This paper reviews the literature on positive and negative aspects of diagnostic classification of children, or labeling. It reviews the Education for All Handicapped Children Act, which mandated that special education must be available to all children with disabilities. Definitional issues in diagnostic labeling of students with learning disabilities are presented. An examination of the advantages and disadvantages of labeling on the children themselves is followed by a discussion of the effects of labeling on teacher and peer perceptions of the labeled child. Methodological issues regarding studies of labeling effects and attempts to counter these methodological flaws are addressed. Confusion of behavior with labels is seen to be at the core of methodological problems. Experiments attempting to separate these two aspects are reviewed and the paper concludes that, although diagnostic labels may initiate expectancies, they hold little power when more salient information (i.e., behavior) is available. Diagnostic labels are seen as necessary for organization, communication, record-keeping, and statistical reporting. They are also seen as necessary to qualify the child for remedial and special educational services and help interest groups focus society's attention on problems. (Contains 29 references.) (DB)