SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  Form 10-KSB

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

                     For the fiscal year ended May 31, 1999

                                       OR

          [ ] 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 0-13281

                               DIAGNON CORPORATION
                 (Name of small business issuer in its charter)

       State of Delaware                              13-3078199
 (State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                    Identification No.)

9600 Medical Center Drive, Rockville, Maryland               20850
----------------------------------------------              -------
   (Address of principal executive office)                 (Zip Code)

Issuer's telephone number, including area code     (301) 251-2801
                                                   --------------

Securities registered under Section 12(b) of the Exchange Act:
                                      Name of each exchange on
          Title of class                     which registered

Common Shares $.01 Par Value              Chicago Stock Exchange
----------------------------              -------------------------

         Securities registered under Section 12(g) of the Exchange Act:
                                      None
                                 Title of Class

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange Act during the past 12 months,  and (2)
has been subject to such filing requirement for the past 90 days. Yes X No

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  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-KSB
or any amendment to this Form 10-KSB. X

The issuer's revenues for the fiscal year ended May 31, 1999 were $11,084,664

The aggregate market value of voting stock held by non-affiliates,  valued using
the average closing bid-and-ask prices at July 30, 1999 is $1,208,673.

Common Stock, $.01 par value per share;  authorized  25,000,000 shares;  876,957
shares outstanding as of July 30, 1999.

Convertible  Preferred  Stock,  $1.00 par value per  share;  authorized  500,000
shares; no shares outstanding as of July 30, 1999.

Documents Incorporated by Reference:  Parts III and IV -Exhibits to Registration
Statement  dated July 13,  1983 and Form 10-K and  10-KSB  for the fiscal  years
ended May 31, 1986, 1989, 1990, 1991, 1992, 1994, 1995, 1996, 1997 and 1998.


<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Diagnon Corporation (the "Company"), a Delaware corporation, was founded in 1981
to  develop,  produce and sell  diagnostic  test kits  incorporating  monoclonal
antibodies to diagnose certain anemias,  infections,  and parasitic diseases. In
fiscal year 1988, the Company  discontinued  the diagnostic  test kit segment of
its business to concentrate on and to expand its contract research base with the
National Institutes of Health (NIH).

Beginning with fiscal year 1988, the Company has reported a profit before income
tax each year.  Beginning in 1994, Company  management,  recognizing the limited
number of new NIH contract  opportunities,  has  concentrated on maintaining its
core base of long-term contracts, competing on new opportunities when available,
and concurrently pursuing other related business elements.

In fiscal year 1996, the Company's Division of Bioresearch  business element was
given  responsibility for the Company's  research and development  activities in
cancer treatment and drug delivery and purified Immunoglobulin G (IgG) products,
and the first IgG  product,  equine  IgG was  introduced.  Immunoglobulins  used
therapeutically provide passive immunity against infectious diseases.

At the end of fiscal year 1997,  in order to accumulate  information  related to
its government research  contracts,  the Company reorganized into five divisions
reflecting the various research focuses.  These are: Division of Primate Biology
and Medicine,  Division of Laboratory Animal Sciences,  Division of Reproductive
Endocrinology  and  Toxicology,  Division  of  Bioresearch  and the  Division of
Neurobiology and Behavior.

On October 22, 1997,  the Company's  shareholders  voted to effect a one for six
reverse stock split.  This was to fulfill a requirement  to become listed on the
Chicago Stock  Exchange.  On October 23, 1997,  the Company became listed on the
Chicago Stock Exchange.

On July 14, 1999, the Board of Directors unanimously approved that Diagnon merge
into  itself  its  wholly  owned  subsidiary,  BIOQUAL,  Inc.  and assume all of
BIOQUAL's assets, liabilities and obligations. In connection with the merger the
Company will change its name to BIOQUAL,  Inc.  The expected  date of the merger
and name change is the close of business on December 31, 1999.

CURRENT OPERATIONS

The Company is currently comprised of two subsidiaries,  Enhanced  Therapeutics,
Inc. (ET), and BIOQUAL,  Inc  (BIOQUAL).  ET was  established to support a joint
venture with The Johns Hopkins  University.  The venture did not materialize and
ET is currently inactive.

The various areas of research are comprised of the following divisions:

DIVISION  OF  LABORATORY  ANIMAL  SCIENCES  -  immunological,  reproductive  and
transgenic studies and services with emphasis on small animal models.

DIVISION  OF   REPRODUCTIVE   ENDOCRINOLOGY   AND  TOXICOLOGY  -   Immunoassays,
biochemistry, endocrine bioassays and safety testing as related to


                                       2
<PAGE>

reproduction.

DIVISION OF NEUROBIOLOGY AND BEHAVIOR - behavioral and neurological  testing and
comparative  studies in support of research on  neurodegenerative  disorders  in
humans (e.g. Alzheimer's, Parkinson's, etc.).

DIVISION  OF PRIMATE  BIOLOGY  AND  MEDICINE - research  and  services  in human
diseases using nonhuman primate models.

DIVISION OF  BIORESEARCH  - discovery  research in  digestive  diseases and drug
delivery   systems  and   developmental   and  applied  research  in  veterinary
therapeutics and nutritional supplements.

The Government is the major source of funding for all of BIOQUAL's services. All
of BIOQUAL's contracts are subject to renegotiation of profits or termination at
the election of the United States Government (the "Government").  Termination of
a contract or failure to win a renewal  competition  would adversely  affect the
Company's  revenues and operating  capital until the vacated  facility space was
taken up by  another  contract,  of  which  there  is no  assurance.  Government
contracts generate more than 85% of the Company's revenue.

BIOQUAL  plans  to bid on  renewals  for  its  contracts  as  they  come  up for
recompetition.

Medical  Center Dr.  Facility - Divisions  of  Laboratory  Animal  Sciences  and
Reproductive Endocrinology and Toxicology

For the past twenty-four  years,  BIOQUAL,  Inc. (through its Medical Center Dr.
Division  from  February  25,  1991  until  May 31,  1997 and  presently  as the
Divisions of  Laboratory  Animal  Sciences and  Reproductive  Endocrinology  and
Toxicology)  has  operated   cost-plus-fixed-fee   ("CPFF")  contracts  for  the
Government to provide research and services in the areas of cancer,  immunology,
transgenics, allophenic development, contraception and congenic animal breeding.
Currently, the two divisions operate five contracts:

      1. Maintenance of an Animal Holding Facility and provision of Attendant
         Research Services.  (ends 10/31/01)

      2. Facility for Preparing and Housing  Virus  Infected  Mice,  Genetically
         Manipulated Mice and Chimeric Mice. (ends 9/30/01)

      3. Biological Testing Facility.  (Efficacy and Safety of Reproductive
         Compounds) (ends 6/30/01)

      4. Provide Animal Housing/Maintenance/Bleeds/Immunizations as Specified
         Herein.  (ends 2/20/02)


      5. Development of New Methods and  Strategies  for Diagnosis,  Treatment
         and Prevention of Invasive  Fungal  Infection in Patients with Cancer
         and HIV Infection.  (ends  09/30/99) (The National  Cancer  Institute
         (NCI) issued a sole source  request for extension of this contract to
         9/30/00. The Company's budgetary proposal was submitted to the NCI on
         August 18, 1999.)


Contract revenues are charged on the basis of direct labor and supplies provided
by these divisions.  Due to the relatively  constant required level of effort on
the  contracts,  revenue  is  evenly  spread  over each  month of the year.  The
Government  traditionally  pays promptly  (barring any unforeseen


                                       3
<PAGE>

circumstances such as a government  shut-down).  The divisions' revenues totaled
$5,803,863 for the most recent fiscal year.

     Medical Center Drive Facility - Division of Neurobiology and Behavior
     ---------------------------------------------------------------------


The  Division  of  Neurobiology  and  Behavior  is  implementing  a  comparative
neurobiology of aging research resource  supported by the National  Institute on
Aging.  In May 1998 the Division was awarded a two-year  Phase II Small Business
Innovative  Research  (SBIR)  grant for the study of the effects of aging on the
brain. The aims are to increase the  understanding of normal aging processes and
to assist in developing  improved methods of diagnosis,  prevention,  treatment,
and  management of age-related  neurodegenerative  disorders such as Alzheimer's
disease. The project has yielded exciting new discoveries  regarding comparative
neuroanatomy and brain aging that have been presented at scientific conferences.
The two year grant is funded at $753,144.  During fiscal year 1999, the Division
acquired a grant from the  National  Center for  Research  Resources  to provide
genetic  analyses and DNA profiling of chimpanzees.  This grant expires on March
9, 2000 and totals $282,499.  This division's  revenues totaled $410,705 for the
most recent fiscal year.


Research Blvd. Facility - Division of Primate Biology and Medicine

For over twenty-six  years,  BIOQUAL,  Inc., and SEMA, Inc., prior to its merger
with BIOQUAL  (through its Research Blvd.  Division from February 25, 1991 until
May 31,  1997  and  presently  through  its  Division  of  Primate  Biology  and
Medicine), have operated CPFF and Fixed Price contracts for the Government using
nonhuman  primates to provide  research  and  services  in the disease  areas of
cancer, AIDS, hepatitis, cystic fibrosis and influenza. Currently, this division
operates five contracts:

      1. Facility for Animal Models Utilized for Viral Hepatitis Experiments.
         (ends  12/27/99)

      2. Facility for Nonhuman Primates Utilized in Infectious Disease
         Research. (ends 12/30/99)

      3. Mechanisms of Chemical Carcinogenesis in Old World Monkeys.  (ends
         12/18/00)

      4. Care and Housing of SIV Infected Research Animals.  (ends 01/18/00)

      5. MAO/Evaluation of AIDS Vaccines in Non-Human Primates. (ends 12/31/99)


The National Institute of Allergy and Infectious Diseases (NIAID) has advertised
the renewal Request for Proposal (RFP) for the first and second contracts listed
above and issued the RFP for the fourth listed contract. The Company will submit
a proposal to compete for the renewal of each of these  contracts.  The contract
listed fifth may not be renewed at its  completion.  That  contract  contributes
approximately 1% of the Company's revenues.


As part of the  predecessor  contract to the first  contract  listed above,  the
division  developed  and has two patents on specially  designed  animal  housing
units under the division's animal environmental enrichment program.

Contract revenues are charged on the basis of direct labor and supplies provided
by the division.  Due to the relatively constant required level of effort on the
contracts,  revenue is evenly spread over each month of the

                                       4
<PAGE>

year.  The  Government  traditionally  pays  promptly  (barring  any  unforeseen
circumstances  such  as a  government  shut-down).  Contract  revenues  totalled
$4,753,108 for the most recent fiscal year.

Division of Bioresearch
-----------------------

The Division of Bioresearch  has three products in the  marketplace,  a purified
equine  IgG that is sold  under  the brand  name  Lyphomune(R),  and two  equine
nutritional  supplements  sold under the brand names ImmunoGam and  MiniGam(TM).
This division is also  responsible  for the Company's  research and  development
activities.

      Equine IgG
      ----------


In  January  1995,  the  Company  entered  into a  Licensing  and  Manufacturing
Agreement  with  ZooQuest  Technologies  Ltd.  under  which the  Company  has an
exclusive  worldwide license to manufacture and sell Equine  Immunoglobulin  for
oral  administration  (Lyphomune(R) IgG) purified by a patented process. On June
11,  1997,  the Company was granted  United  States  Department  of  Agriculture
approval to sell and distribute its oral/intravenous  equine IgG also being sold
under the name Lyphomune(R).


The purified  equine IgG is used for treatment  for Failure of Passive  Transfer
(FPT)  of  immunity  in  newborn  foals.  During  the  first  twenty-four  hours
postpartum the foals showing symptoms of FPT can be, under normal circumstances,
administered IgG orally; however, after twenty-four hours postpartum, the foals,
generally, must be treated using intravenous methods.

On October 1, 1998, the Company  introduced two nutritional  supplements for the
equine  industry.  The two equine  immunoglobulin  products  are  ImmunoGam  and
MiniGam(TM).  Both products are colostrum  supplements  that are recommended for
use in newborn foals.  MiniGam(TM) is for use in miniature  horses and ImmunoGam
is  intended  for use in all other  horse  breeds.  These  products  provide  an
inexpensive  oral  colostrum  supplement  that can be used by horse  owners  and
breeders, whereas Lyphomune(R) is recommended for veterinarian use only.


In addition to direct  sales by the  Company,  the product is being  distributed
throughout  the United States by a number of  distributors.  Repeat sales of the
three products indicates user acceptance.  Production has been increased to meet
immediate  demands and can be readily and rapidly  expanded.  The  products  are
seasonal, allowing for an inventory buildup during the slow season.
Product sales for the year ended May 31, 1999 totaled $66,383.

      Research and Development Activities
      -----------------------------------

           Discovery Research Department
           -----------------------------

Initially this Department directed its discovery research toward the development
of new antibiotics  and protective  vaccines for the treatment and prevention of
Helicobacter  pylori  infection which is of significant  interest to the medical
community.  H. pylori is a bacterium associated with duodenal and gastric ulcers
and  considered  a risk  factor in the  development  of gastric  adenocarcinoma.
Infection with H. pylori has been associated with morbidity and mortality on all
five  continents.  With the current large  worldwide  market for  antibiotics to
control this  organism,  along with the  emergence  of  resistant  strains of H.
pylori,  the Company  mounted a dual  effort  directed  toward both  vaccine and
antibiotic  development.  This work led to a broader

                                       5
<PAGE>

research  base  in  targeting  specific  enzymes  of  a  variety  of  pathogenic
organisms.


The Company  succeeded in the  development  of an assay designed to identify and
validate  antibiotics  that  specifically  target  critical  enzymes  related to
pathogen  maintenance.  This  success has  prompted the Company to focus on this
technology.  The  expansion  of the  Department  into a program to  support  the
discovery of new antibiotics and antifungals coupled with continued progress may
lead the  Company to seek  capital  and/or  partnerships  to fulfill its overall
goals.


In May 1997,  the  Company  entered  into a two year  Cooperative  Research  and
Development  Agreement  (CRADA)  with the  National  Institute  of Diabetes  and
Digestive   and   Kidney   Diseases   (NIDDK)   for  the   "Identification   and
Characterization  of  Novel  Targets  for the  Development  of  Antibiotics  and
Protective Vaccines Directed Against  Helicobacter pylori" (extended through May
2000) and a two year cooperative  agreement with the Uniform Services University
of the Health Sciences (USUHS) for the  "Identification  of Helicobacter  pylori
Antigens for the  Development of Protective  Vaccines"  (expired May 1999).  The
Company  incurred  approximately  $107,000  in  expenses in support of these two
agreements during fiscal year 1999 and anticipates  reduced  expenditures during
fiscal year 2000 due to the expiration of one of the agreements.


During fiscal year 1999, the Department of Discovery  Research continued work on
two Phase I SBIR grants from the National  Cancer  Institute (NCI) and the NIDDK
respectively.  The NCI grant titled  "Nonhuman  Primate  Model for  Helicobacter
pylori Infection"  totaled $100,000.  The NIDDK grant titled  "Identification of
Helicobacter pylori Protective Antigens" totaled $99,673.  Both grants have been
fully utilized in fiscal year 1999. Recently,  the Director of the Department of
Discovery Research was awarded a second Young Investigator Award for his work on
the natural  resistance to H. pylori in the rhesus monkey.  An  understanding of
this  observed  natural  resistance  could  potentially  contribute  to  vaccine
development and/or novel therapeutic approaches.


           Veterinary Therapeutics Department
           ----------------------------------

The Veterinary  Therapeutics  Department is developing  six additional  products
related to equine IgG. These products will serve different  therapeutic markets.
Two are  currently in clinical  trials.  The research  direction is to provide a
family of  therapeutic  immunoglobulin  products  for the equine  industry.  The
Company  believes  that the costs  associated  with the  development  of the six
additional products will not be material to Diagnon's financial position.

      Small Business Innovative Research Program (SBIR)
      -------------------------------------------------

The Government  offers to commercial  entities  "Phase I" SBIR grants which fund
feasibility  studies  costing up to $100,000  and  lasting  six  months.  If the
feasibility  study shows  sufficient  promise,  a "Phase II"  program  providing
grants up to  $750,000  may be awarded.  "Phase III" of the program  consists of
establishing the project on a commercial  basis. The Company  regularly  submits
SBIR  proposals and has been awarded and completed  seven Phase I grants and has
been awarded two and completed one Phase II grants.


As  described in Item 1.  Description  of  Business,  Research  and  Development
Activities,  and Discovery  Research  Department,  on May 15, 1998,  BIOQUAL was
awarded  and  began  work  on  the  Phase  II  SBIR  grant  titled  "Comparative

                                       6
<PAGE>

Neurobiology of Aging  Resource"  totaling  $753,144 for two years.  Also during
fiscal  year 1998  BIOQUAL  was  awarded  two Phase I SBIR  grants:  1) Nonhuman
Primate Model for Helicobacter pylori Infection" totaling $100,000 from the NCI,
and 2)  "Identification  of Helicobacter  pylori Protective  Antigens"  totaling
$99,673 from the NIDDK.  The first grant expired on June 30, 1998 and the second
grant expired on March 31, 1999.


The Company  continues to compete for the  Government's  SBIR contract and grant
mechanisms to further the Company's proprietary research.  Proprietary positions
and/or  patents  arising from these programs will be the property of the Company
with free  licensing  available to the  Government.  There can be no  assurance,
however,  that  additional  SBIR  grants  will be awarded,  or that  grants,  if
awarded, will result in proprietary positions or patents for the Company.

Backlogs


The divisions of Laboratory  Animal  Sciences,  Reproductive  Endocrinology  and
Toxicology and Primate Biology and Medicine operate under  Government  contracts
which  typically  run  three  to five  years.  Therefore,  the  backlogs  of the
divisions are significantly increased in a year in which a long-term contract is
awarded.   Most  of  the  contracts   included  in  the  following   totals  are
incrementally  funded on an annual basis.  Therefore  much of the backlog is not
"firm" in that the funds will not be  committed  until a later date as described
in the third column titled Backlog Unfilled in FY00 Projected.
<TABLE>
<CAPTION>
                                                                                                       Backlog
                                                  Backlog                   Backlog                   Unfilled
                                                   FY 99                      FY 00                   in FY 00
                                               as of 6/1/98                as of 6/1/99               Projected
                                               ------------                ------------               ---------
<S>                                             <C>                         <C>                      <C>
      Med. Ctr. Dr. Facility                    $16,096,000                 $12,510,000              $ 9,662,000
      Res. Blvd. Facility                         7,862,000                   3,666,000                  983,000
                                                -----------                 -----------              -----------

      TOTAL                                    $23,958,000                  $16,176,000              $10,645,000
</TABLE>


Supervision and Regulation
--------------------------

      Animal Model Contracts
      ----------------------

Over the last few decades,  there has been an  increasing  awareness of the need
for adequate  oversight  and  regulation  of the  utilization  and  husbandry of
animals.


BIOQUAL, Inc. utilizes animals and, under its government contracts,  is required
to observe the regulations and guidelines of the Institute of Laboratory  Animal
Resources,  Guide  for the  Care  and Use of  Laboratory  Animals.  Furthermore,
BIOQUAL,  Inc. must meet the Public  Health  Service (PHS) Policy on Humane Care
and Use of Laboratory  Animals.  This policy  mandates  that BIOQUAL,  Inc. file
annually an assurance as to compliance  with the NIH Office for Protection  from
Research  Risks.  BIOQUAL,  Inc. also comes under the  jurisdiction  of the U.S.
Department of Agriculture (USDA), which regularly inspects both of the Company's
facilities  for  adherence  to its  rules  and  regulations  regarding  care and
treatment of animals. To ensure compliance with the several laws and regulations
regarding animal care, both facilities are accredited as complying  laboratories
by the Association for Assessment and  Accreditation  of Laboratory  Animal Care
International (AAALAC).


                                       7
<PAGE>

The supervision and regulation  programs described herein are costly in terms of
ongoing operation and maintenance,  but are essential because lack of compliance
can lead to cessation of operations and loss of contracts.

      Environmental Compliance
      ------------------------

The Company incurs  minimal costs in the disposal of the waste  generated by its
operations. These costs are reimbursable under government contracts.

      Veterinary Products
      -------------------

The USDA is responsible  for regulation of certain  veterinary  products and the
Company's  product testing,  approval,  production and packaging are governed by
Part 9 of the Code of Federal Regulations (CFR).

Competition
-----------

      Animal Model Contracts
      ----------------------

The  Company is  classified  as a "small  business"  in  Government  contracting
procedures.  So long as the Company  continues to qualify as a "small business,"
this classification  effectively limits competition for several of the Company's
current research contracts to other "small  businesses" in the Washington,  D.C.
area. Other barriers to competition  include the general requirement of location
in the D.C.  area (to serve the NIH  scientists)  and the high capital  costs to
establish animal holding facilities.

The Company's main "small  business"  competitors are Taconic Farms,  BIOCON and
Priority One.

The Company also  competes on open  contracts  for animal  research work and its
competitors  at this  level  are  Covance,  ABL,  Bionetics,  Southern  Research
Institute, BioReliance and universities.

Due to the  specialized  nature of the work and the  facilities,  relatively few
companies   compete  for   contracts  in  small  animal  and  nonhuman   primate
applications.  The Government  generally  selects  winners among the competitors
through  evaluation of the merit of the written  technical  proposals with price
being an important but not an overriding factor.

      Veterinary Products
      -------------------


The Company's Equine IgG products,  which began to be introduced into the market
in  fiscal  year  1996,  are  purified  and  unpurified  immunoglobulin  sold as
lyophilized (freeze-dried) products.  Competing products currently on the market
involve the use of  unpurified  equine  serum/plasma  maintained  in a liquid or
frozen  state  (thawed  for  use).   Principal   suppliers  of  these  competing
alternative products are Veterinary Dynamics, Inc. and Sera, Inc.


Employees
---------


At the end of fiscal  year 1999,  the Company  employed  109 people (102 of whom
were full-time) as follows:  Diagnon general and  administrative,  17 employees;
Research  Blvd.  Facility,  47 employees;  and Medical Center Dr.  Facility,  45
employees.  The  Company  expects to  encounter  competition  for the  technical
management positions necessary for the Company's business, but believes there is
an   ample   labor   pool  of   laboratory   technicians,   animal   caretakers,
support/maintenance personnel and the like.

                                       8
<PAGE>

Forward Looking Information
---------------------------

Statements   herein  that  are  not   descriptions   of  historical   facts  are
forward-looking  and subject to risk and  uncertainties.  Actual  results  could
differ  materially from those  currently  anticipated due to a number of factors
including  those set  forth in  Diagnon's  Securities  and  Exchange  Commission
filings under "Risk  Factors",  including  risks  relating to the early stage of
products  under   development;   uncertainties   relating  to  clinical  trials;
dependence on third parties'  future  capital  needs;  and risks relating to the
commercialization,  if any, of Diagnon's  proposed  products (such as marketing,
safety,  regulatory,  patent, product liability,  supply,  competition and other
risks).


ITEM 2.  DESCRIPTION OF PROPERTY

The Company's current leases are as follows:
<TABLE>
<CAPTION>
Division/Facility                  Location                      Sq. Ft.         Exp. Date                  Options
-----------------                  --------                      -------         ---------                  -------
<S>                                <C>                           <C>             <C>                        <C>
Diagnon                            Rockville, MD                 10,070          5/31/02                    5 years
Res. Blvd. Fac.                    Rockville, MD                 30,000          5/31/02                    5 years
Med. Ctr. Dr. Fac.                 Rockville, MD                 51,585          5/31/02                    5 years
</TABLE>

The Company's  laboratory  facilities are suitable and adequate for the purposes
for which they are used.


ITEM 3. LEGAL PROCEEDINGS

None.

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

Annual Meeting  -  October 28, 1998

Election of Directors

  Four directors were elected:
                              For            Withheld
                              ---            --------
  J. Thomas August, M.D.     769,168          5,339
  Charles C. Francisco       769,168          5,339
  Charles F. Gauvin          769,119          5,388
  John C. Landon, Ph.D.      768,736          5,771

There were no other directors whose term of office as a director continued after
the meeting.

Other Matters Voted Upon at the Meeting

                  Proposal 2   To approve the appointment of Deloitte & Touche
LLP as independent public accountants for the Company.

                  Affirmative Votes           770,284
                  Negative Votes                3,481
                  Abstain                         742




                                       9
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The approximate number of holders of record of the Registrant's  Common Stock on
July 30, 1999 was 1,000.  The  Registrant  has paid no dividends with respect to
its Common Stock during the past five years.  On July 20, 1999,  Diagnon's Board
of Directors  declared a dividend of $0.02 a share for shareholders of record on
September 7, 1999,  payable on September 22, 1999. The Company's  Line-of-Credit
Agreement  requires that no dividends be declared or paid until all  obligations
to the lender have been  satisfied.  The Company's  lender  (Allfirst  Bank) has
agreed to waive this requirement for this dividend.

The Common Stock is traded in the over-the-counter (O-T-C) market and the
Chicago Stock Exchange.


The  following  table  sets  forth,  for the  periods  indicated,  prior  to the
Company's  listing on the Chicago Stock  Exchange (CHX) on October 23, 1997, the
high and low per share closing bid prices for the Common Stock as advised to the
Company by the principal  market maker in the Common  Stock,  and for the period
beginning  when the Company was listed on the CHX,  the high and low sale prices
of the Common Stock as advised by the CHX.

                                                      Sale Prices
                           Fiscal Year             High         Low


                             2000
                           1st Quarter
                           (thru 7/30/99)         2  5/8      2  5/8

                             1999
                           4th Quarter            2  7/16     2  1/8
                           3rd Quarter(1)(2)
                           2nd Quarter            1  1/2      1  1/2
                           1st Quarter(1)(2)

                             1998
                           4th Quarter            1  7/8      1  7/8
                           3rd Quarter            1  7/8      1  3/4
                           2nd Quarter            2  1/2      2  3/8


                                    Bid or Closing Quotations(2)
                                                   High         Low
                           1st Quarter(3)         2  5/8      2  1/16

(1) During these quarters, the high and low bid or closing quotations from the
O-T-C were 2 3/8 and 1 1/4 for the 3rd quarter and 1 1/2 and 1 1/8 for the 1st
quarter.

(2) Prices are interdealer quotations and do not necessarily reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.

(3) Prices for the 1st Quarter 1998 have been restated to reflect the six to one
reverse stock split effected October 22, 1997.

The  Company's  Common  Stock,  $.01 par value per share,  carries  one vote per
share. There are no outstanding shares of preferred stock.


                                       10
<PAGE>



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
         PLAN OF OPERATION

Liquidity and Capital Resources
-------------------------------


The Company  currently has a $1,000,000  secured  revolving  line of credit with
Allfirst Bank (formerly,  First National Bank of Maryland).  This line of credit
is annually renewable and the Company believes,  although there is no assurance,
that the line of credit will be renewed in October  1999.  The line of credit is
callable on demand.  Currently,  the interest  rate of the line of credit is the
prime rate plus .25%.  As of May 31,  1999,  there were  $275,282 of  borrowings
under this line of credit. In the opinion of the Company,  total current assets,
the line of credit resources and the capital provided by future  operations will
provide adequate  liquidity and capital  resources to maintain  operations.  The
Company has received  approval  from Allfirst Bank to proceed with the merger of
Diagnon and BIOQUAL.


The Company leases equipment under various capital leases which expire in fiscal
years  2000,  2001 and 2002.  At May 31,  1999 the  present  value of the annual
minimum lease payments was $122,304.


The Company's  revenues  result  primarily from  Government CPFF and Fixed Price
contracts.  Continued success in winning these contracts and the continuation of
the  Government's  solicitation  of  contracts  in these areas are  essential to
maintaining liquidity and capital resources.  Since the 1998 FORM 10-KSB report,
the Company has not been awarded any material new contracts. The Company has and
will submit proposals as described in Item 1.  Description of Business,  Current
Operations, on renewal competitions during fiscal year 2000.


Year 2000
---------


The Company has  performed an internal  assessment of the scope of the Year 2000
computer systems and software problems and its potential effect on the operation
of the Company.  The Company is continuing the assessment of its non-information
systems for Year 2000 compliance.  The Company has contacted its major suppliers
of products  and services to determine  the status of the  suppliers'  Year 2000
capability.  The Company has received assurances from a majority of providers of
critical  systems that those systems are or will be Year 2000  compliant  before
December 31, 1999. There can be no assurance that another  company's  failure to
ensure Year 2000  compliance and  capability  will not have an adverse effect on
the Company.  The Company  spent  approximately  $20,000 in fiscal year 1999 and
anticipates  spending  approximately  $30,000 in fiscal year 2000  replacing its
Year 2000 non-compliant  computers. To date, the Company has spent approximately
$35,000 to replace non-compliant  computers and software.  Any costs incurred in
connection  with Year 2000  compliance  will be expensed as incurred.  It is the
opinion  of  management  that the Year  2000  computer  problem  will not have a
material effect on the Company's  operation.  However, the Company is monitoring
the progress of its largest customer,  the National  Institutes of Health (NIH),
toward Year 2000 compliance. If the NIH is non-compliant on January 1, 2000, the
Company's financial condition may be adversely affected until such time that the
NIH's non-compliant contingency plan is initiated.

Not all instances of date failure can be anticipated or controlled.  In planning
for the most  reasonably  likely worst case  scenario,  (e.g.  NIH systems being
non-compliant  on January 1, 2000),  or in cases in which,  despite our efforts,
failures occur,  we have developed a contingency  plan such that our vendors can
support us and enable our critical  operations to


                                       11
<PAGE>

continue to the maximum extent possible.


Changes in Financial Position - 1999 versus 1998
------------------------------------------------

Assets

In the twelve  months of operation in this fiscal year,  total assets  increased
$346,864.  This  amount was  primarily  attributable  to an increase to accounts
receivable of $160,627  consisting  mainly of 1) an increase of $63,011 in trade
accounts receivable reflecting a slightly slower collection rate compared to the
previous fiscal year end, 2) a $100,732 increase in unbilled accounts receivable
(current  plus  noncurrent)  primarily  resulting  from a $124,796  increase  in
reimbursable  indirect  rate  variances for the current  fiscal year,  offset by
$84,755 of prior year indirect rate variances billed and paid during the current
year, a $34,762 increase in unbilled direct costs to be billed in the subsequent
fiscal year due to a longer  accrual  period at the end of this fiscal year, and
the  recording of $25,929  unbilled  contract fee  retention to be billed at the
completion  of the  respective  contracts,  and 3) a  $3,116  decrease  in other
accounts  receivable.  Other noncurrent assets increased $8,275 due to a $46,423
increase in the cash value of  officers'  split dollar life  insurance  policies
offset by  $38,148  due to the  delivery  and  payment  on a new  freeze  drying
equipment  order.  Inventories  increased  $242,489 as the Company  continues to
produce  Lyphomune(R),  ImmunoGam,  and  MiniGam(TM)  for future sales.  Prepaid
expenses  increased  $36,633 primarily due to the prepayment of health insurance
premiums.

The increases above were partially offset by 1) a decrease in fixed assets,  net
of accumulated  depreciation and amortization of $19,304 reflecting depreciation
and amortization of $321,111 offset by fixed asset purchases of $301,807 (mainly
nonhuman  primate housing units,  lab equipment and facility  improvements),  2)
deferred  income  tax  asset  decreased  by  $27,800  primarily  as a result  of
utilizing a portion of the federal  income tax loss  carryforward  during fiscal
year 1999, and 3) loans to officers decreased $57,094 due to payments during the
current fiscal year.

Liabilities

In the  twelve  months of  operation  in this  fiscal  year,  total  liabilities
increased  $8,989.  This amount was  primarily  due to 1) a $62,736  increase in
borrowings under  line-of-credit  reflecting the increase in inventories,  2) an
increase in accrued income taxes of $11,372,  3) an $84,498  increase in accrued
compensation  and related costs  reflecting a longer  accrual period this fiscal
year  compared to fiscal year 1998 and a larger  management  bonus  accrual this
year  compared to fiscal year 1998,  and 4) a $9,096  increase in other  accrued
liabilities.

The  increases  above were  largely  offset by a decrease in  long-term  debt of
$140,244  reflecting  payments  on capital  leases and an  $18,469  decrease  in
accounts payable.

Changes in Financial Position - 1998 versus 1997
------------------------------------------------

Assets

In the twelve  months of operation in fiscal year 1998,  total assets  decreased
$417,651.  This  amount was  primarily  attributable  to a decrease  in accounts
receivable of $305,333  consisting  mainly of 1) a decrease of $341,949 in trade
accounts receivable  reflecting a faster collection rate compared to

                                       12
<PAGE>

fiscal year 1997, 2) a $56,632 increase to unbilled accounts receivable (current
plus noncurrent)  primarily  resulting from a $162,077  increase in reimbursable
indirect rate  variances  for fiscal year 1998,  offset by $50,395 of prior year
indirect rate variances  billed and paid during current year 1998, a $43,672 net
decrease in unbilled  contract fee retention,  and a $11,378 decrease in accrued
unbilled  direct  costs to be  billed  in  fiscal  year  1999,  and 3) a $20,016
decrease in other accounts receivable  primarily due to the collection of fiscal
year 1997 receivable from the Medical Center Drive facility  landlord.  Deferred
income tax asset  decreased  by $141,900  primarily as a result of the change in
certain  estimates  used in the  calculation  of future  utilization  of federal
income tax loss  carryforward  and of utilizing a portion of the federal  income
tax loss  carryforward  during fiscal year 1998.  Prepaid expenses  decreased by
$21,555.

The  decreases  above were  partially  offset by 1) a $29,826  increase in other
noncurrent assets due to a $45,678 increase in the cash value of officer's split
dollar  life  insurance  policies,  a  $38,148  deposit  on  new  freeze  drying
equipment,  offset  by  the  completion  of a  nonhuman  primate  housing  order
($54,000)  from fiscal year 1997,  and 2) an  increase in fixed  assets,  net of
accumulated  depreciation and  amortization,  of $18,073  reflecting fixed asset
purchases of $311,801  (mainly nonhuman primate housing units and laboratory and
production  equipment),  reduced by a $147,872 fully depreciated equipment write
off  and  disposal  during  fiscal  year  1998,   offset  by  depreciation   and
amortization  of $293,728  during fiscal year 1998 reduced by the $147,872 fully
depreciated  equipment  write off.  The balance of the  decrease is due to other
miscellaneous factors.

Liabilities

In the  twelve  months of  operation  in fiscal  year  1998,  total  liabilities
decreased $267,763. This amount was primarily due to 1) a decrease in borrowings
under  line-of-credit of $323,574  primarily due to more timely payment of trade
accounts  receivable,  2) a decrease  in  long-term  debt of $25,797  related to
$135,837 in payments on capital leases offset by a capital lease of $110,040 for
nonhuman  primate  housing units at the Research  Boulevard  facility,  and 3) a
$16,342 decrease to accounts payable.

The  decreases  above were  partially  offset by a $97,143  increase  in accrued
compensation  and related costs  reflecting a longer  accrual  period for fiscal
year 1998  compared to fiscal year 1997, a larger  management  bonus accrual for
fiscal year 1998  compared  to fiscal  year 1997,  and the accrual of $24,678 in
401(k)  contributions  for May 1998 paid to the insurance carrier for investment
during  June 1998.  The balance of the  decrease  is due to other  miscellaneous
factors.

Results of Operations  - 1999 versus 1998
-----------------------------------------

Revenues

Contract revenues increased by 11.9% compared to the prior year primarily due to
increased  contract  activity,  an increase in sales related to SBIR grants, and
the  funding  of  $82,920 of  indirect  rate  variance  cost  overruns  of three
contracts  that  expired  in  fiscal  years  1995 and 1998 (the  contracts  were
administratively  closed out on September 30, 1998, January 29, 1999 and May 13,
1999  respectively).  Product sales decreased to $66,683  compared to $76,377 in
fiscal year 1998.  Product unit sales for fiscal year 1999 were  relatively  the
same as fiscal year 1998,  however,  in fiscal year 1999 the Company was selling
the lower priced  ImmunoGam and  MiniGam(TM)  products  along

                                       13
<PAGE>

with Lyphomune(R) which resulted in a net decrease in sales.

Operating Expenses

Contract expenses  increased 8.4% compared to the prior year primarily due to an
increase in contract and SBIR  activity.  This increase is not as large as would
be  anticipated  because of a $45,590 cost overrun on two contracts that expired
during fiscal year 1998. The greater increase in contract revenues over contract
expenses  is  primarily  due to the fiscal year 1999  funding of  indirect  cost
overruns on three expired  contracts from prior years  totaling  $82,920 (two of
the three contracts created the $45,590 overrun from fiscal year 1998). Costs of
goods sold  decreased  to $55,238  compared to $108,984 in the prior year.  This
decrease  was  primarily  due to the  expensing,  of 300  units of  Lyphomune(R)
inventory,  used in a sales  promotion  in fiscal year 1998  compared to only 71
complimentary  units  being used in sales  promotions  during  fiscal year 1999.
Research and development  (R&D) Costs increased to $203,167 compared to $144,123
in the prior year.  This increase is primarily due to costs  associated with the
development of a proprietary assay design for high throughput  screening for new
antibiotics.  General and administrative  expenses (G&A) increased 3.0% compared
to the  prior  fiscal  year.  The  increase  is  primarily  due to  inflationary
increases in several items of expense in this fiscal year.  This increase is not
as large as would be  anticipated  because of  expenses  incurred in fiscal year
1998  related  to the  $25,000  termination  fee  for  terminating  the  private
placement  funding effort with Slusser  Associates  (SA) and the $15,000 fee for
listing on the  Chicago  Stock  Exchange  (CHX).  The  combination  of these net
increases resulted in an overall increase in operating expenses of 7.2%.

Operating Income


Operating  income  increased to $529,128  compared to $75,554 in the prior year.
The increase is primarily  due to the  increase in contract  revenues  without a
comparative  increase in related contract  expenses  resulting in an increase in
the gross  margin  percentage  on contracts  from the prior  fiscal  year;  this
increase  in  contract  gross  profit  dollars  was offset to some extent by net
increases in R&D and G&A expenses.


Provision For Income Tax

In accordance with Statement of Financial  Accounting  Standards (SFAS) No. 109,
"Accounting  for Income Taxes," the Company  reported a deferred  federal income
tax expense of $27,800 for the year ended May 31, 1999.  This  expense  resulted
primarily  from a change  in the  estimate  used in the  calculation  of  future
utilization of federal income tax loss carryforward,  offset by another deferred
income tax  adjustment.  The Company  provided for state income tax estimated at
$60,000.  State income tax expense is reimbursable under government  contracting
regulations.

Earnings Per Share (EPS)

Options to purchase  51,845 shares of common stock at prices  ranging from $1.80
per share to $3.375  per share  were  outstanding  at May 31,  1999 but were not
included in the  computation of diluted EPS because the options'  exercise price
was greater than the market price of the common  shares.  For the year ended May
31, 1998, all  outstanding  options  (72,351) to purchase shares of common stock
are not  included  in the  computation  of diluted  EPS  because the options are
antidilutive.

                                       14
<PAGE>

Results of Operations  - 1998 versus 1997
-----------------------------------------

Revenues

Contract revenues increased by 10.4% compared to the prior year primarily due to
increased  contract  activity  and the award of three  SBIR  grants  during  the
current year.  Product sales increased to $76,377  compared to $19,916 in fiscal
year 1997.

Operating Expenses

Contract expenses increased 11.9% compared to the prior year primarily due to an
increase in  contract  activity  and the award of three SBIR grants  during this
fiscal year. The greater  increase in contract  expenses over contract  revenues
are primarily due to an indirect cost overrun on two expired contracts  totaling
$45,590. These indirect costs were currently not available for reimbursement and
therefore  revenue could not be  recognized.  According to Federal  Acquisitions
Regulations, the Company may be able to recover all or part of these costs after
a government indirect cost audit for fiscal year 1998 has been completed.  Costs
of goods sold increased to $108,984  compared to $18,941 in the prior year. This
increase was primarily due to increased sales of Lyphomune(R) during this fiscal
year  compared to fiscal year 1997 and the  expensing,  from  inventory,  of 300
units of  Lyphomune(R)  used in a sales  promotion  which  ended  May 31,  1998.
Research and development  (R&D) costs decreased to $144,123 compared to $349,199
in the prior year.  This  decrease was  primarily  due to the  completion of the
pre-clinical  and  clinical  trials  for the  Company's  purified  IgG  product,
Lyphomune(R),  and the award of two SBIR grants to help  support  the  Company's
ongoing research of Helicobacter  pylori.  General and  administrative  expenses
(G&A)  increased  17.1%  compared to the prior  fiscal  year.  The  increase was
primarily due to the legal  expenses  incurred in defense of a legal  proceeding
brought on by a former employee, increased legal and transfer agent fees related
to the reverse stock split, a $25,000 termination fee paid to Slusser Associates
related to the tabled private  placement  funding effort during fiscal year 1998
and a $15,000  listing fee from the Chicago  Stock  Exchange  paid during fiscal
year  1998.  The  combination  of these net  increases  resulted  in an  overall
increase in operating expenses of 11.1%.

Operating Income


Operating  income  increased  1.3%  compared to the prior year  primarily due to
increased  contract  revenues offset by legal and transfer agent fees related to
the reverse stock split, the $25,000  termination fee paid to Slusser Associates
related to a tabled private  placement  funding effort,  the $15,000 listing fee
from the Chicago Stock  Exchange  paid during this fiscal year,  and an indirect
cost overrun on two expired contracts totaling $45,590.


Interest Expense

For this fiscal year,  the Company had interest  expense of $57,239  compared to
$49,320 in the prior year. This increase was due to increased average Borrowings
Under the Line-of-Credit during the current fiscal year.

Provision For Income Tax

In accordance  with SFAS No. 109,  "Accounting  for Income  Taxes",  the Company
reported a deferred  federal  income tax expense of $141,900  for the year ended
May 31, 1998.  This expense  resulted  primarily  from a change in the estimates
used in the  calculation  of  future  utilization  of  federal  income  tax loss

                                       15
<PAGE>

carryforwards,   and  utilizing  a  portion  of  the  federal  income  tax  loss
carryforward  during fiscal year 1998. The Company provided for state income tax
which is estimated at $35,500.  State income tax expense is  reimbursable  under
government contracting regulations.

Earnings Per Share (EPS)

All  outstanding  options  (72,351) to purchase  shares of common stock were not
included  in  the   computation   of  diluted  EPS  because  the  options   were
antidilutive.  Options  to  purchase  20,934  shares of  common  stock at prices
ranging  from $2.46 per share to $3.375 per share  were  outstanding  at May 31,
1997 but were not  included  in the  computation  of  diluted  EPS  because  the
options' exercise price was greater than the market price of the common shares.

For  comparison  purposes,  all  share  and  per  share  data  in the  financial
statements have been  retroactively  adjusted to reflect the  one-for-six  share
reverse stock split effected on October 22, 1997.

Inflation and Price Changes for Fiscal Year
-------------------------------------------

For fiscal years 1997,  1998,  and 1999 neither  inflation nor price changes had
any material effect on net sales, revenues, or income from operations.

ITEM 7. FINANCIAL STATEMENTS

Financial statements are listed in the Table of Contents on page 31 as Financial
Statements filed as part of this FORM 10-KSB.

ITEM 8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

None


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Set forth  below is  information  with  respect to the  present  directors,  and
executive officers.
<TABLE>
<CAPTION>
NAME                                  DIRECTOR SINCE             AGE      POSITIONS
----                                  --------------             ---      ---------
<S>                                        <C>                   <C>
John C. Landon, Ph.D.                      1986                  62       Chairman of the Board; President & Chief Executive
                                                                          Officer; Director

J. Thomas August, M.D.                     1982                  72       Director; Consultant; Scientific Advisor

Charles C. Francisco                       1991                  61       Director; Member of Compensation Committee; Member of
                                                                          Audit Committee

Charles F. Gauvin                          1992                  44       Director;  Member of Compensation Committee;  Member of
                                                                          Audit Committee


                                       16
<PAGE>

Michael P. O'Flaherty                                            61       Secretary; Chief Operating Officer

David A. Newcomer                                                38       Chief Financial Officer

Leanne DeNenno                                                   45       Vice President, BIOQUAL, Inc. (Subsidiary)

Richard P. Bradbury, DVM                                         64       Vice President, BIOQUAL, Inc. (Subsidiary)

Jerry R. Reel, Ph.D.                                             61       Vice President, BIOQUAL, Inc. (Subsidiary)
</TABLE>

Each  director  is  elected  to hold  office  until the next  annual  meeting of
stockholders and until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors.

Dr. John C.  Landon was elected  President  and Chief  Executive  Officer of the
Company in May 1986 and has been Chairman of the Board since February, 1987. Dr.
Landon has been President of BIOQUAL, Inc. from January 1982 to the present. Dr.
Landon is also the President,  Chief Executive Officer, Treasurer and a Director
of the Company's  subsidiaries.  Dr. Landon's experience includes positions with
the National Cancer Institute and with Litton Industries as Scientific  Director
of the  Frederick  Cancer  Research  Facility  and as  President  of EG&G  Mason
Research Institute.

Dr. J. Thomas August is a consultant to the Company, a principal stockholder and
a founder  of the  Company,  as well as a  Director.  He is a  Professor  in the
Department  of  Pharmacology  and  Molecular   Sciences  at  the  Johns  Hopkins
University  School of  Medicine,  Baltimore,  Maryland  and has  served in those
positions since 1976. Dr. August's  previous  experience  includes  positions as
Director of the Division of Biological  Sciences and Chairman of the  Department
of Molecular  Biology at the Albert  Einstein  College of Medicine.  He has also
held posts as a Research  Fellow in Medicine at Harvard  Medical  School,  as an
Instructor and Assistant  Professor of Medicine at Stanford University School of
Medicine,  and as an Associate  Professor in Medicine (assigned to microbiology)
at the New York University School of Medicine.

Mr.  Charles C.  Francisco  is CEO and  Managing  Member of  EdgeTech,  Inc.,  a
manufacturer  of acoustic  underwater  imaging  instruments  located in Milford,
Massachusetts.   Mr.  Francisco  is  also  CEO  of  C&W  Fabricators,   Inc.,  a
manufacturer  of inlet and exhaust systems for gas turbine  electric  generators
located in Gardner,  Massachusetts.  From 1993 to March of 1998 he was CEO and a
Director  of   Victoreen,   Inc.,  a   manufacturer   of   radiation   measuring
instrumentation,  located  in  Cleveland,  Ohio.  From  1992 to  1995,  he was a
director  of R. E.  Wright &  Associates,  Inc.  and  Environmental  Restoration
Systems,  Inc.,  earth  resources  consultants and pollution  removal  equipment
makers,  respectively.  For  part of  1996,  he was a  director  of R.E.  Wright
Environmental,  Inc., an SAIC company and successor to R.E. Wright & Associates,
Inc.


Mr.  Charles F. Gauvin is the President and CEO of Trout  Unlimited,  located in
Arlington,  Virginia,  a non-profit  organization  dedicated to  protection  and
conservation  of trout and salmon and their  habitats.  From 1986 - 1991, he was
associated with the law firm of Beveridge & Diamond,  P.C. in Washington,  D.C.,
where his practice included corporate and securities work for the Company.


Mr. Michael P.  O'Flaherty  joined the Company in June 1986, as a Vice


                                       17
<PAGE>

President of BIOQUAL.  Mr.  O'Flaherty is currently the Chief Operating  Officer
and the  Secretary  of the  Company.  Mr.  O'Flaherty's  duties for the  Company
include most functions of general management.

Mr. David A. Newcomer joined the Company in May 1989 as the Acting Controller of
the  Company.  Mr.  Newcomer is  currently  the Chief  Financial  Officer of the
Company.   Mr.  Newcomer's  duties  include  managing  the  Company's  financial
functions.


Ms. Leanne DeNenno has been an employee of Diagnon's subsidiary,  BIOQUAL, Inc.,
since its  inception  in 1982.  From that  date to the  present,  she has been a
Project Manager on a major National Cancer Institute  contract and its successor
contracts.  In 1988, Ms. DeNenno was named head of Animal Research  Programs for
BIOQUAL, Inc., in 1991 she was named the Vice President in charge of the Medical
Center Dr.  Division of BIOQUAL,  Inc.  and (in 1997) the Vice  President of the
Division of Laboratory Animal Sciences.


Dr.  Richard P.  Bradbury,  D.V.M.,  an American  College of  Laboratory  Animal
Medicine  Diplomate,  joined the  Company in 1989 as the Vice  President  of the
Company's subsidiary, SEMA, Inc. Since the 1991 merger of SEMA into BIOQUAL, Dr.
Bradbury has been the Vice  President of BIOQUAL in charge of the Research Blvd.
Division  and (in 1997)  became the Vice  President  of the  Division of Primate
Biology and Medicine.

Dr. Jerry R. Reel, Ph.D., an American Board of Toxicology Diplomate,  joined the
Company  in 1991 as Vice  President,  Science  and (in  1997)  became  the  Vice
President of the  Division of  Reproductive  Endocrinology  and  Toxicology  for
BIOQUAL. Prior to joining BIOQUAL, Dr. Reel had his own consulting company.



                                       18
<PAGE>


Item 10.  EXECUTIVE COMPENSATION

The following table sets forth  information  with respect to  remuneration  paid
during the last three fiscal years to the Chief Executive Officer of the Company
and other company officers whose compensation exceeded $100,000.

                           SUMMARY COMPENSATION TABLE

                               Annual Compensation

<TABLE>
<CAPTION>
                                                                                                             Other
Name and Principal                                                    Salary             Bonus           Compensation
     Position                                           Year            ($)               ($)             ($) /1,2
------------------                                      ----          -------           -------           ------------
<S>                                                     <C>           <C>                <C>                 <C>
John C. Landon                                          1999          275,000            40,000              32,723
                                                        ----
CEO, President, Chairman                                1998          275,000                                32,723
                                                        ----
  of the Board                                          1997          160,000           101,863              32,723
                                                        ----

Michael P. O'Flaherty                                   1999          127,286            44,292              10,593
                                                        ----
Chief Operating Officer,                                1998          122,085            36,444              10,593
                                                        ----
  Secretary                                             1997          116,690            21,660              10,593
                                                        ----

Jerry R. Reel                                           1999          120,652             3,789
                                                        ----
Vice President, Bioqual, Inc.                           1998          111,282             3,926
                                                        ----
  (Subsidiary)                                          1997          118,614             9,179
                                                        ----

Richard P. Bradbury                                     1999          106,426             4,730
                                                        ----
Vice President, Bioqual, Inc.                           1998           97,130             8,372
                                                        ----
  (Subsidiary)                                          1997           99,573             4,000
                                                        ----

David A. Newcomer                                       1999           88,600            26,292               4,500
                                                        ----
Chief Financial Officer                                 1998           83,412            19,430               4,500
                                                        ----
                                                        1997           78,202             6,592               3,750
                                                        ----
</TABLE>


  1/ Other  Annual  Compensation  for the CEO for the years 1999,  1998 and 1997
     represents premiums for a $1,000,000 Split Dollar Life Insurance Policy.

  2/ Other  Annual  Compensation  for the  Chief  Operating  Officer  and  Chief
     Financial Officer for the years 1999, 1998 and 1997 represents premiums for
     a $250,000 Split Dollar Life Insurance Policy.


Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                                           Number of                    % of Total
                                           Securities                  Stock Options
                                           Underlying                   Granted to
                                          Stock Options                Employees in              Exercise          Expiration
      Name                                 Granted (#)                  Fiscal Year            Price ($/Sh)           Date
      ----                                 -----------                  -----------            ------------           ----
<S>                                          <C>    <C>                     <C>                   <C>               <C>  <C>
John C. Landon                               23,500 1/                      69.0%                 $2.8875           2/24/04
CEO, President,
  Chairman of the Board

Michael P. O'Flaherty                         7,500 1/                      22.0%                 $1.5625           12/31/08
Chief Operating Officer


1/ All options reported in this table are fully exercisable.

                                       19
<PAGE>

Aggregated Stock Option Exercised in Last Fiscal Year, and FY-End Option Value


                                                                                                                     Value of
                                                                                          Number of                Unexercised
                                                                                         Unexercised               In-the-Money
                                                    Shares                                 Options                   Options
                                                   Acquired               Value          at FY-End (#)           at FY-End ($)
                                                  on Exercise            Realized
           Name                                       (#)                  ($)            Exercisable               Exercisable
--------------------------                        -----------            --------        -------------             -------------

John C. Landon                                                                             1,667  /1                      177
CEO, President,                                                                           23,500  /1,2                    N/A
 Chairman of the Board

Michael P. O'Flaherty                                                                     14,168  /1                   14,228
Chief Operating Officer,                                                                   3,334  /1,2                    N/A
 Secretary

Jerry R. Reel                                                                                500  /1                      288
Vice President, Subsidiary                                                                 1,334  /1,2                    N/A

Richard P. Bradbury                                                                        1,168  /1                    1,772
Vice President, Subsidiary                                                                 1,167  /1,2                    N/A

David A. Newcomer                                                                          1,001  /1                    1,456
Chief Financial Officer                                                                    1,667  /1,2                    N/A
</TABLE>


 1/  All options reported in the table are fully exercisable.
 2/  Options are out-of-the-money.


Compensation of Directors
-------------------------

During fiscal year 1999, the Company paid to Directors:
<TABLE>
<CAPTION>
                                                               Attendance of
                                                               Board Meetings                      Travel to
                                        Directors             and Consultation                   Board Meetings
                                         Fees ($)                 Fees ($)                        Expenses ($)
                                        ---------             ----------------                   --------------
<S>                                       <C>                       <C>                                <C>
J. Thomas August, M.D.                    4,000                    11,500
Charles C. Francisco                      4,000                     1,500                              755
Charles F. Gauvin                         4,000                     1,500                              100
</TABLE>


Messrs. Francisco,  August and Gauvin have agreements with the Company extending
through the term of their  election.  For fiscal year 1999,  the  agreements for
Messrs. Francisco,  August and Gauvin provided quarterly payments of $1,000 each
as Directors  fees and payments of $500 each for attendance at Board of Director
meetings. Beginning September 1, 1999, Messrs. Francisco, August and Gauvin will
receive $2,000 each per quarter as Directors fees and $1,000 each for each Board
meeting attended.  The agreement for Dr. August also provides payments of $2,500
per quarter for  services  rendered to the Company as  Scientific  Adviser.  The
Company also reimburses  Company related travel expenses  incurred by any of the
directors.


                                       20
<PAGE>


Employment Contracts
--------------------

Dr. Landon has an employment agreement with the Company,  extending through July
13, 2002. Pursuant to this agreement, Dr. Landon's base compensation is $275,000
per year. The agreement provides for various additional  incentive  compensation
dependent  upon the results of the  Company's  operations  each year through the
term of employment.


COMPENSATION PURSUANT TO PLANS

Stock Option Plan - The Company  adopted the 1998 Stock Option Plan (the "Plan")
in August  1997 which  permits  the  granting  of options  to all  employees  to
purchase up to an aggregate of ten percent of the  outstanding  shares of Common
Stock. The Plan is designed to qualify as an "incentive stock option plan" under
Section 422 of the Internal  Revenue Code, but also permits the Company to grant
nonqualified  options to persons,  such as  consultants  and outside  directors.
Under the Plan,  options to purchase  shares of Common  Stock are granted at not
less than 100% of the fair  market  value of the  underlying  shares on the date
granted.  The Plan is  administered  by a committee  of the Board of  Directors,
which has the authority to select optionees,  evaluate suggestions  presented by
the  Company  in order to  determine  the number of options to be granted to the
selected optionees,  designate the number of shares to be covered by each option
and, subject to certain restrictions, specify other terms of the options. During
fiscal year 1999, the committee was comprised of Messrs. Gauvin and Francisco.

On February  25,  1999,  the Company  filed a Form S-8 with the  Securities  and
Exchange  Commission to register 100,000 shares of common stock, par value $.01,
to cover  previously  issued options granted under the Diagnon  Corporation 1988
Stock Option Plan and the Diagnon  Corporation 1998 Stock Option Plan as well as
future options to be offered pursuant to the Plans.


As of May 31, 1999,  the following  options to the officers and  directors  were
outstanding:
<TABLE>
<CAPTION>
                                                                             Percentage   Option       Date
           Name                        Service                Shares          of Total    Price       Granted
           ----                        -------                ------          --------    -----       -------
<S>                                                            <C>                 <C>    <C>         <C>  <C>
John C. Landon                         CEO, President,         1,667               2.3%   $2.26875    7/29/96
                                       Director,              23,500              31.8%   $2.8875     2/24/99
                                         Chairman
Michael P. O'Flaherty                  Chief Operating         3,334               4.5%   $1.50       10/26/89
                                         Officer,              2,500               3.4%   $ .48       2/8/90
                                         Secretary               834               1.1%   $1.80       8/14/92
                                                               1,667               2.3%   $3.375      6/5/95
                                                               1,667               2.3%   $2.52       5/30/97
                                                               7,500              10.1%   $1.5625     12/31/98

Richard Bradbury                       Vice President,           834               1.1%   $ .48       2/8/90
                                         BIOQUAL                 334                .4%   $1.80       8/14/92
                                                                 667                .9%   $3.375      6/5/95
                                                                 500                .7%   $2.52       5/30/97
Leanne DeNenno                         Vice President,           834               1.1%   $ .48       2/8/90
                                         BIOQUAL                 334                .4%   $1.80       8/14/92
                                                                 667                .9%   $3.375      6/5/95
                                                                 500                .7%   $2.52       5/30/97
Jerry Reel                             Vice President,           500                .7%   $1.80       8/14/92
                                         BIOQUAL                 667                .9%   $3.375      6/5/95
                                                                 667                .9%   $2.52       5/30/97


                                       21
<PAGE>

David A. Newcomer                      Chief Financial           667                .9%   $ .48       2/8/90
                                         Officer                 334                .4%   $1.80       8/14/92
                                                                 667                .9%   $3.375      6/5/95
                                                               1,000               1.4%   $2.52       5/30/97
Charles C. Francisco                   Director                1,667               2.3%   $ .54       8/14/92
                                                               1,667               2.3%   $2.0625     7/29/96
                                                                 500                .7%   $2.625      2/24/99
Charles F. Gauvin                      Director                1,667               2.3%   $1.80       8/14/92
                                                               1,667               2.3%   $2.0625     7/29/96
                                                                 500                .7%   $2.625      2/24/99
J. Thomas August                       Director                1,667               2.3%   $2.0625     7/29/96
                                                                 500                .7%   $2.8875     2/24/99
All officers and                                              61,676              83.7%   $ .48 to    10/26/89 to
directors as a group                                                                      $3.375      2/24/99
(9 persons)
</TABLE>


A total of 73,684 options were granted and  outstanding at May 31, 1999. On July
16, 1998,  options for 167 shares were exercised by a former employee.  No other
options have been exercised to date, however all options are exercisable. Of the
options  granted  and  outstanding,  34,683 are from the 1988 Stock  Option Plan
which was  terminated  in accordance  with its terms and  conditions on June 20,
1998 but allows the exercise of  outstanding  options in  accordance  with their
terms.  There are  33,000  options  granted  under the 1998  stock  option  plan
(described  herein) which was established for a ten year period beginning August
15, 1997.  The 1998 stock option plan is authorized to grant options to purchase
up to 83,333  shares of common stock  (89,950 at May 31,  1998).  The  remaining
6,001 options were granted outside the plan.

The options  granted from the 1988 Plan are effective for a ten year period from
the date of grant,  with the  exception  of the options  for 23,500  shares that
expires  February 24, 2004,  and 1,667 shares that expires July 29, 2001 granted
to John C.  Landon,  and the options for 500 shares that  expires  February  24,
2004, and 1,667 shares that expires July 29, 2001 granted to J. Thomas August.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security ownership of certain beneficial owners

The following table sets forth  information as of July 30, 1999, with respect to
the stock ownership of all holders of 5% or more of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address                                Number of Shares                    Percentage (1)
----------------                                ----------------                    --------------
<S>                                              <C>                                      <C>

Dr. John C. Landon
8213 Raymond Lane
Potomac, MD  20854                                167,798 (2),(3)                        18.69

S. David Leibowitt
2295 South Ocean Blvd.
Palm Beach, FL  33480                              98,973 (4)                            11.34

Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD  21210                              179,006 (5)                            20.46

David H. Bishop
100 W. 57th Street
New York, New York  10019                          60,509 (6)                             6.93
</TABLE>

           (1)   Assumes  the  exercise  by such  person  or  persons  of the
                 currently
                                         22
<PAGE>

                 exercisable  options  and does not give effect to
                 any shares  issuable  upon  exercise by any other  person or
                 persons of options.

           (2)   Includes 6,888 shares in the names of members of Dr. Landon's
                 family.

           (3)   Assumes the exercise of currently exercisable options to
                 purchase 25,167 shares.

           (4)   Includes 10,833 shares in the name of S. David Leibowitt's
                 spouse.

           (5)   Assumes the exercise of currently exercisable options to
                 purchase 2,167 shares.

           (6)   Includes 1,506 shares in the name of David H. Bishop's spouse.

Security ownership of management
--------------------------------

The following table sets forth  information as of July 30, 1999, with respect to
the  ownership  of the  Company's  Common  Stock  of all:  directors,  executive
officers  included in the Summary  Compensation  Table on page 19, and directors
and officers as a group.


Name and Address    Number of Shares            Percentage (1)
----------------    ----------------            --------------

Dr. John C. Landon
8213 Raymond Lane
Potomac, MD  20854    167,798 (2),(3)              18.69

Charles C. Francisco
96 Old Littleton Road
Harvard, MA  01451      3,834 (4)                    .44

Dr. J. Thomas August
905 Poplar Hill Road
Baltimore, MD  21210  179,006 (5)                  20.46

Charles F. Gauvin
97-Cobbs Bridge Road
New Gloucester, ME
04260                   3,834 (4)                    .44

Michael P. O'Flaherty
1213 Bradfield Drive
Leesburg, VA  22075    18,218 (6)                   2.05

Dr. Jerry R. Reel
302 Watkins Pond Blvd.
Rockville, MD  20850    1,884 (7)                    .22

Dr. Richard P. Bradbury
16708 Briardale Road
Rockville, MD  20855    2,385 (8)                    .27

David A. Newcomer
9 Eternity Court
Germantown, MD  20874   2,718 (9)                    .31


                                       23
<PAGE>

All executive officers
and directors (8, of
whom all beneficially
own shares) as a group             379,677 (10)                           40.74

    (1)    Assumes  the  exercise  by such  person or  persons of the
           currently  exercisable  options  owned  by him or them and
           does not give effect to any shares  issuable upon exercise
           by any other person or persons of options.

    (2)    Includes 6,888 shares in the names of members of Dr. Landon's family.

    (3)    Assumes the exercise of currently exercisable options to purchase
           25,167 shares.

    (4)    Assumes the exercise of currently exercisable options to purchase
           3,834 shares.

    (5)    Assumes the  exercise of  currently  exercisable  options to purchase
           2,167 shares.

    (6)    Assumes the  exercise of  currently  exercisable  options to purchase
           17,502 shares.

    (7)    Assumes the  exercise of  currently  exercisable  options to purchase
           1,834 shares

    (8)    Assumes the  exercise of  currently  exercisable  options to purchase
           2,335 shares.

    (9)    Assumes the  exercise of  currently  exercisable  options to purchase
           2,668 shares.

    (10)   See Notes (2) through (9) above.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


On June 1, 1988 the Company and Dr.  Landon agreed to  consolidate  the previous
loan facilities available to Dr. Landon into a single loan of $100,000. The loan
had a five year term with repayment of principal  deferred for three years.  The
loan bore interest at the six month  certificate  of deposit rate paid by Signet
Bank,  Maryland and the rate was adjusted  quarterly.  On September 29, 1989 the
Company  agreed to increase the loan to $125,000.  On  September  21, 1990,  the
Company  agreed to  increase  the loan to  $150,000.  Pursuant  to Dr.  Landon's
previous employment agreement, the loan was to be repaid in five installments of
$30,000  plus  interest  within six weeks after the end of each of the next five
fiscal years beginning with fiscal year 1992.


On July 1, 1994,  Dr.  Landon made a payment of $2,745 on accrued  interest.  On
June 6, 1994, the Company agreed to defer Dr.  Landon's third $30,000  repayment
and make the payment due as two  $15,000  installments  paid with the fourth and
fifth  $30,000  repayments  respectively.  On October 11,  1995,  the  Company's
shareholders  affirmatively  voted to approve the purchase of Company stock from
Dr.  Landon at market value to fund the repayment by Dr. Landon of the remainder
of the Company  loan.  On October 16, 1996 the Board of Directors  affirmatively
voted to  extend  the due date of the  loan,  maintaining  all  other  terms and
conditions, until October 31, 1998.

On October 28, 1998, the Compensation Committee of the Board of Directors

                                       24
<PAGE>

agreed to extend the  repayment  period of the Company  loan to Dr.  Landon from
October 31, 1998 to April 30, 2000. In accordance with the  shareholders'  prior
approval of the  Company's  plan to purchase  shares of stock from Dr. Landon at
market value, the Company is purchasing,  on a quarterly basis for six quarters,
9,000  shares of  Company  stock  from Dr.  Landon at market  value.  Any unpaid
principal  balance and accrued  interest  will be paid in cash at the end of the
sixth  quarter.  As of July 23,  1999,  Dr.  Landon  has made  three  repayments
totaling  $57,094.  The largest amount owed by Dr. Landon during the fiscal year
ended May 31,  1999 in respect to his loan  facilities  was  $90,000,  excluding
accrued interest amounting to $20,453.  There was no addition to the loan during
this fiscal year.

ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K


    (a)    See Table of Contents to Financial Statements, on page 31.


    (b)    The Registrant  filed no reports on FORM 8-K during the final quarter
           of its fiscal year ended May 31, 1999.

    (c)    Exhibits   filed   (Exhibits   incorporated   by   reference   listed
           separately.)

           (21)        List of Subsidiaries

           Exhibits  incorporated  by  reference  to the  Company's
           Registration Statement No.2-83803.

           (3)         By-laws.

           (4)         Stock certificate  representing shares of
                       Common Stock.

           Exhibits incorporated by reference to the Company's FORM
           10-K for the fiscal year ended May 31, 1986.

           (10)   (a)  Agreement of Sale dated February 28, 1986 between Meloy
                       Laboratories, Inc. and SEMA, Inc.

                  (b)  Stock Purchase Agreement dated May 30, 1986 between
                       BIOQUAL, Inc. and Diagnon Corporation.

           Exhibits incorporated by reference to the Company's FORM
           10-K for the fiscal year ended May 31, 1989.

           (10)   (a)  The Company's 1988 Stock Option Plan, adopted
                       November 17, 1988.

           Exhibits incorporated by reference to the Company's FORM
           10-K for the fiscal year ended May 31, 1990.

           (10)           Government Contracts.

                    1.   Title:          Facility for Animal Models Utilized
                                           for Viral Hepatitis Research
                         Institute:      National Institute of Allergy
                                           and Infectious Diseases
                         Dates Funded:   12/28/89 - 12/27/94

                    2.   Title:          Care and Housing of AIDS Research
                                           Animals

                                       25
<PAGE>

                     Institute:      National Institute of Allergy and
                                       Infectious Diseases
                     Dates Funded:   1/1/90 - 1/18/95

                3.   Title:          Facility for Nonhuman Primates Utilized
                                       in Infectious Disease Research
                     Institute:      National Institute of Allergy
                                       and Infectious Diseases
                     Dates Funded:   1/1/90 - 12/30/94


                4.   Title:          Mouse Breeding Facility
                     Institute:      National Institutes of Allergy
                                       and Infectious Diseases
                     Dates Funded:   1/1/90 - 5/31/95

                Exhibits  incorporated  by reference to the Company's FORM 10-K
                for the fiscal year ended May 31, 1991.

               (10)     Government Contracts.

                 l.   Title:         SIV Rhesus Macaque Model for Pediatric AIDS
                      Institute:     National Institute of Mental Health
                      Dates Funded:  11/7/90 - 6/30/95

                 2.   Title:         Transplacental Carcinogenesis and
                                     Tumor Promotion in Old World Monkeys
                      Institute:     National Cancer Institute
                      Dates Funded:  12/19/90 - 12/18/95

                 3.   Title:         Biological Testing Facility
                      Institute:     National Institute of Child Health and
                                       Human Development
                      Dates Funded:  6/1/91 - 5/31/96

                    Exhibits incorporated by reference to the Company's FORM
                    10-K for the fiscal year ended May 31, 1992.

                    (10) (a) Leases.

                           1. Medical Center Drive Facility
                           2. Research Boulevard Facility

                          (b) Employment Agreement dated January 23, 1991
                              between John C. Landon and Diagnon Corporation.

                    Exhibits incorporated by reference to the Company's FORM
                    10-KSB for the fiscal year ended May 31, 1994.

               (10)     Government Contracts.

                 1.   Title:         Facility for Preparing and Housing Virus
                                     Infected Mice, Genetically Manipulated
                                     Mice, and Chimeric Mice.
                      Institute:     National Cancer Institute
                      Dates Funded:  10/1/93 - 9/30/97

                 2.   Title:         Maintenance of an Animal Holding and
                                     Breeding Facility and Provision of

                                       26
<PAGE>
                                    Attendant Research Services.
                     Institute:     National Cancer Institute
                     Dates Funded:  11/1/93 - 10/31/97

                3.   Title:         Provide Animal Housing / Maintenance /
                                    Bleeds / Immunizations as Specified Herein.

                     Institute:     National Institute of Diabetes and Digestive
                                    and Kidney Diseases
                     Dates Funded:  2/21/92 - 2/20/97

                4.   Title:         Development of Transgenic Mouse Models for
                                    HIV Drug Testing
                     Institute:     National Institute of Dental Research
                     Dates Funded:  6/28/94 - 6/27/97

         Exhibits incorporated by reference to the Company's FORM
         10-KSB for the fiscal  year  ended May 31,  1995  (filed
         with the  Company's  FORM 10-QSB for the  quarter  ended
         August 31, 1994).

         (10)  (a)    Option and Pre-Incorporation Agreement
                      dated March 25, 1994 between Johns Hopkins
                      University, Diagnon Corporation, and
                      Slusser Associates, Inc.

               (b)    First Amendment to Option and
                      Pre-Incorporation Agreement dated June 8,
                      1994.

               (c)    Second Amendment to Option and
                      Pre-Incorporation Agreement dated June 29,
                      1994.

               (d)    Service Agreement dated July 1, 1994
                      between Enhanced Therapeutics, Inc. and
                      Diagnon Corporation.

               (e)    Stockholders' Agreement of Enhanced
                      Therapeutics, Inc. dated July 1, 1994.

         Exhibits incorporated by reference to the Company's FORM
         10-KSB for the fiscal  year  ended May 31,  1995  (filed
         with the  Company's  FORM 10-QSB for the  quarter  ended
         February 28, 1995).

         (10)  (a)    Licensing and Manufacturing Agreement dated
                      January 12, 1995 between ZooQuest
                      Technologies Ltd., Inc., Equilab
                      Associates, Inc., and Diagnon Corporation.

               (b)    Government Contracts.

          1.       Title:          Care and Housing of Research Animals
                                   for  Hepatitis  Studies.
                   Institute:      National Institute of Allergy and
                                   Infectious Diseases
                   Dates Funded:   12/28/94 - 12/27/99

          2.       Title:          Facility for Non-Human Primates
                                   Utilized in Infectious Disease
                                   Research.
                   Institute:      National Institute of Allergy and
                                   Infectious Diseases
                   Dates Funded:   12/31/94 - 12/30/99

                                       27
<PAGE>

                 3.       Title:          Care and Housing of SIV Infected
                                          Research Animals.
                          Institute:      National Institute of Allergy and
                                          Infectious Diseases
                          Dates Funded:   1/19/95 - 1/18/00


                 4.       Title:          Development of New Methods and
                                          Strategies for Diagnosis, Treatment,
                                          and Prevention of Invasive Fungal
                                          Infection in Patients with Cancer and
                                          HIV Infection.
                          Institute:      National Cancer Institute
                          Dates Funded:   10/1/94 - 9/30/99

                 5.       Title:          Studies Using Primate Models for AIDS
                                          Vaccine Research.
                          Institute:      National Cancer Institute
                          Dates Funded:   11/30/94 - 11/29/98

                 Exhibits incorporated by reference to the Company's FORM
                 10-KSB for the fiscal year ended May 31, 1996.

                 (10)           Government Contracts.

                           Title:         Biological Testing Facility.
                           Institute:     National Institute of Child Health
                                          and Human Development
                           Dates Funded:  7/1/96 - 6/30/01

                 Exhibits incorporated by reference to the Company's FORM
                 10-KSB for the fiscal  year  ended May 31,  1996  (filed
                 with the Company's  FORM 10-QSB during the quarter ended
                 November 30, 1995).

                (10)       Government Contracts.

                 1.       Title:          MAO/Evaluation of AIDS Vaccines in
                                          Non-Human Primates.
                          Institute:      National  Institute of Allergy and
                                          Infectious Diseases
                          Dates Funded:    9/30/95 - 11/15/97


                 2.       Title:          Mechanisms of Chemical Carcinogenesis
                                          in Old World Monkeys.
                          Institute:      National Cancer Institute
                          Dates Funded:   12/19/95 - 12/18/00

                 Exhibits incorporated by reference to the Company's FORM
                 10-KSB for the fiscal  year  ended May 31,  1997  (filed
                 with the Company's  FORM 10-QSB during the quarter ended
                 August 31, 1996).

                 (10)       Agreement of Sale by and between ZooQuest
                            Technologies,

                                       28
<PAGE>

                                   LTD. and Diagnon Corporation.

                        Exhibits incorporated by reference to the Company's FORM
                        10-KSB for the fiscal year ended May 31, 1996.

                        (10)(a)    Leases.

                                   1.  Amendment to Lease Agreement-
                                       Medical Center Drive Facility


                                   2.  Second Amendment to Lease Agreement -
                                       Research Boulevard Facility

                            (b)    Employment Agreement dated July 14, 1997 by
                                   and between John C. Landon and Diagnon
                                   Corporation.

                        Exhibits incorporated by reference to the Company's FORM
                        10-KSB for the fiscal  year  ended May 31,  1998  (filed
                        with the  Company's  FORM 10-QSB for the  quarter  ended
                        August 31, 1997.

                        (10)       Government Contracts.

                 1.       Title:          Facility for Preparing  and Housing
                                          Virus Infected Mice, Genetically
                                          Manipulated Mice, and Chimeric Mice.
                          Institute:      National Cancer Institute
                          Dates Funded:   10/1/97 - 9/30/01


                        Exhibits incorporated by reference to the Company's
                        Registration Statement No. 1-13527 (filed on October 22,
                        1997.

                        (3) (1)    Second Amended and Restated Certificate of
                                   Incorporation dated October 22, 1997.

                            (2)    By-laws.

                            (3)    Form of Common Stock Certificate.

                            (4)    Restated 1988 Stock Option Plan.


                        Exhibits incorporated by reference to the Company's FORM
                        10-KSB for the fiscal  year  ended May 31,  1998  (filed
                        with the  Company's  FORM 10-QSB for the  quarter  ended
                        November 30, 1997.

                        (10)(a)   Government Contracts.

                 1.       Title:          Maintenance of an Animal Holding and
                                          Breeding Facility and Provision of
                                          Attendant Research Services.
                          Institute:      National Cancer institute
                          Dates Funded:   11/1/97 - 10/31/01

                            (b)   The Company's 1998 Stock Option Plan, adopted
                                  October 22, 1997.

                                       29
<PAGE>

                                   SIGNATURES
                                   ----------


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned thereunto duly authorized on August 25, 1999.


                                 DIAGNON CORPORATION



                                 /s/ John C. Landon
                                 -----------------------------
                                 BY:  John C. Landon
                                      Chairman of the Board
                                      President and Director

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 in
the capacities and on the dates indicated.


Signature                          Title                              Date
---------                          -----                              ----
                                   Chairman of the
                                   Board, President and
                                   Director (Chief Executive
/s/ John C. Landon                 Officer)                           8/25/99
--------------------------
John C. Landon, Ph.D.


/s/ J. Thomas August               Director                           8/25/99
--------------------------
J. Thomas August M.D.


/s/ Charles C. Francisco           Director                           8/25/99
--------------------------
Charles C. Francisco


/s/ Charles F. Gauvin              Director                           8/25/99
--------------------------
Charles F. Gauvin


/s/ Michael P. O'Flaherty          Chief Operating Officer
--------------------------         and Secretary                      8/25/99
Michael P. O'Flaherty


/s/ David A. Newcomer              Chief Financial Officer            8/25/99
--------------------------
David A. Newcomer

                                       30
<PAGE>

                      DIAGNON CORPORATION AND SUBSIDIARIES
                      ------------------------------------
                    TABLE OF CONTENTS TO FINANCIAL STATEMENTS
                    -----------------------------------------



Independent Auditors' Report.....................................  32


Financial Statements:

     Consolidated Balance Sheets, May 31, 1999 and 1998..........  33

     Consolidated Statements of Operations for each of the
     years in the three year period ended May 31, 1999...........  34

     Consolidated Statements of Stockholders' Equity for each
     of the years in the three year period ended May 31, 1999 ...  35

     Consolidated Statements of Cash Flows for each of the years
     in the three year period ended May 31, 1999.................  36

     Notes to Financial Statements...............................  37


All financial statement schedules are omitted because they are not applicable or
required.

                                       31
<PAGE>


Deloitte & Touche LLP
2 Hopkins Plaza
Baltimore, Maryland 21201-2983
Telephone: (410) 576-6700
Facsimile: (410) 837-0510
ITT Telex: 4995614



INDEPENDENT AUDITORS' REPORT


Diagnon Corporation:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Diagnon
Corporation  and  Subsidiaries  as of May 31,  1999 and  1998,  and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each  of  the  years  in the  three  year  period  ended  May  31,  1999.  These
consolidated  financial  statements are the  responsibility of the Corporation's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial   position  of  Diagnon   Corporation  and
Subsidiaries  at May 31, 1999 and 1998 and the results of their  operations  and
their cash flows for each of the years in the three  year  period  ended May 31,
1999 in conformity with generally accepted accounting principles.


/s/  Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
July 22, 1999


                                       32
<PAGE>
<TABLE>
<CAPTION>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, MAY 31, 1999 AND 1998
ASSETS                                                                 1999                       1998
------                                                                 ----                       ----
<S>                                                          <C>                          <C>
CURRENT ASSETS:
Cash and cash equivalents                                    $       68,768               $       65,730
Accounts receivable:
  Trade                                                             966,354                      903,343
  Unbilled - current                                                262,774                      301,843
  Other                                                              26,867                       29,983
Prepaid expenses                                                     91,522                       54,889
Inventories                                                         287,596                       45,107
Loans to Officers - current                                          32,906
Deferred income taxes - current                                      77,300                       43,700
                                                             --------------               --------------
Total current assets                                              1,814,087                    1,444,595
                                                             --------------               --------------
LOANS TO OFFICERS - NONCURRENT                                                                    90,000
                                                             --------------               --------------
FIXED ASSETS:
Leasehold improvements                                              832,264                      749,155
Furniture, fixtures and equipment                                 3,289,879                    3,071,181
                                                             --------------               --------------
Total                                                             4,122,143                    3,820,336
Less accumulated depreciation and amortization                    2,649,058                    2,327,947
                                                             --------------               --------------
Fixed assets, net                                                 1,473,085                    1,492,389
                                                             --------------               --------------
DEFERRED INCOME TAXES - NONCURRENT                                  600,400                      661,800
UNBILLED ACCOUNTS RECEIVABLE - NONCURRENT                           493,512                      353,711
OTHER NONCURRENT ASSETS                                             242,650                      234,375
                                                             --------------               --------------
TOTAL                                                        $    4,623,734               $    4,276,870
                                                             ==============               ==============
LIABILITIES
CURRENT LIABILITIES:
Borrowings under line of credit                              $      275,282               $      212,546
Current maturities of long-term debt                                 66,093                      140,245
Accounts payable                                                    215,956                      234,425
Accrued compensation and related costs                              474,597                      390,099
Accrued income taxes                                                 24,281                       12,909
Other accrued liabilities                                            15,178                        6,082
                                                             --------------               --------------
Total current liabilities                                         1,071,387                      996,306
LONG-TERM DEBT                                                       56,211                      122,303
                                                             --------------               --------------
Total liabilities                                                 1,127,598                    1,118,609
                                                             --------------               --------------
STOCKHOLDERS' EQUITY
Convertible preferred stock - par value of
$1.00 per share:  500,000 shares
authorized; no shares issued and outstanding
Common stock - par value of $.01 per share;
25,000,000 shares authorized; 1,600,408
shares  issued; May 31, 1999, 872,672
shares, May 31, 1998, 899,505                                        16,004                       16,004
shares outstanding
Additional paid-in capital                                        7,475,035                    7,475,035
Accumulated deficit                                              (3,310,022)                  (3,704,910)
                                                             --------------               --------------
Total                                                             4,181,017                    3,786,129
Less - treasury stock May 31, 1999, 727,736
shares, May 31, 1998, 700,903 shares, at
cost                                                               (684,881)                    (627,868)
                                                             --------------               --------------
Total stockholders' equity                                        3,496,136                    3,158,261
                                                             --------------               --------------
TOTAL                                                        $    4,623,734               $    4,276,870
                                                             ==============               ==============
</TABLE>

See notes to consolidated financial statements.

                                       33
<PAGE>
<TABLE>
<CAPTION>
DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF
THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999

                                                                  1999                     1998                    1997
                                                                  ----                     ----                    ----
<S>                                                           <C>                       <C>                     <C>
REVENUES AND SALES:
  Contract revenues                                           $11,017,981               $9,848,009              $8,919,294
  Product sales                                                    66,683                   76,377                  19,916
                                                              -----------               ----------              ----------
  Total Revenues and Sales                                     11,084,664                9,924,386               8,939,210
                                                              -----------               ----------              ----------

OPERATING EXPENSES:
  Contract                                                      8,354,057                7,709,687               6,886,440
  Cost of goods sold                                               55,238                  108,984                  18,941
  Research and development                                        203,167                  144,123                 349,199
  General and administrative                                    1,943,074                1,886,038               1,610,012
                                                              -----------               ----------              ----------

  Total Operating Expenses                                     10,555,536                9,848,832               8,864,592
                                                              -----------               ----------              ----------

OPERATING INCOME                                                  529,128                   75,554                  74,618

INTEREST INCOME                                                     6,578                    9,708                  10,157
INTEREST EXPENSE                                                  (53,018)                 (57,239)                (49,320)
                                                              -----------               ----------              ----------

INCOME BEFORE INCOME TAX                                          482,688                   28,023                  35,455

PROVISION FOR INCOME TAX                                          (87,800)                (177,400)                (30,900)
                                                              -----------               ----------              ----------

NET INCOME (LOSS)                                             $   394,888               $ (149,377)             $    4,555
                                                              ===========               ==========              ==========

BASIC EARNINGS (LOSS) PER SHARE                               $      0.44               $    (0.17)             $     0.01
                                                              ===========               ==========              ==========
DILUTED EARNINGS (LOSS) PER SHARE                             $      0.44               $    (0.17)             $     0.00
                                                              ===========               ==========              ==========

WEIGHTED AVERAGE NUMBER OF
  SHARES OUTSTANDING FOR BASIC
   EARNINGS PER SHARE                                             890,626                  899,584                 899,707
EFFECT OF DILUTIVE SECURITIES -
  OPTIONS                                                           8,818                                           12,404
                                                              -----------                ----------              ----------

WEIGHTED AVERAGE NUMBER OF
  SHARES OUTSTANDING FOR DILUTIVE
   EARNINGS PER SHARE                                              899,444                 899,584                 912,111
                                                              ============              ==========              ==========
</TABLE>

See notes to consolidated financial statements.

                                       34
<PAGE>

DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
                                    COMMON STOCK                                                 TREASURY STOCK
                                    ------------                                                 ---------------
                               NUMBER                      ADDITIONAL
                                 OF               PAR       PAID-IN          ACCUMULATED       NUMBER OF         AT
                               SHARES            VALUE      CAPITAL           DEFICIT           SHARES          COST     TOTAL
                               ------            -----      -------           -------           ------          ----     -----
<S>           <C>            <C>              <C>         <C>               <C>               <C>           <C>         <C>
BALANCE, JUNE 1, 1996        9,602,452        $ 96,024    $7,395,015        $(3,560,088)      (4,204,208)   $(627,357)  $3,303,594


NET INCOME                                                                        4,555                                      4,555
                            ------------------------------------------------------------------------------------------------------

BALANCE, MAY 31, 1997        9,602,452          96,024     7,395,015         (3,555,533)      (4,204,208)    (627,357)  $3,308,149
SIX TO ONE REVERSE
  STOCK SPLIT               (8,002,044)        (80,020)       80,020                           3,503,507
REPURCHASE OF
  FRACTIONAL SHARES                                                                                 (202)        (511)        (511)
NET LOSS                                                                       (149,377)                                  (149,377)
                            ------------------------------------------------------------------------------------------------------

BALANCE, MAY 31, 1998        1,600,408          16,004     7,475,035         (3,704,910)        (700,903)    (627,868)  $3,158,261
STOCK RECEIVED FOR
  OFFICER LOAN
   REPAYMENT                                                                                     (27,000)     (57,094)     (57,094)

EXERCISE OF STOCK
  OPTIONS                                                                                            167           81           81
NET INCOME                                                                      394,888                                    394,888
                            ------------------------------------------------------------------------------------------------------

BALANCE, MAY 31, 1999        1,600,408        $ 16,004    $7,475,035        $(3,310,022)        (727,736)   $(684,881)  $3,496,136
                            ==========        ========    ==========        ===========       ==========    =========   ==========
</TABLE>


See notes to consolidated financial statements.

                                       35
<PAGE>

DIAGNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF
THE YEARS IN THE THREE YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
                                                                                    1999               1998             1997
                                                                                    ----               -----            ----
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Income (Loss)                                                               $  394,888         $(149,377)       $    4,555
                                                                                 ----------         ---------        ----------
<S>                                                                                 <C>               <C>               <C>
 Adjustments  to reconcile  net income (loss) to net
  cash provided by (used for)operating activities:
    Depreciation and amortization                                                   321,111           293,728           261,218
    Deferred income taxes                                                            27,800           141,900            (1,900)
    (Increase) decrease in accounts receivable                                     (160,627)          305,333          (313,945)
    (Increase) decrease in prepaid expenses                                         (36,633)           21,555            (5,012)
    (Increase) decrease in inventories                                             (242,489)             (146)            7,794
    Increase in other assets                                                         (8,275)          (29,826)         (102,456)
    Increase in accounts payable and accrued expenses                                75,125            74,242            34,797
    Increase in income taxes payable                                                 11,372             7,366             1,983
                                                                                 ----------         ---------        ----------
      Total Adjustments                                                             (12,616)          814,152          (117,521)
                                                                                 ----------         ---------        ----------
 NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                               382,272           664,775          (112,966)
                                                                                 ----------         ---------        ----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
 Net capital expenditures                                                          (301,807)         (201,761)         (465,141)
                                                                                 ----------         ---------        ----------
 NET CASH USED FOR INVESTING ACTIVITIES                                            (301,807)         (201,761)         (465,141)
                                                                                 ----------         ---------        ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net proceeds (payments) under line-of-credit agreement                              62,736          (323,574)          536,120
 Principal payments under capital lease obligations                                (140,244)         (135,837)         (113,918)
 Net proceeds from exercise of stock options                                             81
 Net payments for fractional shares as a result of
   6 to 1 share  reverse stock split                                                                     (511)
                                                                                 ----------         ---------        ----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES                                (77,427)         (459,922)          422,202
                                                                                 ----------         ---------        ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  3,038             3,092          (155,905)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                       65,730            62,638           218,543
                                                                                 ----------         ---------        ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                         $   68,768         $  65,730        $   62,638
                                                                                 ==========         =========        ==========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 Cash paid during the year for:
  Interest                                                                        $  52,710         $  57,134        $   46,988
                                                                                  =========         =========        ==========
  Income taxes                                                                    $  48,936         $  17,900        $   25,600
                                                                                  =========         =========        ==========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:

  Long-term debt issued in connection with capital
   Leases                                                                                           $ 110,040
                                                                                                    =========
   Treasury stock received for payment
     of loans to officer                                                          $  57,094
                                                                                  =========
</TABLE>
See notes to consolidated financial statements.

                                       36
<PAGE>

DIAGNON CORPORATION AND SUBSIDIARIES
------------------------------------

NOTES TO FINANCIAL STATEMENTS
---------------------------------------------------------------------------


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation
-------------
The accompanying consolidated financial statements include the accounts of
Diagnon Corporation ("Diagnon") its wholly owned subsidiaries, BIOQUAL, Inc.
("BIOQUAL") and Enhanced Therapeutics, Inc. (collectively the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation.

Reclassifications
-----------------
Certain 1998 amounts have been reclassified to conform to the 1999 presentation.

Segment Information
-------------------
The Company's  principal  business consists of the government  contract research
operations.

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  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Fixed Assets and Depreciation
-----------------------------
Fixed  assets  are  stated  at cost.  Depreciation  is  provided  for  financial
reporting  purposes  using the  straight-line  method over the estimated  useful
lives of the assets (generally three to ten years). Tax depreciation is provided
on the straight-line method. Leasehold improvements are amortized over the lease
period or the estimated useful life of the improvements, whichever is shorter.

Inventories
-----------
Inventories  are stated at the lower of cost or market  using the  average  cost
method.

Research and Development
------------------------
All costs incurred in connection  with any research and  development  activities
are expensed as incurred.

Government contracts
--------------------
Substantially  all of the Company's revenue is from U.S.  Government  contracts.
The indirect rates used in cost-plus-fixed-fee ("CPFF") contracts are subject to
final negotiated settlements for each fiscal year.

                                       37
<PAGE>

Revenue Recognition
-------------------
Contract research revenue is generally earned based on CPFF arrangements and is
recognized as costs are incurred.


Earnings (Loss) Per Share
-------------------------
The Company adopted Statement of Financial Accounting Standard No. 128 ("SFAS
128") "Earnings Per Share" during the fiscal year ended May 31, 1998 and
restated, as required, all prior year earnings per share data.

Cash and Cash Equivalents
-------------------------
The Company considers cash equivalents to include short-term investments which
have a maturity of 90 days or less at the date of purchase.

New Accounting Standards
-------------------------
The Company adopted the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of and Enterprise and Related Information, during this fiscal year.
SFAS No. 130 requires businesses to disclose comprehensive income and its
components in the financial statements. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about the Company's operating segments. SFAS No. 130 had
no impact on its financial position. The Company has determined that it only has
one material operating segment and, in accordance with SFAS No. 131, has
described and reported the Company as such.

2.  CAPITAL STOCK


Reverse Stock Split
-------------------
On October 22, 1997, the Company's shareholders affirmatively voted to effect a
reverse split of the shares of the Common Stock in which each six shares of
Common Stock became one share of Common Stock. The Company's Common Stock shares
decreased from 9,602,452 shares issued to 1,600,408 shares issued, outstanding
shares decreased from 5,398,244 shares to 899,505 shares, while the Treasury
Stock decreased from 4,204,208 shares to 700,903 shares. Fractional shares
(202), as a result of the reverse split, were repurchased by the Company and
recorded as Treasury Stock.

Stock Options
-------------
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for the 1988 and 1998 Stock Option Plans,
accordingly, no compensation has been recognized for the plan. Had compensation
costs for the plan been determined based on fair value at the grant date under
the plan consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income/loss and
income/loss per share would not have been materially affected on a pro forma
basis for the years ended May 31, 1999, 1998 and 1997.

The Company has granted 67,683 shares of its Common Stock under its 1988 and
1998 stock option plans. The 1998 stock option plan is authorized to grant
options to purchase up to 83,333 shares of common stock. Except for certain
options granted to an officer and a director, options expire ten years from

                                       38
<PAGE>

date of grant under the plan, or upon the optionee's separation from the Company
and are granted at the average of the closing bid and ask price of the Company's
Common Stock at the date of grant. Options for 24,000 and 3,334 common shares
granted to an officer and a director for a period of five years expire in 2000
and 2004, respectively. The Company has reserved an additional 6,001 shares of
its Common Stock to cover the exercise of options granted outside its 1988 and
1998 stock option plans. The 1988 plan was terminated in accordance with its
terms and conditions on June 20, 1998.

The number of options exercisable at May 31 were 73,684 in 1999, 72,351 in 1998,
and 73,018 in 1997.

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

                                1999                           1997
                                ----                           ----

  Expected volatility           36.0%                          59.0%
  Risk-free interest rate     5.5%-6.15%                     5.5%-6.15%
  Expected term of options    5-10 years                     5-10 years
  Expected dividend yield        -0-                            -0-

Information  regarding the Company's  stock option plans for the years ended May
31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
                                                1999                      1998                           1997
                                                ----                      ----                           ----

                                                      Weighted                     Weighted                     Weighted
                                                      Average                      Average                      Average
                                                      Exercise                     Exercise                     Exercise
                                         Options       Price        Options         Price         Options        Price
                                         -------       -----        -------         -----         -------        -----
<S>                                       <C>           <C>          <C>             <C>           <C>            <C>
Outstanding at beginning of year          72,351        $2.17        73,018          $2.16         57,346        $2.11
Granted                                   34,000         2.52                                      16,172         2.34
Forfeited                                (32,500)        2.50          (667)           .81           (500)        3.375
Exercise                                    (167)         .48       _______                       _______
                                         -------

Outstanding at end of year                73,684        $2.19        72,351          $2.17         73,018        $2.16
                                         =======                    =======                       =======

Options exercisable at end of year        73,684        $2.19        72,351          $2.17         73,018        $2.16
                                         =======                    =======                       =======

Weighted average fair value of
 options granted during year             $  0.88                                                  $  1.19
</TABLE>

                                    Outstanding and Exercisable
                              ----------------------------------------
                                           Weighted           Weighted
                                           Remaining          Average
                                           Contractual        Exercise
                             Options       Life (years)       Price
                             -------       -----------        -----
Range of exercise price
 .48  to 1.80                 26,343           4.27             $1.19
1.81  to 2.625                17,839           5.99              2.37
2.626 to 3.375                29,502           4.97              2.98
                              ------

                              73,684           4.97             $2.19
                              ======


                                       39
<PAGE>

3.  LINE OF CREDIT

The Company has a line of credit of $1,000,000 with a bank to meet periodic cash
flow needs.  As of May 31, 1999,  there were $275,282 of  borrowings  under this
line of  credit.  During  fiscal  year  1999 the  maximum  amount  borrowed  was
$892,003, the average balance outstanding was $430,728, and the average interest
rate was 8.38%.  The line is guaranteed by BIOQUAL,  Inc., and bears interest at
the prime rate plus .25% and is collateralized by trade accounts receivable. The
line is subject to renewal on or before October 29, 1999.

4.  LONG-TERM DEBT

                                                1999            1998

Capitalized Lease Obligations                 $122,304       $262,548

Less Current Maturities                         66,093        140,244
                                              --------       --------

Long-Term                                     $ 56,211       $122,304
                                              ========       ========


Future  annual  minimum  payments  under the capital  leases as of May 31, 1999,
were:

        2000                                                      $ 73,774
        2001                                                        43,101
        2002                                                        16,435
                                                                  --------
                                                                   133,310
        Less:  Amount representing interest                         11,006
                                                                  --------
        Present value of minimum lease payments                   $122,304
                                                                  ========

The Company leases equipment under various capital leases which expire in fiscal
years 2000, 2001 and 2002. Property held under the capital leases at May 31,
1999 and 1998 consisted of the following:

                                                   1999                  1998
                                                   ----                  ----

        Equipment                                $589,402              $589,402
        Less accumulated amortization             209,926               150,986
                                                 --------              --------
                                                 $379,476              $438,416
                                                 ========              ========

The equipment is amortized on a straight-line basis over the estimated useful
life of the equipment. Amortization expense amounted to $94,828, $81,352 and
$54,975 in 1999, 1998 and 1997, respectively, and is included with depreciation
expense in the financial statements. The fair value of long-term debt is
estimated to approximate its carrying value at May 31, 1999 based on borrowing
rates currently available with similar terms and maturity.

5.  INCOME TAXES

Income taxes are accounted for using Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109), which requires an asset
and liability approach to financial accounting and reporting for income taxes.
Under SFAS No. 109, deferred tax assets and liabilities are provided for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred tax assets and liabilities are measured using the

                                       40
<PAGE>

enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Income tax expense is computed as the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities. The income tax expense for 1999 is lower
than the statutory rate as a result of management's assessment in the fourth
quarter that a decrease in the valuation allowance offset by other income tax
adjustments was necessary because of the current estimates of future taxable
income during the available tax loss carryforward period.

The deferred tax expense in 1998  resulted from  management's  assessment in the
fourth quarter that an increase to the valuation allowance was necessary because
of the current  estimates of future taxable income during the available tax loss
carryforward period.

If the Company is unable to  generate  sufficient  taxable  income in the future
through operating results, increases in the valuation allowance will be required
through a charge to income.  However, if the Company achieves sufficient taxable
income to utilize a greater  portion of the  deferred tax asset,  the  valuation
allowance will be reduced through a credit to income.

The components of income tax expense are as follows:

                                               1999         1998        1997
                                               ----        ----         ----
        Current tax expense                 $ 60,000     $ 35,500     $ 32,800
        Deferred tax expense (benefit)        27,800      141,900       (1,900)
                                            --------     --------     --------
                                            $ 87,800     $177,400     $ 30,900
                                            ========     ========     ========

A reconciliation  of actual income tax expense to that which would have resulted
from applying the federal statutory tax rates is as follows:

                                               1999         1998        1997
                                               ----         ----        ----
Federal taxes at statutory
  rate                                      $164,500     $  9,500     $ 12,100
State taxes at statutory rate                 39,600       23,400       21,600
Executive life insurance
  Premiums                                     3,000        3,000        2,000
Decrease (increase) in
  previously recognized tax
  loss carryforwards, net of
  other adjustments to deferred
  taxes                                     (113,000)     141,900       (1,900)
     Other, net                               (6,300)      (1,400)      (2,900)
                                            --------     --------     --------
                                            $ 87,800     $177,400     $ 30,900
                                            ========     ========     ========


The components of deferred income taxes are as follows:

                                             May 31,      May 31,      May 31,
                                              1999         1998         1997
                                              ----         ----         ----
Financial statement accruals              $   48,735   $   45,553   $   40,904
Different useful lives for
  depreciation of fixed assets
    for tax purposes                        (148,000)     (46,000)     (58,300)
Research & development costs
  deferred for tax purposes                  218,000      164,000          -0-
Tax loss carryforward                      1,268,000    1,443,000    1,598,000
Less valuation allowance                    (709,035)    (901,053)    (733,204)
                                           ---------    ---------    ---------
Total deferred  income  taxes              $ 677,700    $ 705,500    $ 847,400
                                           =========    =========    =========

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As of May 31, 1999, the Company has cumulative tax operating loss carryforwards
of approximately $3,700,000 available to reduce future federal taxable income.
The operating loss carryforwards expire in fiscal years 2000 to 2003. Management
believes that it is more likely than not that the Company will generate future
taxable income sufficient to realize a portion of the remaining tax loss
carryforward and that the valuation allowance is appropriate given the current
estimates of future taxable income.

6.  COMMITMENTS AND CONTINGENCIES

Leases

The Company is a lessee under various noncancelable operating leases, covering
the facilities in which its operations are conducted and certain equipment and
vehicles. During 1999, 1998 and 1997, the Company subleased a part of its
premises. As of May 31, 1999, there are no material sublease agreements. The
rental income earned has been offset against the Company's rental expense in the
period. The aggregate minimum annual rental commitments under these various
leases are as follows:

2000          1,578,000
2001          1,622,000
2002          1,596,000
2003             11,000

Facilities leases contain options for five-year extensions.

Rental expense was approximately $1,449,000, net of $12,000 of sublease income,
$1,346,000, net of $11,000 of sublease income, and $1,322,000, net of $11,000 of
sublease income, for the years ended May 31, 1999, 1998 and 1997, respectively.

7.       RELATED PARTIES

The following schedule presents information  regarding loans to officers for the
three year period ended May 31, 1999.



                            Balance at                              Balance
                           Beginning of                           at End of
Name of Person                Period     Additions   Repayments     Period
--------------                -------    ---------   ----------     ------
Year Ended May 31, 1999:

President                   $ 90,000     $    -0-     $ 57,074     $ 32,906

Each of the Years Ended
  May 31, 1998 and 1997:

President                     90,000          -0-          -0-       90,000

The loan to the President bears interest at the six month certificate of deposit
rate. The Company's shareholders affirmatively voted to approve the purchase of
common stock of the Company held by the President at fair market value in an
amount sufficient to fund the loan payments, plus accrued interest. On October
16, 1996, the Board of Directors affirmatively voted to extend the due date of
the loan, maintaining all other terms and conditions, until October 31, 1998.

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On October 28, 1998, the Compensation Committee of the Board of Directors agreed
to extend the repayment period of the Company loan to the President from October
31, 1998 to April 30, 2000. In accordance with the shareholder's  prior approval
of the Company's  plan to purchase  shares of stock from the President at market
value,  the Company  plans to purchase,  on a quarterly  basis for six quarters,
9,000 shares of Company  stock from the  President at market  value.  Any unpaid
principal  balance and accrued  interest  will be paid in cash at the end of the
sixth quarter.  During the 1999 fiscal year, the Company purchased shares valued
at $57,094.

The President has an employment agreement with the Company which provides a base
compensation and additional incentive compensation dependent upon annual
operations. This agreement expires on July 13, 2002.

8.       SUBSEQUENT EVENTS

On July 14, 1999, the Board of Directors unanimously approved that Diagnon merge
into itself it's wholly owned subsidiary, BIOQUAL, Inc., and assume all of the
subsidiary's assets, liabilities and obligations. Further, in connection with
the merger, the name of Diagnon will change its name to BIOQUAL. The expected
date for the merger and name change is the close of business on December 31,
1999.

Also on July 14, 1999, the Board of Directors declared a dividend of $0.02 a
share for shareholders of record on September 7, 1999, payable on September 22,
1999. This is the first dividend declared by Diagnon.

On July 9, 1999, the Company, acknowledging the contribution of its employees,
distributed fifty shares of common stock to all current employees who have been
with the company for at least one year as of May 31, 1999.

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                                    EXHIBITS







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