES OF STOCK
SECURITIES GRANTED OR PRICE APPRECIATION
UNDERLYING TO BASE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE EXPIRATION -------------------
NAME GRANTED(#) IN 2001 ($/SHARE) DATE 5%($) 10%($)
---- ---------- --------- --------- ---------- ------ -------

Valerie B. Palmieri 20,000 (1) 11% 35.75 06/07/2011 449,660 1,139,526

(1) In June 2001, the Company granted Ms. Valerie B. Palmieri options to
purchase 20,000 shares of Common Stock at $35.75 per share. These options
vest 20% per year. Upon termination of employment, all unvested options
are cancelled and all vested options expire 90 days after termination of
employment.

The following table shows aggregate option exercises in the last fiscal
year and fiscal year-end option values for the named executive officers.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES

VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
NUMBER OF SECURITIES AT FISCAL YEAR-END
UNDERLYING (BASED ON FISCAL
SHARES UNEXERCISED OPTIONS YEAR-END PRICE OF
ACQUIRED VALUE AT FISCAL $60.80/SHARE) ($)(1)
ON REALIZED YEAR-END(#) ----------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------

Steven T. Clayton 7,000 $290,030 4,000 31,000 $ 89,200 $1,062,550
Kevin C. Johnson 8,000 319,640 209,000 67,000 11,223,200 2,328,225
Valerie B. Palmieri 9,400 374,085 4,000 52,200 89,200 1,628,860
David R. Schreiber 18,000 748,240 6,000 51,000 133,800 1,837,425
Martin J. Stefanelli 3,900 150,977 16,000 52,200 665,550 1,902,735

(1) Computed based upon difference between aggregate fair market value and
aggregate exercise price.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors of DIANON Systems,
Inc. (the "Committee") sets forth its report on executive compensation below.
This Committee report documents the components of the Company's executive
officer compensation programs and describes the basis on which 2001 compensation
determinations were made by the Committee with respect to the executive officers
of the Company, including the executive officers that are named in the
compensation tables below.

COMPENSATION PROGRAM COMPONENTS

The Committee is responsible for setting and monitoring the effectiveness
of the compensation provided to the Company's Directors and executive officers.
In its decision-making, the Committee is guided by a compensation philosophy
designed to reward employees for the achievement of business goals and the
maximization of shareholder returns. Specific levels of pay and incentive
opportunity are determined by the competitive market for executive talent and,
where appropriate, the need to invest in the future growth of the business. The
compensation program, which provides incentives for executive officers to
achieve the short-term and long-term goals of the Company, comprises three
components: base salary, incentive compensation and stock option awards.

BASE SALARY - Base pay levels are largely determined through comparisons
with service companies of similar size. Since the Company's current
strategy places greater reliance on outstanding professional and
management skills than on proprietary technology, the Company believes
that base salaries at the high end of the competitor range may be required
in certain circumstances to maintain the Company's strategic position.
Actual salaries are based on individual performance contributions within a
tiered salary range for each position that is established through job
evaluation and competitive comparisons.

MANAGEMENT INCENTIVE PLAN - The Company's Management Incentive Plan
provides cash bonus incentives ("Incentive Payments") for all management
employees. The bonus payment under this plan is based on a fixed
percentage of an employee's annual salary, which increases with the grade
of an employee's position from 5% to a maximum of 50%. This percentage of
salary is then adjusted to reflect the degree to which Company and
individual performance goals are achieved (respectively, the "Company
Achievement Percentage" and the "Individual Achievement Percentage") by
multiplying the employee's fixed bonus percentage by the Company
Achievement Percentage and by the Individual Achievement Percentage. The
Company Achievement Percentage is based on, among other things, sales and
earnings per share growth. The Individual Achievement Percentages for
executive officers is based upon the degree to which each officer met the
individual goals set for him/her, as evaluated by the CEO and Compensation
Committee. The maximum bonus attainable is limited to the prescribed
salary percentage, unless certain special Company sales and income goals
are met. Achieving these special "stretch" goals entitles participants to
additional compensation equal to 50% of the amount otherwise payable under
the Management Incentive Plan ("Extra Incentive Payout"). Actual awards
are subject to decrease or increase at the discretion of the Committee. In
2001, Company performance goals were achieved.

STOCK OPTION PROGRAM - The Committee strongly believes that by providing
executives an opportunity to own shares of Company stock, the best
interests of shareholders and executives will be closely aligned.
Therefore, all executives are eligible to receive stock options from time
to time giving them the right to purchase shares of Common Stock of the
Company at a specific price in the future. The number of stock options
granted to executive officers is determined at the discretion of the
Committee based on the accomplishments of such executives, their length of
service with the Company, the number of prior awards received by such
officer, the relative value as well as the exercise price of such awards,
and competitive practices.

DISCUSSION OF 2001 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

The Committee meets with the Chief Executive Officer to evaluate his
performance. For 2001, Mr. Johnson's incentive compensation was based on the
Company Achievement Percentage and the Committee's evaluation regarding his
overall performance based on both quantitative and qualitative objectives, as
set by the Board at the start of the year. Based on these considerations, the
Committee awarded Mr. Johnson incentive compensation in 2001 which represented
approximately 141% of his annual base salary for the year.

This report has been provided by the Compensation Committee of the Board
of Directors:

Bruce K. Crowther
John P. Davis
G. S. Beckwith Gilbert
Jeffrey L. Sklar, MD, Ph.D.

PERFORMANCE GRAPH

The Securities and Exchange Commission requires that the Company include
in this Annual Report a line-graph presentation comparing cumulative shareholder
return on an indexed basis with a broad equity market index and either a
published industry index or an index of peer companies selected by the Company.
The graph below compares the cumulative total return during such period on $100
invested as of December 31, 1996 in the Common Stock of the Company, the JP
Morgan H&Q Health Care Sub-Sector excluding the Biotechnology Sector of the JP
Morgan Hambrecht & Quist Technology and Growth Indices and the NASDAQ National
Market Index, assuming the reinvestment of all dividends:

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

JP MORGAN H&Q INDEX PRODUCTS AND SERVICES:

2001 PROXY PERFORMANCE GRAPH DATA

ANNUAL DATA SERIES

SCALED PRICES: Stock and index prices scaled to 100 at 12/31/96

JP Morgan H&Q
DIANON Healthcare Nasdaq Stock
Dates Systems Excl. Biotech Market -U.S.
----- ------- ------------- ------------
Dec-96 100.00 100.00 100.00
Dec-97 108.70 122.48 119.17
Dec-98 104.35 172.68 144.80
Dec-99 159.42 320.89 126.51
Dec-00 508.70 193.01 197.91
Dec-01 704.93 153.15 195.23

EMPLOYMENT AND SEVERANCE AGREEMENTS

The Company entered into an employment agreement with Mr. Johnson on May
2, 1996. The agreement provides for Mr. Johnson to serve as President of the
Company at an initial base salary of $275,000 per annum, the grant of options to
purchase 200,000 shares of Common Stock with a 10-year term and an exercise
price of $5.69, stock grants of 15,000 shares of Common Stock on January 2, 1997
and 15,000 additional shares on January 2, 1998, a signing bonus of $50,000 and
a loan of $150,000. The loan carries an interest rate of 5.9%, payable annually,
and is repayable upon termination of Mr. Johnson's employment with the Company.
If Mr. Johnson continues to be employed with the Company, the loan principal
will be forgiven at the rate of $2,500 per completed month of employment from

January 31, 1998 through December 31, 2002. This agreement provides that in the
event of a termination of Mr. Johnson's employment other than for "Cause," as
defined in the agreement, he is entitled to receive one year's salary and other
benefits. Subject to the foregoing, this agreement is subject to termination at
will by either party.

The Company entered into an employment agreement with David R. Schreiber
on September 30, 1996 as the Chief Financial Officer and Senior Vice President,
Finance. The agreement provides for an initial base salary of $190,000 per
annum, the grant of options to purchase 50,000 shares of Common Stock with a
10-year term and an exercise price of $6.625, a signing bonus of $80,000 and a
stock grant of 7,500 shares of Common Stock on April 1, 1997. This agreement
provides that in the event of a termination of Mr. Schreiber's employment other
than for "Cause," as defined in the agreement, he is entitled to receive one
year's salary (and certain other benefits) if such termination occurs within the
first year of employment or six months after the Company is acquired by another
business entity, or six month's salary (and certain other benefits) if such
termination occurs after such period. Subject to the foregoing, this agreement
is subject to termination at will by either party.

The Company entered into an employment agreement with Steven T. Clayton on
November 18, 1996 as Vice President, Information Services of the Company. The
agreement provides for an initial base salary of $120,000 per annum, a signing
bonus of $14,000 and the grant of options to purchase 15,000 shares of Common
Stock with a 10-year term and an exercise price of $7.875.

The Company entered into an agreement with Mr. Kevin C. Johnson on April
24, 2000, which provides that following a "Change in Control" of the Company, as
defined in the agreement, if Mr. Johnson's employment is terminated other than
for "Cause," as defined in the agreement, he is entitled to receive three years
salary, bonus and other benefits if such termination occurs within 12 months of
the change of control. This agreement supercedes any prior "Change in Control"
agreements with Mr. Johnson.

The Company entered into an agreement with Mr. David R. Schreiber on
April 24, 2000, which provides that following a "Change in Control" of the
Company, as defined in the agreement, if Mr. Schreiber's employment is
terminated other than for "Cause," as defined in the agreement, he is entitled
to receive three years salary, bonus and other benefits if such termination
occurs within 12 months of the change of control. This agreement supercedes any
prior "Change in Control" agreements with Mr. Schreiber.

The Company entered into an agreement with Mr. Christopher J. Rausch on
April 24, 2000 (as amended on August 1, 2001), which provides that following a
"Change in Control" of the Company, as defined in the agreement, if Mr. Rausch's
employment is terminated other than for "Cause," as defined in the agreement, he
is entitled to receive 100% of his annual salary, bonus and other benefits if
such termination occurs within 12 months of the change of control.

On August 1, 2001, the Company also entered into agreements with each of
Messrs. Steven T. Clayton, Steven L. Gersen and Martin J. Stefanelli and Ms.
Valerie B. Palmieri, which provide that following a "Change of Control" of the
Company, as defined in the agreements, if the employee's employment is
terminated other than for "Cause," as defined in the agreements, the employee is
entitled to receive 100% of his or her annual salary, bonus and other benefits
if such termination occurs within 12 months of the change in control.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

OWNERSHIP OF VOTING STOCK BY CERTAIN BENEFICIAL OWNERS

The following table sets forth information with respect to the only
persons who, to the best knowledge of the Company, beneficially owned more than
five percent of the Common Stock of the Company as of March 20, 2002. Unless
otherwise indicated below, each person included in the table has sole voting and
investment power with respect to all shares included therein.

Amount and
Nature
Name and Address of of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class(1)
- -------------- ------------------- ------------- -----------

Common Stock Fidelity Management and 1,271,993 10.6%
Research, Inc.
82 Devonshire Street
Boston, MA 02109

(1) For the purposes of this table, "Percent of Class" held by each person has
been calculated based on a total class equal to the sum of (i) 12,049,942
shares of Common Stock issued and outstanding on March 20, 2002 plus (ii)
for such person the number of shares of Common Stock subject to stock
options or warrants presently exercisable, or exercisable within 60 days
after March 20, 2002, held by that person, and which percent is rounded to
the nearest whole number.

OWNERSHIP OF VOTING STOCK BY MANAGEMENT

The following table gives information concerning the beneficial ownership
of the Company's Common Stock as of March 20, 2002 by each director and each of
the executive officers named in the summary compensation table and all current
directors and executive officers (as of March 20, 2002) as a group.

Total
Shares
Beneficial Owners Beneficially Direct Right to Percent
Owned(1)(2) Ownership Acquire(3) of Class(4)
----------- --------- ---------- -----------

James T. Barry 3,045 2,960 85 -- (5)
Steven T. Clayton -- -- -- -- (5)
Bruce K. Crowther 8,419 2,383 6,036 -- (5)
John P. Davis 149,317 4,000 145,317 1.2%
E. Timothy Geary 9,940 2,829 7,111 -- (5)
G. S. Beckwith Gilbert 592,706 564,392 28,314 4.9%
Kevin C. Johnson 216,438 1,438 215,000 1.8%
Valerie B. Palmieri 8,052 52 8,000 -- (5)
David R. Schreiber 6,000 -- 6,000 -- (5)
Jeffrey L. Sklar, M.D., Ph.D. 24,206 773 23,433 -- (5)
Martin J. Stefanelli 22,000 -- 22,000 -- (5)

All current directors and
executive officers as a
group (14 persons) 1,046,923 578,827 468,096 8.4%

(1) The information as to beneficial ownership is based on statements
furnished to the Company by its executive officers and directors. Each
executive officer and director has sole voting and sole investment power
with respect to his respective shares listed above, except that the shares
reported for Mr. Gilbert include 121,951 shares which are held by a trust
of which Mr. Gilbert is a trustee, as to which Mr. Gilbert shares voting
and investment powers. Amounts shown for Mr. Johnson include 1,438 shares
held in the Company's 401(K) Retirement Plan.
(2) Includes shares listed under the captions "Direct Ownership" and "Right to
Acquire," as well as shares held in the Company's 401(K) Retirement Plan
which are beneficially owned by the named individuals.
(3) Individuals have the right to acquire these shares within 60 days of March
20, 2002 1 by the exercise of stock options or through purchases under the
Company's Employee Stock Purchase Plan.
(4) For the purposes of this table, "Percent of Class" held by each individual
has been calculated based on a total class equal to the sum of (i)
12,049,942 shares of Common Stock issued and outstanding on March 20, 2002
plus (ii) for such individual the number of shares of Common Stock subject
to stock options presently exercisable, or exercisable within 60 days
after March 20, 2002, held by that individual, and which percent is
rounded to the nearest whole number.
(5) Owns less than 1% of the outstanding Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company pays a stockholder, who is also Chairman Emeritus, and who was
a director until January 1995, a royalty of 6% of revenue on sales of certain
technology covered by a license agreement. In addition, the Company provides
this stockholder with certain insurance benefits, the use of an automobile and
the reimbursement of expenses incident to his performance as a consultant to the
Company. The Company paid licensing and royalty fees to this stockholder of
approximately $10,000, $12,000 and $30,000 during the years ended December 31,
2001, 2000 and 1999, respectively.

Pursuant to his employment agreement, the President of the Company
received a loan in 1996 totaling $150,000 which bears interest at 5.9%, payable
annually, and is repayable upon termination of his employment with the Company.
In addition, pursuant to the terms of such agreement the loan principal is being
forgiven at a rate of $2,500 per month over the period January 1998 through
December 2002 if the President continues to be employed by the Company. Pursuant
to the terms of such agreement, the current outstanding balance on the loan was
$30,000 on December 31, 2001.

The President of the Company was a shareholder and board member of Medical
Logistics Inc., a company that provides logistics for a variety of healthcare
providers, during portions of 2001 and throughout 2000 and 1999. The Company
began using Medical Logistics Inc. in the fourth quarter of 1999 for a limited
number of logistic routes. The Company paid approximately $183,000, $194,000 and
$11,000 in 2001, 2000 and 1999, respectively, to Medical Logistics Inc.

In December 1999, the Company modified an existing loan agreement with an
officer of the Company, for approximately $55,000, bearing interest at 8.25% per
annum through December 31, 1999. The loan is payable at a rate of $1,000 per
month, commencing January 1, 2000, with the remaining outstanding balance due in
full no later than December 31, 2002 or upon termination of employment with the
Company. As of December 31, 2001, the outstanding balance was approximately
$11,000.

In connection with the acquisition of John H. Altshuler, M.D., P.C.
(see Note 2), the Company entered into a lease for an office and laboratory
facility located in Englewood, Colorado for a one-year term commencing
October 1, 2000. There is an option to renew the lease for one year. John
H. Altshuler, M.D., and Barbara A. Altshuler are owners in joint tenancy of
this laboratory facility. As discussed in Note 2 to the consolidated
financial statements, the Company closed this facility in the first quarter
of 2002.

PART IV

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

(a) Financial Statements, Financial Statement Schedules Filed.

1) Financial Statements - See accompanying Consolidated Financial
Statements and Schedules, Pages F-1 through F-20.

2) Financial Statement Schedules - See accompanying Consolidated
Financial Statements and Schedules, Pages F-1 through F-20.

3) Exhibits - Refer to 14(c) below.

(b) Reports on Form 8-K:

The Company filed the following current report on Form 8-K in the fourth
quarter of 2001 with the Securities and Exchange Commission:
(i) Form 8-K filed November 26, 2001 reporting as to Item 2 and
Item 7

3.1 Restated Certificate of Incorporation of the Company, as amended through
June 12, 1991 (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement No. 33-41226).
3.2 Restated By-Laws of the Company, as amended through October 24, 1996
(incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement No. 333-18817).
3.3 Restated By-Laws of the Company, as amended through February 2, 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement No. 333-18817).
10.1 Consulting Agreement, dated August 4, 1989, between DIANON Systems, Inc.
and Nonda Katopodis, Ph.D. (incorporated by reference to Exhibit 10.7 of
the Registrant's Registration Statement No. 33-41226).**
10.2 Executive Vesting Agreement, dated as of June 11, 1991, between DIANON
Systems, Inc. and James B. Amberson, M.D. (incorporated by reference to
Exhibit 10.13 of the Registrant's Registration Statement No. 33-41226).**
10.3 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 of
the Registrant's Registration Statement No. 33-41226).**
10.4 Management Incentive Plan (incorporated by reference to Exhibit 10.18 of
the Registrant's Registration Statement No. 33-41226).**
10.5 Stock Option Grant to James B. Amberson, M.D., dated April 23, 1991
(incorporated by reference to Exhibit 28.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991).**
10.6 Rights Agreement, dated April 29, 1994, by and among the Registrant and
American Stock and Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K dated April 29, 1994,
filed with the Securities and Exchange Commission on May 9, 1994).
10.7 Severance Agreement, dated January 20, 1995, by and among the Registrant
and John P. Davis (incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on March 29,
1996).**
10.8 Employment Agreement, dated May 3, 1996, by the Registrant and Kevin C.
Johnson (incorporated by reference to Exhibit 10.37 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).**
10.9 Employment Agreement, dated September 1, 1996, by the Registrant and James
B. Amberson, M.D. (incorporated by reference to Exhibit 10.39 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).**
10.10 Executive Employment Agreement, dated September 1, 1996, by the Registrant
and James B. Amberson, M.D. (incorporated by reference to Exhibit 10.40 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**

Exhibit Index (continued)

10.11 Employment Agreement, dated September 30,1996, by the Registrant and David
R. Schreiber (incorporated by reference to Exhibit 10.42 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).**
10.12 Employment Agreement, dated November 18, 1996, by the Registrant and
Steven T. Clayton.**
10.13 Amendment dated as of October 4, 1995 to Rights Agreement dated as of
April 29, 1994 between the Registrant and American Stock Transfer and
Trust Company, as Rights Agent (incorporated by reference to Exhibit No. 1
to the Registrant's Form 8-K dated October 30, 1996 filed with the
Securities and Exchange Commission on November 8, 1995).
10.14 1996 Stock Incentive Plan (incorporated by reference to Appendix A to the
Registrant's Statement on Schedule 14A filed with the Securities and
Exchange Commission on September 23, 1996).**
10.15 Stock and Warrant Purchase Agreement, dated as of October 4, 1995, among
the Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.16 Registration Rights Agreement, dated as of October 4, 1995, among the
Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.17 Stock Option Grant dated November 4, 1996 by the Registrant to Jeffrey M.
Sklar, M.D., Ph.D.**
10.18 Loan Agreement dated December 3, 1996 by the Registrant to Kevin C.
Johnson).**
10.19 Form of standard Stock Option Grant for outside directors.**
10.20 Consulting and Proprietary Information and Inventions Agreement dated
October 1, 1997 by the Registrant and Jeffrey L. Sklar, M.D., Ph.D.
10.21 Asset Purchase Agreement dated as of April 7, 1999 among DIANON Systems,
Inc., Kyto Meridien Diagnostics, L.L.C., Kyto Diagnostics, L.P., Meridian
Diagnostics Labs, Inc., A. Bruce Shapiro and Ralph M. Richart, M.D.
(incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
10.22 Registration Rights Agreement dated as of May 1, 1999 between DIANON
Systems Inc. and Kyto Meridien Diagnostics, L.L.C. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated May 1, 1999,
filed with the Securities and Exchange Commission on May 5, 1999).
10.23 Consulting Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and A. Bruce Shapiro (incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.24 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Ralph M. Richart, M.D. (incorporated by reference to Exhibit 10.4 to
the Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.25 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Beth Phillips (incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.26 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Dana Shapiro (incorporated by reference to Exhibit 10.6 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.27 Amendment Agreement date December 23, 1999 by and among DIANON Systems,
Inc. and A. Bruce Shapiro, Ralph M. Richart, Dana Shapiro, Kyto Meridien
Diagnostics, L.L.C., Kyto Diagnostics L.P. and Meridien Diagnostics Labs,
Inc.
10.28 Change-of-Control Agreement, dated April 24, 2000, by the Registrant and
Kevin C. Johnson (incorporated by reference to Exhibit 10.01 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
10.29 Change-of-Control Agreement, dated April 24, 2000, by the Registrant and
David R. Schreiber (incorporated by reference to Exhibit 10.02 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
10.30 Change-of-Control Agreement, dated April 24, 2000 (as amended on August 1,
2001), by the Registrant and Christopher J. Rausch (incorporated by
reference to Exhibit 10.03 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000).
10.31 Employment Agreement dated July 24, 2000 by and between DIANON Systems,
Inc. and Jack W. Snyder
10.32 Form of Employment Agreements, dated August 1, 2001, by the Registrant
and Messrs. Steven T. Clayton, Steven L. Gersen and Martin J. Stefanelli
and Ms. Valerie B. Palmieri (filed herewith).
10.33 Agreement and Plan of Merger, dated as of June 28, 2001, as amended on
October 3, 2001, among DIANON Systems, Inc. UroCor Acquisition Corp., a
wholly-owned subsidiary of DIANON Systems, Inc. and UroCor, Inc.
(incorporated by reference to the Registrant's Form S-4 filed with the
Securities and Exchange Commission on October 10, 2001).
11.1 Statement re: computation of per share earnings. *

Exhibit Index (continued)

21.1 List of Subsidiaries of the Company (incorporated by reference to Exhibit
22.1 of the Registrant's Registration Statement No. 33-41226).
23.1 Consent of Arthur Andersen LLP (filed herewith).
99.1 Press Release (incorporated by reference to Exhibit 99.1 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
99.2 KMD financial statements for the year ending December 31, 1998
(incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
99.3 Letter to Commission pursuant to temporary note 3T (filed herewith).
- --------------
* Not applicable or contained elsewhere herein.
** A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

DATED: March 27, 2002

DIANON SYSTEMS, INC.

By: /s/ KEVIN C. JOHNSON
-------------------------------------
Kevin C. Johnson,
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ KEVIN C. JOHNSON Chairman of the Board, March 27, 2002
- --------------------------------- President and Chief Executive
Kevin C. Johnson Officer and a Director
(Principal Executive Officer)

/s/ DAVID R. SCHREIBER Senior Vice President, March 27, 2002
- --------------------------------- Finance and Chief Financial
David R. Schreiber Officer and a Director
(Principal Financial and
Accounting Officer)

/s/ JAMES T. BARRY Director March 27, 2002
- ---------------------------------
James T. Barry

/s/ BRUCE K. CROWTHER Director March 27, 2002
- --------------------------------- Chairman of the
Bruce K. Crowther Compensation Committee

/s/ JOHN P. DAVIS Director March 27, 2002
- ---------------------------------
John P. Davis

/s/ E. TIMOTHY GEARY Director March 27, 2002
- --------------------------------- Chairman of the
E. Timothy Geary Audit Committee

/s/ G. S. BECKWITH GILBERT Director March 27, 2002
- --------------------------------
G. S. Beckwith Gilbert

/s/ JEFFREY L. SKLAR, M.D., Ph.D. Director March 27, 2002
- ---------------------------------
Jeffrey L. Sklar, M.D., Ph.D.

DIANON SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page
----
Report of Independent Public Accountants F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 & F-4

Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 F-5

Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999 F-6

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F-7 & F-8

Notes to Consolidated Financial Statements F-9 to F-20

Schedules:

Report of Independent Public Accountants on Financial Statement
Schedule F-21

Schedule II - Valuation and Qualifying Accounts F-22

All other schedules required by Regulation S-X have been omitted because
they are not applicable or because the required information is included in the
consolidated financial statements or notes thereto.

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To DIANON Systems, Inc.:

We have audited the accompanying consolidated balance sheets of DIANON
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIANON Systems, Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

ARTHUR ANDERSEN LLP

Stamford, Connecticut
February 19, 2002

F-2

DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 2001 AND 2000

2001 2000
--------------------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $41,229,353 $12,515,424
Short term investments 1,071,778 --
Accounts receivable, net of allowance for bad
debts of $7,002,096 and $1,302,096 at
December 31, 2001 and 2000, respectively 29,863,129 21,413,404
Prepaid expenses and employee advances 3,767,086 1,035,953
Refundable income taxes 5,753,944 2,245,894
Inventory 1,932,713 1,417,247
Deferred income taxes 6,560,564 774,150
--------------------------
Total current assets 90,178,567 39,402,072
--------------------------

PROPERTY AND EQUIPMENT, at cost
Laboratory and office equipment 19,539,228 14,930,672
Leasehold improvements 8,967,113 5,327,052
Less - accumulated depreciation and
amortization (17,650,512) (14,644,420)
--------------------------
10,855,829 5,613,304
--------------------------

INTANGIBLE ASSETS, net of accumulated amortization
of $7,027,749 and $4,648,029 at December 31, 183,167,116 14,228,274
2001 and 2000, respectively

INVESTMENTS 508,191 500,000

DEFERRED INCOME TAXES 2,429,417 1,581,560

OTHER ASSETS 279,039 225,720
--------------------------
TOTAL ASSETS $287,418,159 $61,550,930
==========================

F-3

DIANON SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 2001 AND 2000 (CONTINUED)

2001 2000
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 1,621,689 $ 977,817
Accrued employee compensation 6,961,747 2,422,029
Accrued employee stock purchase plan 26,367 18,682
Accrued income taxes 674,734 342,500
Current portion of capitalized lease obligations 300,102 31,811
Other accrued expenses 11,758,208 2,983,926
--------------------------
Total current liabilities 21,342,847 6,776,765
--------------------------

LONG-TERM LIABILITIES:
Long-term note payable -- 2,500,000
Long-term portion of capitalized lease
obligations 439,029 15,427
--------------------------
Total liabilities 21,781,876 9,292,192
--------------------------

STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share,
20,000,000 shares authorized, 11,896,140 and
7,397,323 shares issued and outstanding at
December 31, 2001 and 2000, respectively 118,961 73,974
Additional paid-in capital 242,987,849 35,877,828
Retained earnings 22,620,561 16,427,788
Common stock held in treasury, at cost -- 9,511
and 12,620 shares at December 31, 2001 and 2000,
respectively (91,088) (120,852)
--------------------------
Total stockholders' equity 265,636,283 52,258,738
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $287,418,159 $61,550,930
==========================

The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.

F-4

DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
----------------------------------------

Net revenues $125,677,654 $95,650,879 $76,097,031

Cost of sales 69,056,948 54,170,663 43,883,592
----------------------------------------

GROSS PROFIT 56,620,706 41,480,216 32,213,439

Selling, general and administrative
expenses 37,276,712 28,955,060 24,176,265

Special provision for bad debts 5,500,000 -- --

Amortization of intangible assets 1,414,800 795,826 670,425

Research and development expenses 1,216,159 1,015,583 571,797

Impairments and other special charges 1,464,921 -- --
----------------------------------------

INCOME FROM OPERATIONS 9,748,114 10,713,747 6,794,952

Interest income, net 659,908 377,042 266,688
----------------------------------------
INCOME BEFORE PROVISION FOR INCOME
TAXES 10,408,022 11,090,789 7,061,640

Provision for income taxes 4,215,249 4,491,770 2,930,581
----------------------------------------

NET INCOME $ 6,192,773 $ 6,599,019 $ 4,131,059
========================================

EARNINGS PER SHARE:
BASIC $ .77 $ .92 $ .61
DILUTED $ .71 $ .84 $ .59

WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 8,030,814 7,154,665 6,763,120
DILUTED 8,756,217 7,839,638 7,053,161

The accompanying notes to consolidated financial statements
are an integral part of these statements.

F-5

DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

Additional Common Stock
Common Stock Paid-In Retained Acquired for Treasury
Shares Amount Capital Earnings Shares Amount Total
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------

BALANCE, December 31, 1998 6,808,729 $ 68,088 $27,398,120 $5,697,710 (222,019) $(1,780,854) $ 31,383,064
Stock options exercised 217,814 2,178 1,705,564 -- -- -- 1,707,742
Issuance of common stock 79,981 800 700,516 -- 222,019 1,780,854 2,482,170
Employee stock purchase
plan -- -- (22,136) -- 4,766 43,920 21,784
Stock grants 4,225 42 39,833 -- -- -- 39,875
Common stock acquired
for treasury -- -- -- -- (113,500) (1,000,132) (1,000,132)
Retired shares (50,000) (500) (393,250) -- 50,000 393,750 --
Net income -- -- -- 4,131,059 -- -- 4,131,059
-------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 7,060,749 70,608 29,428,647 9,828,769 (58,734) (562,462) 38,765,562
Stock options exercised 334,714 3,347 2,271,936 -- -- -- 2,275,283
Issuance of common stock -- -- 1,009,184 -- 36,633 350,816 1,360,000
Tax effect for stock
options exercised -- -- 3,131,904 -- -- -- 3,131,904
Employee stock purchase
plan -- -- (3,589) -- 9,481 90,794 87,205
Stock grants 1,860 19 39,746 -- -- -- 39,765
Net income -- -- -- 6,599,019 -- -- 6,599,019
-------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 7,397,323 73,974 35,877,828 16,427,788 (12,620) (120,852) 52,258,738
Stock options exercised 636,097 6,361 8,173,364 -- -- -- 8,179,725
Issuance of common stock
and stock options for
the acquisition of
UroCor 3,861,585 38,615 192,283,768 -- -- -- 192,322,383
Tax effect for stock
options exercised -- -- 6,511,474 -- -- -- 6,511,474
Employee stock purchase
plan / other -- -- 95,887 -- 3,109 29,764 125,651
Stock grants 1,135 11 45,528 -- -- -- 45,539
Net income -- -- -- 6,192,773 -- -- 6,192,773
-------------------------------------------------------------------------------------------
BALANCE, December 31, 2001 11,896,140 $118,961 $242,987,849 $22,620,561 (9,511) ($91,088) $265,636,283
===========================================================================================

The accompanying notes to consolidated financial statements
are an integral part of these statements.

F-6

DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

2001 2000 1999
----------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 6,192,773 $ 6,599,019 $ 4,131,059
Adjustments to reconcile net income to net cash
provided by operations -
Non-cash charges
Depreciation and amortization 4,606,134 4,006,706 3,489,544
Tax effect of stock options exercised 6,511,474 3,131,904 --
Provision for bad debts 5,700,000 380,500 --
Impairments and special charges 1,464,921 -- --
Stock compensation expense 45,539 39,765 39,875
Gain on disposal of fixed assets (26,506) -- --
Deferred tax provision (3,736,054) (260,299) (470,063)
Changes in other current assets and
liabilities
Accounts receivable (1,306,554) (2,248,757) (4,724,164)
Refundable income taxes (2,414,569) (2,245,894) --
Prepaid expenses and employee advances (1,617,706) (22,043) (264,986)
Inventory 150,922 (505,774) 79,924
Other assets and other 2,353,124 (310,470) 296,603
Accounts payable and other accrued
liabilities 4,162,863 (407,989) 1,118,114
----------------------------------------
Net cash provided by operating
activities 22,086,361 8,156,668 3,695,906
----------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures (2,346,057) (3,393,670) (2,263,528)
Cash paid for acquisition of UroCor, Inc.
net of cash acquired (2,800,276) -- --
Proceeds from disposition of Mills
Biopharmaceuticals, Inc. 4,550,000 -- --
Acquisitions of assets, net of
liabilities assumed -- (340,000) (10,500,000)
Proceeds from sales of investment
securities 1,409,062 -- --
Investments -- (500,000) --
Proceeds from the sale of fixed
assets / other 56,701 -- 1,316
----------------------------------------
Net cash provided by (used in)
investing activities 869,430 (4,233,670) (12,762,212)
----------------------------------------

F-7

DIANON SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)

2001 2000 1999
----------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Net (repayments) borrowings of note
payable ($2,500,000) ($3,500,000) $ 6,000,000
Issuance of common stock -- -- 16,545
Purchase of common stock acquired for
treasury -- -- (1,000,132)
Exercise of stock options 8,179,725 2,275,283 1,707,742
Employee stock purchase plan / other 125,651 87,205 21,784
Net repayments of capitalized lease
obligations (47,238) (31,109) (44,662)
----------------------------------------
Net cash provided by (used in)
financing activities 5,758,138 (1,168,621) 6,701,277
----------------------------------------
Net increase (decrease) in cash and
cash equivalents 28,713,929 2,754,377 (2,365,029)

CASH AND CASH EQUIVALENTS,
beginning of year 12,515,424 9,761,047 12,126,076
----------------------------------------
CASH AND CASH EQUIVALENTS,
end of year $41,229,353 $12,515,424 $ 9,761,047
========================================

Cash paid during the year:
Interest $ 62,901 $ 366,277 $ 281,318
Income taxes 3,671,977 4,268,712 2,659,753

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Common Stock shares (3,861,585) and common stock options (644,438)
aggregating to $192,322,383 were issued in connection with the
acquisition of UroCor, Inc. in 2001.
Common Stock of $1,360,000 (36,633 shares) was issued in connection
with the acquisition of John H. Altshuler, M.D., P.C. in 2000.
Common Stock of $2,465,625 (222,019 shares) was issued in connection
with the acquisition of KMD in 1999.

The accompanying notes to consolidated financial statements
are an integral part of these statements.

F-8

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) THE COMPANY

DIANON Systems, Inc. (the "Company" or "Dianon") provides a full line of
anatomic pathology testing services, as well as a number of genetic and clinical
chemistry testing services to patients, physicians and managed care
organizations throughout the United States. A significant portion of the
services provided by the Company are paid for by either the patients' Medicare
or private medical insurance carriers. The remaining services are generally paid
for by patients, physicians or hospitals directly.

The Company operates in one reportable segment, the medical laboratory
industry. Its testing services are separated based upon the nature of the test:
anatomic pathology testing, genetic testing and clinical chemistry testing.
Anatomic pathology is characterized by tissue or cell specimens that are
interpreted by physicians. Genetic testing is characterized by the analysis of
genes or chromosomes by physicians. Clinical chemistry testing is characterized
by blood or urine specimens that are interpreted through highly automated
processes. Net revenues by type of test for fiscal year 2001, 2000 and 1999 are
presented below:

Year Ended December 31,
---------------------------------------
2001 2000 1999
---------------------------------------

Anatomic pathology testing $ 87,195,759 $68,713,467 $52,607,002
Genetic testing 19,803,869 13,679,427 9,929,826
Clinical chemistry testing 18,678,026 13,257,985 13,560,203
--------------------------------------
Consolidated net revenues $125,677,654 $95,650,879 $76,097,031
======================================

The Company's operations are almost conducted entirely in the United
States. No customer accounted for more than 10% of the Company's revenues;
however, in 2001, 2000 and 1999, respectively, approximately 40%, 37% and 31% of
the Company's net revenues were derived from testing performed for beneficiaries
under the Medicare and Medicaid programs. These figures include the 20%
co-payment portion normally billed to patients.

(2) ACQUISITIONS

Effective May 1, 1999, the Company acquired substantially all the assets
of an outpatient OB/GYN laboratory with locations in Woodbury and New City, New
York ("Kyto Meridien Diagnostics, L.L.C." or "KMD"). The acquisition price was
approximately $13.0 million and was financed through a combination of available
cash and drawdowns of the Company's credit line, as well as through the issuance
of Common Stock. The purchase price was primarily allocated to customer lists
($7.5 million), goodwill ($5.6 million), laboratory and office equipment
($400,000), and client receivables ($400,000), partially offset by accrued
liabilities ($930,000). The acquisition has been accounted for pursuant to the
purchase method of accounting.

Pro forma net revenues (unaudited) for the twelve months ended December
31, 1999, adjusted as if the acquisitions of KMD had occurred January 1, 1999,
was approximately $79.7 million. Pro forma consolidated net income and earnings
per share would not differ materially from the reported amounts.

Effective October 1, 2000, the Company acquired substantially all of the
assets of John H. Altshuler, M.D., P.C., a pathology physician practice located
in Englewood, Colorado, which specializes in dermatopathology and GYN pathology.
The acquisition price was approximately $1.7 million and was financed through a
combination of available cash and the issuance of Common Stock. Approximately
$300,000 of the purchase price is being held in trust pursuant to a contingent
earn-out agreement. The purchase price was primarily allocated to customer lists
($1.0 million), goodwill ($670,000), lab and office equipment ($73,000), and
client receivables ($67,000), partially offset by accrued liabilities of
($110,000). The acquisition has been accounted for pursuant to the purchase
method of accounting. Pro forma consolidated net income and earnings per share,
had the acquisition occurred January 1, 2000, would not differ materially from
the reported amounts. In the first quarter of 2002, the Company closed this
facility and in the fourth quarter of 2001, wrote off the remaining goodwill of
approximately $524,000 and wrote down the customer list by approximately
$441,000. See Note 3 to the consolidated financial statements.

F-9

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The results of the acquisition of UroCor, Inc. have been included in the
consolidated statements of operations of the Company from the November 9, 2001
acquisition date. The pro forma historical results (unaudited), as if UroCor had
been acquired on January 1, 2001 and 2000, respectively, are estimated as
follows:
2001 2000
---- ----
(in millions, except per
share data)
Net revenue $177.0 $146.2
Net income $12.3 $0.7
Diluted earnings per share- $1.04 $0.06

(3) SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation -

The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.

Use of Estimates -

F-10

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents -

The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 2001 and 2000, the Company had approximately $41.2 million and $12.5
million, respectively, invested in short-term U.S. treasury funds with
maturities of less than three months. The carrying amount of the cash
equivalents approximates its fair value due to the relatively short period to
maturity of these instruments. Interest income reflected in the consolidated
statements of operations is presented net of interest expense of $92,689,
$366,277 and $281,318 for 2001, 2000 and 1999, respectively.

Investments -

Long-term and short-term investments are composed of bonds, maturing over
a 14-month period. The Company intends to hold these investments to maturity
and, accordingly, accounts for these investments at amortized cost, which
approximates fair value.

Inventory -

Inventory consists primarily of bulk reagents, specimen collection kits
and devices. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.

Property and Equipment -

Property and equipment are stated at cost. Major improvements which add to
productive capacity or extend the life of an asset are capitalized while repairs
and maintenance are charged to expense as incurred.

The Company has capitalized approximately $37,000, $402,000 and $70,000 in
internally developed software costs in 2001, 2000 and 1999, respectively. These
costs relate to the purchase of external materials and direct payroll costs
associated with software development. The Company is amortizing these costs on a
straight-line basis over three years.

Intangible Assets -

Intangible assets are amortized on a straight-line basis over the
respective economic life as follows:
Years
Customer lists 7 - 15
Non-compete agreements 4
Tradename Indefinite

The Company periodically reviews the anticipated revenues related to
intangible assets to determine whether any adjustments to their carrying values
are necessary. Based on the guidelines of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of (FAS 121), the Company believes that no
material impairment exists for any of the intangible assets as of December 31,
2001. Impairments are recognized in operating results when a permanent
diminution in carrying value occurs.

During the fourth quarter 2001, the Company wrote down intangible assets
and investments totaling $1.5 million under FAS 121. The intangible asset was
related to the fourth quarter decision to close the Colorado facility and
consolidate testing operations into the Company's other laboratories. The
Company wrote off the remaining $524,000 of unamortized goodwill and
approximately $441,000 of the customer list to arrive at current fair value
based on future expected discounted cash flows.

The investment charge was to write off the $500,000 investment in Response
Genetics, Inc. due to the uncertainty, in management's opinion, of the financial
position of the investee as a result of the uncertainty regarding the amount of
additional time required for that technology to gain widespread market
acceptance in the oncology community and for acceptable reimbursement levels to
be attained.

F-11

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements -

In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Statement No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method, thus
eliminating the use of the pooling-of-interests accounting for business
combinations. Statement No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach, whereby goodwill
amortization will no longer be required after December 31, 2001. The Statement
requires an annual assessment of goodwill for impairment and more frequent
assessments if circumstances indicate a possible impairment. The initial test
for impairment must be completed by June 30, 2002, but any impairment would be
reflected as an accounting change recorded retroactively in the first quarter
2002. The Company does not believe the adoption of Statement No. 142 will have
a material impact on its financial position.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," which is effective in 2003. It requires the recording of an asset
equal to the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual obligation exists.
The asset is required to be depreciated over the life of the related equipment
or facility, and the liability accreted each year based on a present value
interest rate. The Company does not believe that the adoption of Statement No.
143 will have a material impact on its financial position.

In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 supersedes
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". It establishes a
single accounting model for the impairment of long-lived assets to be held
and used or to be disposed of by sale or abandonment and broadens the
definition of discontinued operations. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company does not believe that the adoption of
Statement No. 144 will have a material impact on its financial position.

Revenue Recognition -

Depreciation and Amortization -

Laboratory and office equipment is depreciated using the straight-line
method over a useful life of two to seven years. Leasehold improvements are
amortized over the shorter of their economic useful life or the remaining life
of the lease.

Research and Development -

Research and development costs are charged to expense as incurred.

F-12

DIANON SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes -

Earnings Per Share -

Basic earnings per share have been computed based on the weighted average
number of common shares outstanding during each year. Diluted earnings per share
have been computed based on the weighted-average number of common shares and
common equivalent shares outstanding during each year. Common equivalent shares
outstanding include the common equivalent shares calculated for warrants and
stock options under the treasury stock method.

Below is a reconciliation of the numerators and denominators of the basic and
diluted EPS computations:

2001 2000 1999
---- ---- ----

BASIC EARNING PER SHARE:
Weighted-average number of common
shares outstanding 8,030,814 7,154,665 6,763,120

DILUTIVE EFFECT OF:
Stock options 725,403 684,973 290,041
---------- --------- ----------

DILUTED EARNINGS PER SHARE:
Weighted-average number of common
shares outstanding 8,756,217 7,839,638 7,053,161
========== ========== ==========

NET INCOME $6,192,773 $6,599,019 $4,131,059
========== ========== ==========

BASIC EARNINGS PER SHARE $0.77 $0.92 $0.61
========== ========== =========

DILUTED EARNINGS PER SHARE $0.71 $0.84 $0.59
========== ========== =========

Options to purchase 112,137, 341,890 and 55,925 shares of common stock at
prices ranging from $43.85 through $49.51, $30.00 through $39.063 and $9.75
through $12.25, respectively, were outstanding as of December 31, 2001, 2000 and
1999, respectively, but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of common shares.

Reclassifications -

Certain reclassifications have been made to prior year amounts to conform
to the classifications used in the current year presentation.

F-13

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) INCOME TAXES

The income tax provisions for the years ended December 31, 2001, 2000 and
1999 consist of the following:

Year Ended December 31
----------------------------------
2001 2000 1999
----------------------------------
Current
Federal $6,675,168 $3,848,554 $2,707,951
State 1,276,135 903,515 692,693
----------------------------------
Total current 7,951,303 4,752,069 3,400,644
----------------------------------
Deferred
Federal (3,136,440) (210,809) (405,959)
State (599,614) (49,490) (64,104)
----------------------------------
Total deferred (3,736,054) (260,299) (470,063)
----------------------------------

Total provision for income taxes $4,215,249 $4,491,770 $2,930,581
==================================

The reasons for the differences between the statutory and effective rates are as
follows:

Year Ended December 31
-------------------------------
2001 2000 1999
-------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax
benefit 4.9 4.9 5.4
Non-deductible expenses 1.6 1.6 1.6
Other -- -- 0.5
-------------------------------
40.5% 40.5% 41.5%
===============================

The net deferred tax asset is a result of the following temporary
differences:

Year Ended December 31
------------------------
2001 2000
------------------------
Allowance for bad debts $5,168,556 $ 547,065
Accrued expenses 1,095,401 163,846
Depreciation of property and equipment 2,610,378 1,706,777
Compensation not currently recognized
for tax reporting 358,431 14,142
Amortization of intangibles (2,855,314) (135,162)
Inventory obsolescence reserve 207,206 55,779
Net operating loss carryforwards 6,539,160 --
Other 32,779 3,263
Valuation allowance (4,166,616) --
------------------------
$8,989,981 $2,355,710
========================

As of December 31, 2001, the Company has net operating loss carryforwards
of approximately $18.2 million which were acquired as a result of the
acquisition of UroCor, Inc.. The net operating loss carryforwards are subject to
review by the Internal Revenue Service and expire from 2003 through 2021.
Further, Dianon's ability to utilize the net operating losses to reduce future
taxable income is subject to limitation under section 382 of the Internal
Revenue Code. A valuation allowance has been established for net operating loss
carryforwards that are expected to expire unutilized or otherwise not be used by
the Company.

F-14

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) LEASE OBLIGATIONS

Included in property and equipment at December 31, 2001 and 2000 is
laboratory and office equipment held under capitalized leases as follows:

Year Ended December 31
----------------------
2001 2000
-------- --------
Property and equipment $311,310 $303,325
Less -- accumulated depreciation (20,582) (262,512)
---------------------
$290,728 $ 40,813
======================

The future minimum lease payments under non-cancelable operating leases
and the present value of future minimum capital lease payments at December 31,
2001 are:

Capital Operating
Leases Leases
-------- ---------
2002 $442,661 $3,266,619
2003 355,144 2,473,845
2004 -- 2,006,943
2005 -- 1,947,068
2006 -- 1,838,209
Thereafter (laboratory, office and warehouse
space up to 2013) 11,952,484
--------------------
Minimum lease payments 797,805 23,485,168
Less -- amount representing interest 58,674 --
--------------------
Present value of total minimum lease payments $739,131 $23,485,168
====================

Total rental expense relating to operating leases for the years ended
December 31, 2001, 2000, and 1999 was $2,200,653, $1,841,312, and $1,560,754,
respectively.

The Company leases office and laboratory facilities in Connecticut, Tampa,
New York, Oklahoma and Texas. In addition, the Company leases offices in
Connecticut, Illinois, North Carolina, Massachusetts and Texas. The Company also
leases a record storage facility in Connecticut, a processing center in Ohio and
a warehouse in Oklahoma. These leases have one to fifteen year terms, and
various renewal options for up to ten years.

(6) LONG-TERM NOTE PAYABLE

As of December 31, 2000, the Company had borrowed $2.5 million under its
$15 million line of credit. No amounts were outstanding as of December 31,
2001. In December 2000, the loan was extended and certain covenants were
modified. The loan bore interest at a rate per annum equal to LIBOR plus 0.75%
- 1.50%. Due to the fluctuating interest rates, the loan was always stated at
fair market value. The interest rate as of December 31, 2000 was 7.45%.
Interest was payable monthly and the principal was due and payable in full by
August 31, 2003. Interest expense relating to the line of credit was
approximately $64,000 and $337,000 during 2001 and 2000, respectively. The loan
agreement contains various provisions including those related to financial
ratios and negative covenants relating to current ratio, EBITDA ratio, funded
debt, EBITDA, interest coverage ratio, debt service coverage ratio, fixed
assets, acquisitions, limitation on debt and limits on loans and advances. As
of December 31, 2001 and 2000, the Company is in compliance with all of its
covenants relating to this arrangement.

(7) STOCK-BASED COMPENSATION PLANS

In June 1991, the Company adopted the 1991 Stock Incentive Plan which
provides for up to 400,000 shares of the Company's Common Stock, par value $.01
per share ("Common Stock"), to be reserved for potential future issuance of
stock options or awards. This plan is the successor to the Company's previous
plan which expired. As of December 31, 2001, 347 shares of Common Stock are
available under the 1991 Stock Incentive Plan for future issuance. The majority

F-15

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the options vest 40% in the second year after grant and 20% each year
thereafter and expire ten years from the original grant date.

In October 1996, the Company's shareholders approved the Company's
adoption of the 1996 Stock Incentive Plan, which provides for up to 700,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 1991 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 2001, 9,169 shares of Common Stock are available
under the 1996 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 40% in the second year after
grant and 20% per year thereafter or 40% in the third year after grant and 20%
per year thereafter and expire ten years from the original date of grant. The
majority of options issued to directors vest at a rate of 10% per quarter and
expire ten years from the original date of grant.

In October 1999, the Company's shareholders approved the Company's
adoption of the 1999 Stock Incentive Plan, which provides for up to 300,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 1996 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 2001, 27,988 shares of Common Stock are available
under the 1999 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 40% in the second year after
grant and 20% per year thereafter and expire ten years from the original date of
grant. The majority of options issued to directors vest at a rate of 10% per
quarter and expire ten years from the original date of grant.

In October 2000, the Company's shareholders approved the Company's
adoption of the 2000 Stock Incentive Plan, which provides for up to 400,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 1999 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 2001, 61,750 shares of Common Stock are available
under the 2000 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 20% per year and expire ten
years from the original date of grant. The majority of options issued to
directors vest at a rate of 10% per quarter and expire ten years from the
original date of grant.

In November 2001, the Company's shareholders approved the Company's
adoption of the 2001 Stock Incentive Plan, which provides for up to 640,000
shares of Common Stock to be reserved for potential future issuance of stock
options or awards. This plan is the successor to the 2000 Stock Incentive Plan
for which only a limited number of shares of Common Stock remain available for
grants. As of December 31, 2001, 430,000 shares of Common Stock are available
under the 2001 Stock Incentive Plan. The majority of options issued to officers
and key employees of the Company vest at a rate of 20% per year and expire ten
years from the original date of grant. The options issued to directors vest at a
rate of one-third per year and expire ten years from the original date of grant.

The Company accounts for these plans under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with the Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:

2001 2000 1999
---- ---- ----
Net Income: As Reported $6,193,00 $6,599,000 $4,131,000
Pro Forma $5,406,00 $5,919,000 $3,467,000
Basic earnings per share: As Reported $.77 $.92 $.61
Pro Forma $.67 $.83 $.51
Diluted earnings per share: As Reported $.71 $.84 $.59
Pro Forma $.62 $.76 $.49

For purposes of the pro forma information above, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2001, 2000 and 1999, respectively: risk-free interest rates of 4.90%, 6.02% and
5.88%, respectively; expected volatility of 71.42%, 70.96% and 67.41%,
respectively; and expected lives of 5.5 years for 2001, 5.3 years for 2000 and

F-16

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.3 years for 1999. A summary of the status of the Company's five fixed stock
option plans as well as the options issued relating to the UroCor acquisition as
of December 31, 2001, 2000 and 1999, and changes during the years ending on
those dates is presented below:

2001 2000 1999
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
2001 EXERCISE 2000 EXERCISE 1999 EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- ------ -------- ------ -------- ------ --------

Outstanding at beginning of year 1,087,622 $20.17 781,525 $7.37 884,454 $7.28
Granted 313,352 40.44 657,915 28.41 90,085 8.98
Issued in exchange for
UroCor options 644,438 15.09 -- -- -- --
Exercised (636,095) 12.86 (320,814) 6.89 (93,014) 7.63
Forfeited / canceled (82,860) 23.74 (31,004) 9.82 (100,000) 7.46
--------- --------- ---------
Outstanding at end of year 1,326,457 25.76 1,087,622 20.17 781,525 7.37
--------- --------- ---------
Options exercisable at
year-end 364,307 18.06 147,202 7.59 284,718 6.94
Weighted-average fair value
of options granted $26.09 $22.27 $5.17

The table below contains information with respect to the 1,326,457 options
outstanding for the Company's 1991, 1996, 1999, 2000 and 2001 and Stock
Incentive Plan as well as the options issued in connection with the UroCor
acquisition as of December 31, 2001:

EXERCISE PRICE EXERCISABLE OPTIONS
------------------------ -------------------------
WEIGHTED
OPTIONS WEIGHTED REMAINING AVERAGE
OUTSTANDING RANGE AVERAGE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
----------- ----- ------- ---------------- -------- --------------

296,195 $1.95 - $9.00 $7.06 5.8 158,295 $6.62
377,375 $9.01 - $25.00 $16.22 7.6 101,005 $14.55
396,073 $25.01 - $40.00 $37.80 8.7 91,433 $38.32
256,814 $40.01 - $50.00 $42.80 9.8 13,574 $41.12

In August 1999, the Company adopted a new Employee Stock Purchase Plan
(the "ESPP" or "Plan") as described in Section 423 of the Internal Revenue Code.
The Company has reserved a maximum of 300,000 shares of Common Stock to be sold
to employees under the Employee Stock Purchase Plan. No more than 100,000 shares
of Common Stock will be available for purchase under the Plan in any calendar
year and no participating employee may purchase more than 500 shares of Common
Stock in any calendar quarter, which is referred to in the Plan as an "Offering
Period". The first Offering Period began on January 1, 2000. The purchase price
for these shares will be 85% of the fair market value of a share of Common Stock
on the last day of each Offering Period, which is referred to in the Plan as the
"Exercise Date". During 2001 and 2000, employees purchased 3,109 and 2,063
shares at average prices per share of $33.14 and $25.81, respectively.

8) RELATED PARTIES

F-17

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to the terms of such agreement, the current outstanding balance on the loan was
$30,000 on December 31, 2001.

In connection with the acquisition of John H. Altshuler, M.D., P.C.
(see Note 2), the Company entered into a lease for an office and laboratory
facility located in Englewood, Colorado for a one-year term commencing
October 1, 2000. There is an option to renew the lease for one year. John
H. Altshuler, M.D., and Barbara A. Altshuler are owners in joint tenancy of
this laboratory facility. As discussed in Note 2, the Company closed this
facility in the first quarter of 2002.

(9) COMMITMENTS AND CONTINGENCIES

The Company is involved in certain legal matters that periodically arise
in the normal course of business. Management believes that the outcome of these
legal matters will not have a material adverse effect on the financial position
and results of operations of the Company. Furthermore, management believes the
Company maintains adequate insurance coverage for most contingencies.

The Company operates in the medical laboratory industry, which is subject
to numerous federal and state laws and regulations. In addition, a significant
portion of the Company's net revenue is from payments by the
government-sponsored Medicare and Medicaid programs. These programs have
extensive compliance requirements, and the payments made thereunder are subject
to audit and adjustment by applicable regulatory agencies. Failure to comply
with these laws and regulations, or the results of regulatory audits and payment
adjustments, could have a material adverse effect on the Company's financial
position and results of operations.

Prior to 1998, the medical director of the Connecticut Medicare carrier to
which the Company submits its Medicare claims orally expressed the view that
some amount of money which the carrier had paid to the Company for certain
pathology services involving DNA measurements in prostate tumor cells
(morphometric analysis of tumor) potentially is recoverable by the carrier. The
carrier medical director has never reduced his view to writing or otherwise
asserted a claim. Accordingly, at this time, the Company cannot evaluate any
such possible claim, or the probability of assertion of any such claim.

During 1997, the Company was made aware that an agent based in the
Hartford, Connecticut branch of the U.S. Department of Health and Human Services
Office of the Inspector General ("OIG") was investigating the Company's practice
of supplying pathology specimen collection devices without charge to physician
customers as well as unspecified billing issues that had been raised by the
local Medicare carrier. The Company believes that its practices with respect to
specimen collection devices were proper, and a letter describing the Company's
actions and its views regarding applicable regulations was sent by the Company
to the OIG. That letter also requested information about any billing issues of
concern to the OIG so that the Company could address them. The Company had not
received a response from or otherwise been contacted by the OIG regarding these
matters, and has not received any formal notification regarding the matter.

The Company received a subpoena dated November 16, 2000, issued by the
United States Attorney's Office for Connecticut, requesting the production of a
variety of documents, with a particular focus on documents relating to billing
for tumor biomarkers, DNA testing and screening tests. The Company is

F-18

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cooperating with the Department of Justice representatives handling this matter
and has substantially completed its production of documents under the subpoena.

(10) EMPLOYEE BENEFIT PLAN

The Company has established a 401(k) employee benefit plan in which
participants receive certain benefits upon retirement, death or termination of
employment. The Company approved a new 401(k) plan, effective February 1, 2000,
which increases the Company match from 20% of the contributions made by
employees up to 1% of their total annual salary (subject to tax code limits) to
50% of the contributions made by employees up to 3% of their total annual salary
(subject to tax code limits). The Company contributed approximately $755,000,
$607,000 and $200,000 to the plan during 2001, 2000 and 1999, respectively. The
Company offers no other post-retirement benefits or post-employment benefits to
its employees.

(11) RIGHTS AGREEMENT

On April 29, 1994, the Company's Board of Directors declared a dividend
distribution of one right for each outstanding share of Common Stock, par value
$.01 per share, of the Company to stockholders of record on May 10, 1994. Each
right entitles the registered holder to purchase from the Company a unit
("Unit") consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company, at a
price of $20 per Unit, subject to adjustment, upon change of control in the
Company, as defined in the rights agreement.

(12) OTHER ACCRUED EXPENSES

The following summarizes the Company's other accrued expenses:

December 31, 2001 December 31, 2000
----------------- ------------------
(in $000s)
Acquisition related accruals $ 4,870 $ --
Legal and insurance 3,426 647
Accrued taxes other than income 771 595
Other 2,691 1,742
-------------------------------------
$11,758 $ 2,984
=====================================

F-19

DIANON SYTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected quarterly financial data for the years ended December 31, 2001 and 2000
is summarized as follows:

INTERIM FINANCIAL RESULTS
- -------------------------------------------------------------------------------------
In millions, except per 1st 2nd 3rd 4th
share amounts Quarter Quarter Quarter Quarter(1)(2) Total
- -------------------------------------------------------------------------------------

2001
Net sales $26,803 $28,762 $28,941 $41,172 $125,678
Gross profit 11,808 12,921 12,846 19,046 56,621
Net income (loss) 2,050 2,367 2,307 (531) 6,193
Diluted earnings (loss) per
share $0.26 $0.29 $0.28 ($0.05) $0.71
Diluted weighted average
common shares outstanding 8,007 8,042 8,150 10,814 8,756

2000
Net sales $22,079 $24,426 $23,594 $25,552 $95,651
Gross profit 9,332 10,594 10,250 11,304 41,480
Net income 1,260 1,576 1,783 1,980 6,599
Diluted earnings per share $0.17 $0.20 $0.22 $0.25 $0.84
Diluted weighted average
common shares outstanding 7,597 7,701 7,952 7,980 7,840

(1) In the fourth quarter 2001, the Company acquired all outstanding shares of
UroCor, Inc., an anatomic pathology laboratory located in Oklahoma City,
Oklahoma, specializing in services related to Urology. This acquisition was
accounted for under the purchase method of accounting and, accordingly, the
results of UroCor have been included in the Company's Consolidated Statements of
Operations since the date of acquisition. See Note 2 to the Company's
consolidated financial statements.

(2) Non-recurring charges of approximately $7.0 million were recorded in the
fourth quarter 2001 including a $5.5 million special bad debt provision related
to the remaining UroCor accounts receivable and a $1.5 million charge relating
to impairments on certain investments and intangible assets.

F-20

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To DIANON Systems, Inc.:

We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of DIANON Systems,
Inc. and subsidiary companies included in this Form 10-K and have issued our
report thereon dated February 19, 2002. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The schedule listed in the index to consolidated financial statements is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Stamford, Connecticut
February 19, 2002

F-21

DIANON SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

Balance at Provision Charged to
Beginning Charged to Charges to Other Balance at
of Year Expense Allowance Accounts(a) End of Year
---------------------------------------------------------------

For the year ended December
31, 1999:
Allowance for bad debts $1,033,059 $ - $ (72,793) $50,000 $1,010,266

For the year ended December
31, 2000:
Allowance for bad debts $1,010,266 $380,500 $ (103,670) $15,000 $1,302,096

For the year ended December
31, 2001:
Allowance for bad debts $1,302,096 $5,700,000 $ -- $ -- $7,002,096

(a) Amounts charged to other accounts represent purchase accounting
adjustments related to the acquisitions of KMD and John H. Altshuler,
M.D., P.C. in 1999 and 2000, respectively.

F-22

EXHIBIT INDEX

Exhibit
Document
No. Reference
-------- ---------
3.1 Restated Certificate of Incorporation of the Company, as amended through
June 12, 1991 (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement No. 33-41226).
3.2 Restated By-Laws of the Company, as amended through October 24, 1996
(incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement No. 333-18817).
3.3 Restated By-Laws of the Company, as amended through February 2, 1997
(incorporated by reference to Exhibit 4.2 of the Registrant's Registration
Statement No. 333-18817).
10.1 Consulting Agreement, dated August 4, 1989, between DIANON Systems, Inc.
and Nonda Katopodis, Ph.D. (incorporated by reference to Exhibit 10.7 of
the Registrant's Registration Statement No. 33-41226).**
10.2 Executive Vesting Agreement, dated as of June 11, 1991, between DIANON
Systems, Inc. and James B. Amberson, M.D. (incorporated by reference to
Exhibit 10.13 of the Registrant's Registration Statement No. 33-41226).**
10.3 1991 Stock Incentive Plan (incorporated by reference to Exhibit 10.17 of
the Registrant's Registration Statement No. 33-41226).**
10.4 Management Incentive Plan (incorporated by reference to Exhibit 10.18 of
the Registrant's Registration Statement No. 33-41226).**
10.5 Stock Option Grant to James B. Amberson, M.D., dated April 23, 1991
(incorporated by reference to Exhibit 28.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1991).**
10.6 Rights Agreement, dated April 29, 1994, by and among the Registrant and
American Stock and Trust Company, as Rights Agent (incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K dated April 29, 1994,
filed with the Securities and Exchange Commission on May 9, 1994).
10.7 Severance Agreement, dated January 20, 1995, by and among the Registrant
and John P. Davis (incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on March 29,
1996).**
10.8 Employment Agreement, dated May 3, 1996, by the Registrant and Kevin C.
Johnson (incorporated by reference to Exhibit 10.37 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).**
10.9 Employment Agreement, dated September 1, 1996, by the Registrant and James
B. Amberson, M.D. (incorporated by reference to Exhibit 10.39 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).**
10.10 Executive Employment Agreement, dated September 1, 1996, by the Registrant
and James B. Amberson, M.D. (incorporated by reference to Exhibit 10.40 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).**
10.11 Employment Agreement, dated September 30,1996, by the Registrant and David
R. Schreiber (incorporated by reference to Exhibit 10.42 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).**
10.12 Employment Agreement, dated November 18, 1996, by the Registrant and
Steven T. Clayton.**
10.13 Amendment dated as of October 4, 1995 to Rights Agreement dated as of
April 29, 1994 between the Registrant and American Stock Transfer and
Trust Company, as Rights Agent (incorporated by reference to Exhibit No. 1
to the Registrant's Form 8-K dated October 30, 1996 filed with the
Securities and Exchange Commission on November 8, 1995).
10.14 1996 Stock Incentive Plan (incorporated by reference to Appendix A to the
Registrant's Statement on Schedule 14A filed with the Securities and
Exchange Commission on September 23, 1996).**
10.15 Stock and Warrant Purchase Agreement, dated as of October 4, 1995, among
the Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A.
Contributory Account, G. S. Beckwith Gilbert and the Registrant.
10.16 Registration Rights Agreement, dated as of October 4, 1995, among the
Gilbert Family Trust, the G. S. Beckwith Gilbert I.R.A. Contributory
Account, G. S. Beckwith Gilbert and the Registrant.
10.17 Stock Option Grant dated November 4, 1996 by the Registrant to Jeffrey M.
Sklar, M.D., Ph.D.**
10.18 Loan Agreement dated December 3, 1996 by the Registrant to Kevin C.
Johnson).**
10.19 Form of standard Stock Option Grant for outside directors.**

E-1

Exhibit
Document
No. Reference
-------- ---------
10.20 Consulting and Proprietary Information and Inventions Agreement dated
October 1, 1997 by the Registrant and Jeffrey L. Sklar, M.D., Ph.D.
10.21 Asset Purchase Agreement dated as of April 7, 1999 among DIANON Systems,
Inc., Kyto Meridien Diagnostics, L.L.C., Kyto Diagnostics, L.P., Meridian
Diagnostics Labs, Inc., A. Bruce Shapiro and Ralph M. Richart, M.D.
(incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
10.22 Registration Rights Agreement dated as of May 1, 1999 between DIANON
Systems Inc. and Kyto Meridien Diagnostics, L.L.C. (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated May 1, 1999,
filed with the Securities and Exchange Commission on May 5, 1999).
10.23 Consulting Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and A. Bruce Shapiro (incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.24 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Ralph M. Richart, M.D. (incorporated by reference to Exhibit 10.4 to
the Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.25 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Beth Phillips (incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.26 Employment Agreement dated May 1, 1999 by and between DIANON Systems, Inc.
and Dana Shapiro (incorporated by reference to Exhibit 10.6 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
10.27 Amendment Agreement date December 23, 1999 by and among DIANON Systems,
Inc. and A. Bruce Shapiro, Ralph M. Richart, Dana Shapiro, Kyto Meridien
Diagnostics, L.L.C., Kyto Diagnostics L.P. and Meridien Diagnostics Labs,
Inc. .
10.28 Change-of-Control Agreement, dated April 24, 2000, by the Registrant and
Kevin C. Johnson (incorporated by reference to Exhibit 10.01 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
10.29 Change-of-Control Agreement, dated April 24, 2000, by the Registrant and
David R. Schreiber (incorporated by reference to Exhibit 10.02 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).
10.30 Change-of-Control Agreement, dated April 24, 2000 (as amended on August 1,
2001), by the Registrant and Christopher J. Rausch (incorporated by
reference to Exhibit 10.03 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000).
10.31 Employment Agreement dated July 24, 2000 by and between DIANON Systems,
Inc. and Jack W. Snyder
10.32 Form of Employment Agreements, dated August 1, 2001, by the Registrant and
Messrs. Steven T. Clayton, Steven L. Gersen and Martin J. Stefanelli and
Ms. Valerie B. Palmieri (filed herewith).
10.33 Agreement and Plan of Merger, dated as of June 28, 2001, as amended on
October 3, 2001, among DIANON Systems, Inc. UroCor Acquisition Corp., a
wholly-owned subsidiary of DIANON Systems, Inc. and UroCor, Inc.
(incorporated by reference to the Registrant's Form S-4 filed with the
Securities and Exchange Commission on October 10, 2001).
11.1 Statement re: computation of per share earnings. *
21.1 List of Subsidiaries of the Company (incorporated by reference to Exhibit
22.1 of the Registrant's Registration Statement No. 33-41226).
23.1 Consent of Arthur Andersen LLP (filed herewith).
99.1 Press Release (incorporated by reference to Exhibit 99.1 to the
Registrant's Form 8-K dated May 1, 1999, filed with the Securities and
Exchange Commission on May 5, 1999).
99.2 KMD financial statements for the year ending December 31, 1998
(incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K
dated May 1, 1999, filed with the Securities and Exchange Commission on
May 5, 1999).
99.3 Letter to Commission pursuant to temporary note 3T (filed herewith).

* Not applicable or contained elsewhere herein.

** A management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c) of
this report.

E-2