SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 
    SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996
                                                       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 No. 1-13392

                               US DIAGNOSTIC INC.
                 (Name of Small Business Issuer in its charter)

          DELAWARE                                         11-3146389
(State or other jurisdiction                            (I.R.S. Employer
of incorporation or organization)                     Identification Number)

777 SOUTH FLAGLER DRIVE, SUITE 1201 EAST, WEST PALM BEACH, FLORIDA     33401
(Address of principal executive offices)                             (Zip Code)

Issuer's telephone number, including area code:  (561) 832-0006

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:  None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, $.01 par value

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the 12 months (or for
such shorter period that the registrant was required to file such report(s), and
(2) has been subject to the filing requirements for the past ninety (90) days.
YES X NO

Check here if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [ ]

State the issuer's revenues for its most recent fiscal year.  $102,061,282.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1997 was approximately $110,378,000 based on the last
sales price of the common stock on March 31, 1997.

As of March 15, 1997, 23,761,217 shares of common stock, $.01 par value, of the
registrant were issued and outstanding.

See Part III for incorporation by reference for information to be filed with the
Securities and Exchange Commission pursuant to General Instruction E.3. to Form
10-KSB.


                                       1
<PAGE>

                                     PART I

           ITEM 1.        BUSINESS.

           GENERAL

      US DIAGNOSTIC INC. (the "Company") is the nation's largest operator of
outpatient diagnostic imaging and related facilities ("Facilities"). The
majority of services provided by the Company involve the use of Magnetic
Resonance Imaging ("MRI"), Computed Axial Tomography ("CT"), mammography, x-ray
and ultrasound equipment. The Company also offers nuclear medicine services
utilizing Single Photon Emission Tomography ("SPECT") equipment, as well as
radiation oncology and therapy services utilizing linear accelerators and
related equipment. The type of imaging and treatment equipment employed by the
Company has grown rapidly in recent years because it allows physicians to
quickly and accurately diagnose a wide variety of diseases and injuries without
exploratory surgery or other invasive procedures, which are usually more
expensive, risky and debilitating for patients.

      During 1996 the Company acquired more imaging centers than any other
company in the nation and became the largest operator of facilities offering
such services in the United States. The Company believes that the management
systems employed in, as well as the fragmented nature of, the diagnostic testing
industry provide a continuing opportunity to grow through acquisitions. Industry
sources estimate that there are over 2,200 imaging centers currently operating
in the United States, the substantial majority of which are owned and operated
on an independent basis. The Company believes that there are and will continue
to be many attractive acquisition opportunities because imaging center operators
are finding it more difficult to compete independently as managed care becomes
more prevalent. The Company believes that managed care and other third-party
payors will increasingly prefer to contract for services on a national or
regional basis, and that the Company's development of a multi-regional network
of centers will assist it in obtaining such contracts on favorable terms.

      Since its inception in 1993, the Company has acquired 120 fixed-site
Facilities in 18 states including four radiation oncology therapy centers, and
eight mobile MRI systems. The Company believes that the mix of services provided
at its Facilities, which include anatomical and functional imaging as well as
cancer therapy, will (i) provide cross referral opportunities, and (ii) increase
the Company's ability to serve as a one-stop provider of such services to
increasingly important managed care organizations.

      The Company's growth strategy has revolved around the acquisition of
Facilities that either are, or have the potential to be the highest volume
facility in their markets and appeal to managed care payors. Upon acquisition,
the Company undertakes measures designed to improve the operating performance of
the Facility, including consolidating financial and administrative functions,
implementing new marketing programs and making upgrades and investments in new
equipment as needed. In addition, the Company is often able to renegotiate debt,
equipment leasing, radiology and supply agreements to increase cash flow and
operating efficiencies.

      The Company generally acquires Facilities from: (i) owner/operators which
may not be in compliance with regulations restricting referring physician
ownership; (ii) owner/operators seeking management expertise, access to managed
care contracts and/or other resources; and (iii) established companies which
already own several Facilities within a concentrated region. In addition, the
Company has and intends to continue to enter into joint ventures with physician
practice management ("PPM") companies, hospitals or other entities which desire
access to diagnostic imaging technologies but lack 


                                       2
<PAGE>

sufficient financial or managerial resources. To date, the Company has evaluated
only a fraction of the potential acquisition candidates in the industry and
intends to pursue additional acquisition opportunities.

      The Company was incorporated in Delaware on June 17, 1993. The Company's
executive offices are located at 777 S. Flagler Drive, West Palm Beach, Florida
33401, its telephone number is (561) 832-0006/(800) 7-USDLAB and its web site is
at WWW.USDL.COM. Unless the context otherwise requires, all references to the
"Company" include US DIAGNOSTIC INC. and its subsidiaries.

      STRATEGY

      FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

      Except for historical information contained herein, certain matters
discussed herein are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, including but not limited
to, economic, competitive, regulatory, growth strategies, available financing,
and other factors discussed elsewhere in this report and the documents filed by
the Company with the SEC. Many of these factors are beyond the Company's
control. Actual results could differ materially from the forward-looking
statements. In light of these risks and uncertainties, there can be no assurance
that the forward-looking information contained in this report will, in fact,
occur.

      During 1996, the Company achieved its objective of becoming the leading
provider of outpatient diagnostic imaging and related services in the United
States. Having achieved this objective, the Company plans to continue to
integrate the Facilities, and to strengthen its presence in existing markets and
expand its geographic base. The Company intends to implement this objective by
utilizing a multi-faceted strategy for internal and external growth as follows:

      FOCUS PRIMARILY ON DIAGNOSTIC TESTING AND RELATED FACILITIES. The Company
believes that significant consolidation opportunities exist to further build
upon its national presence. The diagnostic imaging industry remains highly
fragmented with over 2,200 outpatient centers. Despite the substantial
consolidation activity during 1996, the second and third largest chains of
outpatient centers in this segment - HealthSouth Corporation and Medical
Resources Inc. account for less than five percent of the overall market.

      ACQUIRE ADDITIONAL IMAGING CENTERS. The Company generally acquires
Facilities from: (i) owner/operators which may not be in compliance with
regulations restricting referring physician ownership; (ii) owner/operators
seeking management expertise, access to managed care contracts and/or other
resources; and (iii) established companies which already own several Facilities
within a concentrated region. In addition, the Company has and intends to
continue to enter into joint ventures with PPM companies, hospitals or other
entities which desire access to diagnostic imaging technologies but lack
sufficient financial or managerial resources. To date, the Company has evaluated
only a fraction of the potential acquisition candidates in the industry and
intends to pursue additional acquisition opportunities.

       In evaluating an acquisition candidate, the Company analyzes a number of
strategic characteristics, including the mix of services provided, the nature of
services demanded in the market versus those currently provided by the
candidate, the presence and strength of local competition, net revenues,
operating income, insurance reimbursement and historical referral and volume
patterns. The Company 


                                       3
<PAGE>

believes that there are and will continue to be many attractive acquisition
opportunities because imaging center operators are finding it more difficult to
compete independently as managed care becomes more prevalent. As the Company has
grown, it continues to seek multiple-facility acquisitions to accelerate its
growth rate. There can be no assurance that the Company will be able to acquire
additional imaging centers.

      ACHIEVE OPERATING EFFICIENCIES. The Company utilizes its management
expertise and systems to operate Facilities which previously lacked professional
management. The Company consolidates certain aspects of operations, such as
accounting, administration, billing, collections, marketing and purchasing, and
believes that it can realize significant economies of scale. By rendering
support and management functions, the Company enables the physicians providing
services at the Facilities to spend more time focusing on patient care, quality
control and marketing, thereby increasing the utilization rate of the Company's
diagnostic equipment which in turn positively impacts revenue.

      ENHANCE MANAGEMENT INFORMATION SYSTEMS. In order to assimilate and
effectively manage the Company's rapid growth, the Company has allocated several
million dollars towards the development of a state-of-the-art information
system. The Company's management is working with software products from
companies such as Microsoft Corporation, MCI Communications, IBM, Oracle, Medic,
Consort and Informix to implement a client/server-based information system over
a wide-area network. This system will be designed to enable the Company to
re-engineer and standardize the workflow process of each Facility and implement
a regional consolidation of its billing and collection operations. The new
information system will be designed to give management standardized real-time
reporting and on-line access to its Facilities nationwide.

      CONTRACT WITH MANAGED CARE PROVIDERS. The Company actively pursues
contractual arrangements with managed care organizations. The Company believes
that third-party payors will increasingly prefer to contract for service on a
national or regional basis, and that the Company's development of a network of
centers will assist it in obtaining such contracts on favorable terms. Senior
management of the Company actively markets the Company's services to
administrators of managed care organizations in regions where the Company
operates Facilities.

      UPGRADE EXISTING MEDICAL TECHNOLOGIES. The Company offers state-of-the-art
diagnostic imaging and therapeutic technologies at many of its Facilities. It
has upgraded the MRI, CT and nuclear medicine equipment at several locations
following acquisitions, resulting in improved image quality and increased
referring physician satisfaction. The Company also has begun installing new high
quality "Open MRI" equipment at certain locations to accommodate a substantial
number of patients who would otherwise forego this procedure due to obesity or
claustrophobia. In addition, the Company is adding new modalities and procedures
at most of its Facilities. Most of the new technologies are designed to enhance
the Company's revenue mix, and shorten examination times resulting in increased
capacity and profitability.

      EXPANDING SERVICE OFFERING WITH COMPLEMENTARY MEDICAL PROCEDURES. The
Company is rolling-out medical services that are complementary to its core
imaging operations. These include: (i) pain management which is performed by
anesthesiologists to reduce patients' pain and possibly avoid the need for
surgery; and (ii) bone densitometry which is a specialized x-ray procedure that
precisely quantifies bone density at the spine, femur and other skeletal sites
for diagnosis and treatment of osteoporosis.

      PROFESSIONAL MARKETING. In order to expand referral sources, the Company
provides marketing 


                                       4
<PAGE>

training and materials to Facility personnel in order to market to area
physicians and third-party payors such as managed care organizations. Most
Facilities have previously focused their marketing efforts only on physicians
and not managed care organizations. The Company utilizes a variety of marketing
techniques in the community where it does business, including meetings between
the Facility administrators or account executives and referring physicians
and/or their staff, financial and social seminars, mailings of technical case
studies and clinical articles.

      PROVIDE MANAGEMENT SERVICES TO UNAFFILIATED CENTERS. In addition to
providing management services to its own Facilities, the Company offers its
management services to independent diagnostic centers, private radiology
practices and hospital radiology practices. The Company believes that its
expertise may potentially be useful for practices that have not had the benefit
of professional management. Each client is able to contract for individual or a
full range of services, including accounting, billing, collections, debt
consolidation, management information systems, purchasing and human resources.
The Company anticipates that it will price its services using a number of
methods, including fee-for-services, percentage of revenue or savings,
capitation or on a project basis.

      PARTNERING WITH HOSPITALS AND RADIOLOGY GROUPS. Currently, the Company has
several joint ventures to provide services at hospitals with large companies
such as Columbia/HCA, Tenet Healthcare and Universal Health Services. Hospitals
are increasingly moving towards outsourcing various components of their
operations. The Company believes opportunities exist to enter into agreements
with many hospitals to manage their in-patient radiology departments.

      JOINT VENTURES WITH PPM COMPANIES. In July 1996, the Company entered into
a joint venture with PhyCor, Inc. in Jacksonville, Florida. By vertically
integrating the imaging provider and the physician's gatekeepers to obtain
exclusive managed care contracts in a given geographic area, the Company expects
to be able to maintain a predictable level of utilization that will help lower
average costs.

INDUSTRY OVERVIEW

      Imaging centers have played a vital role in the healthcare delivery system
by offering diagnostic services such as MRI, CT, X-ray and mammography in an
outpatient setting. Diagnostic imaging procedures are used to diagnose various
diseases and physical injuries through the use of MRI, CT, mammography, X-ray,
ultrasound and other technologies. The use of non-invasive diagnostic imaging
has grown rapidly in recent years because it allows physicians to quickly and
accurately diagnose a wide variety of diseases and injuries without exploratory
surgery or other invasive procedures, which are usually more expensive, risky
and debilitating for patients. While conventional X-ray continues to be the
primary imaging modality in the number of procedures performed, the use of the
more sophisticated MRI and CT procedures has increased due to their increased
diagnostic capabilities.

      The number of non-hospital-affiliated imaging centers has grown due to a
number of factors. First, the enactment of new government reimbursement programs
in 1983 put strict controls on inpatient reimbursement, which led to the
expansion of all types of freestanding outpatient services, including outpatient
surgery and imaging centers. Second, the use of MRI, CT and other equipment
became more prevalent due to quality and quantity of diagnostic information,
technological improvements and increased government and third-party
reimbursement. Although MRI was developed in the late 1970s, it was not approved
for Medicare reimbursement until 1984. Ultrasound and low-dose mammography
technology improved in the late 1980s. New technologies and procedures continue
to be developed, although some such as positron emission tomography ("PET")
scanners are relatively expensive and are not considered cost-effective for most
procedures. Third, the number of hospital and physician joint 


                                       5
<PAGE>

ventures increased in the 1980s as hospitals were eager to minimize their
financial exposure for expensive equipment and physicians were seeking
investments at a time when traditional tax shelters were being eliminated.

      Imaging centers are typically independently owned and managed. The
industry is highly fragmented, which is reflected in the fact that at December
31, 1996, there was no dominant national imaging services provider. At December
31, 1996, no entity owned more than 120 centers and the ten largest operators
owned a total of approximately 300 centers, or less than 13% of the total number
of imaging centers. Generally, independent operators have not performed well in
recent years because they have not adapted well to the managed care environment,
utilize aging equipment or have poor locations, suffer from decreased
reimbursement and have been restricted by the self-referral and anti-kickback
restrictions.

    Total spending on diagnostic imaging services in the United States is
estimated to be between $56 billion and $70 billion. While 70% of this spending
is done in hospital settings, a significant share of the market is commanded by
the nation's 2,200 outpatient testing facilities, especially in relation to the
roughly $10 billion subsector of advanced imaging services, which includes MRI
and CAT scans.

    Payment for services comes primarily from third-party payors, such as
private insurers (traditional indemnity and Blue Cross/Blue Shield plans),
managed health plans (HMOs, PPOs), government payors (Medicare, Medicaid), and
state-run worker's compensation programs. Some centers have significant
relationships with attorneys specializing in personal injury litigation.
Typically, large third-party payors, especially managed care programs and
Medicare/Medicaid, demand significant discounts from the list prices paid under
direct-bill circumstances.

IMAGING INDUSTRY BACKGROUND

    Outpatient imaging centers began to develop in significant numbers in the
1980s, concurrent with changes in Medicare reimbursement and the commercial
introduction of MRI and other advanced imaging techniques.

    When Congress reformed Medicare in 1983 - putting strict controls on
reimbursement for inpatient medical costs - many services such as diagnostic
imaging moved to outpatient settings. Imaging centers were well suited to the
concept of hospital and physician joint ventures, which were very popular in the
1980s, as hospitals tried to minimize the risk inherent in investing in
expensive medical equipment and as physician groups sought safe investment
opportunities. As new research escalated the number of clinical applications of
various testing modalities (MRI, in particular), utilization trends exhibited
strong growth, encouraging an expansion in the industry that met little
resistance in a friendly regulatory environment. Thus, between 1984 and 1991,
the number of outpatient imaging centers in operation in the U.S. increased from
roughly 700 to over 2,000.

    The industry generally suffered setbacks in 1993, as utilization levels
generally stabilized and reimbursement per test declined sharply. Utilization
rates stopped growing primarily for three key reasons: (i) the threat of
sweeping government health care reform put expensive procedures under increased
scrutiny; (ii) market forces - arriving in the form of managed care - also
discouraged providers from ordering all but absolutely necessary tests; and
(iii) under the Stark laws, Medicare no longer would provide reimbursement for
tests carried out at centers in which the referring physician had any ownership
interest. Diagnostic imaging was exempt from the original Stark anti-kickback
law (passed in 1989), but the effort to flush out any existing overutilization 
of imaging services began to form in advance of Stark II 


                                       6
<PAGE>

(passed in 1993), which updated the original legislation by including diagnostic
imaging.

    In general, the income generated by imaging centers declined sharply during
1993 and 1994. Flat utilization and declining reimbursement - principally due to
rollbacks in Medicare reimbursement and discounted fee-for-service demands from
managed care payors - struck an industry characterized by heavy fixed costs and
an excess of capacity. Sales of new MRI machines dropped in 1993 as the earnings
prospects of centers became less attractive; what new systems were sold were
principally for replacement of old equipment. Additionally, to address
overcapacity many states instituted Certificate of Need (CON) laws to limit the
number of systems like MRI. Since the early 1990s, the total installed base of
MRI systems has remained relatively flat, a trend more or less symptomatic to
all diagnostic imaging services.

    In 1996, Medicare reimbursement for MRI procedures increased approximately
1%-2% over 1995 levels - the first increase in at least four years. Even the
public HMOs, which have suffered in 1996 from declining margins, have indicated
that their corrective actions will more likely take the form of more rational
premium pricing than of further pressure on providers' fee-for-service
reimbursement levels. Thus, the Company believes that further decreases in the
average reimbursement per test will be mostly attributable to payor mix shifts
to more managed care business. However, there is also the potential for a
softening pricing environment as companies become more discerning in negotiating
managed care contracts and as the industry continues to consolidate.

                                       7
<PAGE>

ACQUISITIONS

      The following is a list of the Company's completed acquisitions .

<TABLE>
<CAPTION>
DATE                       NAME                         LOCATION                 BUSINESS                 OWNERSHIP %
----                       ----                         --------                 --------                 -----------
<S>        <C>                                       <C>                  <C>                                 <C>
10/93      Havertown Medical Laboratory(1)           Havertown, PA        Clinical Blood Lab                  100%
6/94       Computerized Medical Imaging Center       Sherman Oaks, CA     Multi-Modality Imaging             56.9
8/94       Columbus Diagnostic Center                Columbus, GA         Multi-Modality Imaging              100
11/94      Alpha Laboratory(1)                       Havertown, PA        Clinical Blood Lab                  100
12/94      Morton Clinical Laboratory(1)             Morton, PA           Clinical Blood Lab                  100
1/95       Santa Fe Imaging Center                   Santa Fe, NM         Multi-Modality Imaging              100
2/95       Laborde Diagnostic Center                 Lafayette, LA        Multi-Modality Imaging               80
               Southern Diagnostic Center            Lafayette, LA        Multi-Modality Imaging               80
2/95       Community Radiology of Virginia           Bluefield, VA        Multi-Modality Imaging              100
                                                     Princeton, WV        Multi-Modality Imaging              100
3/95       Arrow Medical Lab (1)                     Philadelphia, PA     Clinical Blood Lab                  100
7/95       Salisbury Imaging Center                  Jacksonville, FL     Multi-Modality Imaging               50
8/95       Orange Park Diagnostic Center             Jacksonville, FL     Multi-Modality Imaging               50
9/95       San Francisco MRC                         San Francisco, CA    MRI                                 100
10/95      Advanced Medical Imaging Center           Montgomery, AL       Multi-Modality Imaging              100
11/95      FutureCare Affiliates, Inc.                                                                        100
               Valley Presbyterian MRC               Van Nuys, CA         MRI                                56.9
           San Luis Obispo Diagnostic                San Luis Obispo, CA  Multi-Modality Imaging               60
                Center(1)
12/95      Modesto Imaging Center                    Modesto, CA          Multi-Modality Imaging              100
4/96       US Cancer Care Inc.                       Modesto, CA          Radiation Therapy Centers          50.1
6/96       US Imaging                                Houston, TX          Imaging Chain                       100
5/96       Wilkes  Barre Imaging                     Wilkes Barre, PA     MRI                                  60
7/96       Owner Diagnostic                          California           MSO                                67.5
7/96       Allegheny MRI                             Pittsburgh, PA       Imaging Chain                       100
6/96       South Coast Radiologists                  Coos Bay, OR         Multi-Modality Imaging              100
6/96       Heights Imaging Center                    Haddon Heights, NJ   Multi-Modality Imaging              100
7/96       MediTek Health Corp                       Miami, FL            Imaging Chain                       100
7/96       Ft. Lauderdale Regional MRI Center        Ft. Lauderdale, FL   MRI Center                          100
8/96       LINC Imaging                              California           3  Imaging Centers                  100
8/96       Integrated Health Concepts                Houston, TX          Imaging Chain                        70
9/96       Alliance Group International              San Francisco, CA    Physician/Imaging Hospital         50.1
                                                                          Management Company
11/96      San Antonio Diagnostic Imaging            San Antonio, TX      Imaging Chain                       100
10/96      Medical Marketing Development             New York             Imaging Management Company          100
10/96      MRI of Monmouth                           Tinton Falls, NJ     MRI Center                          100
10/96      Narrows MRI                               Brooklyn, NY         MRI Center                          100
10/96      Metropolitan Imaging                      Garden City, NY      Multi-Modality Center               100
10/96      Grammercy MRI                             New York, NY         MRI Center                          100
11/96      Dayton Medical Imaging                    Dayton, OH           Imaging Chain                       100
11/96      Lee Imaging                               New York, NY         Nuclear Imaging Chain                80
11/96      MICA                                      San Diego, CA        Imaging Chain - Fixed and           100
                                                                          Mobile
2/97       Medical Diagnostics, Inc.(2)              Boston, MA           Imaging Chain - Fixed and           100
                                                                          Mobile
</TABLE>
-----------------
(1)   Sold in 1996
(2)   See Note 20 to Consolidated Financial Statements

                                       8
<PAGE>

      The Company has entered into a non-binding letter of intent to acquire
American Shared Hospital Services ("AMS") for approximately $16.8 million of the
Company's Common Stock. The transaction, as announced, calls for the Company to
issue common stock with a value of $2.40 per share for each outstanding share of
AMS (approximately 7.0 million shares). As previously announced, recent events
at the Company have delayed the Company's efforts to proceed with the AMS
acquisition.

      Each Facility acquired by the Company generally is the dominant or sole
non-hospital-affiliated outpatient facility in its geographic market and has a
strong physician referral base and/or numerous managed care contracts. Following
an acquisition, the Company provides management and administrative systems,
marketing and technical support, centralized billing, collection and payable
services and often is able to renegotiate debt, equipment leasing, radiology and
supply agreements to immediately increase cash flow and operating efficiency at
its Facilities. The Company has also added additional modalities and new
technologies to many of its centers in order to further increase revenues.

      The Company has financed its acquisitions with cash, notes, equipment
leases, assumption of indebtedness, public and private offerings of debt and
equity securities and combinations of the foregoing and expects to finance
future acquisitions similarly. The Company generally seeks to acquire at least
an 80% interest in a center, but in certain cases only purchases a majority
interest. In certain of the acquisitions, a portion of the Common Stock issued
is held in escrow pending the attainment of certain agreed upon revenue or
earnings targets of the acquired Facility. The Company also has entered into
long-term radiology agreements with radiologists who were owners of centers
purchased by the Company. In connection with certain acquisitions, the Company
also entered into property leases at fair market value for the facility, many of
which are with the physician partnership that was the seller of the center. See
Item 1 - Business - Recent Developments for information regarding the Company's
retention of an investment banking firm to explore possible business
combinations.

IMAGING OPERATIONS

      Prior to completing the acquisition of a Facility, the Company evaluates
the efficiency of operations. The Company seeks to utilize its management
expertise and purchasing power to more efficiently manage and increase the cash
flow of Facilities while maintaining the highest level of service to physicians
and managed care organizations. By centralizing such functions as payables,
payroll, maintenance, collections, accounting and purchasing after an
acquisition, the Company is able to realize economies of scale while allowing
Facilities to place more emphasis on providing efficient and quality care. The
Company is also able to utilize its credit quality to receive preferential rates
from major equipment vendors and lessors and the Company's volume of business
permits it to qualify for discounts for equipment maintenance and film, which
are substantial operating expenses of Facilities.

    Diagnostic imaging services are performed on an outpatient basis by
experienced radiological technicians. After the diagnostic procedures are
completed, the images are reviewed by radiologists who have contracted with the
Company. These radiologists prepare a report of the tests and their findings,
which are then delivered to the referring physician. Additionally, upon request,
a report of any critical abnormality, or "stat report," is provided by phone as
soon as the test is completed and evaluated.

    Each of the Company's Facilities have agreements with radiologists as
independent contractors under long-term agreements to provide all radiology
services to the Facilities. Radiologist compensation averages 15-18% of net
collections attributable to radiology services performed by the radiologist. The


                                       9
<PAGE>

interpreting physicians are board-certified or board eligible specialists in
radiology, orthopedics, cardiology or neurology, as appropriate. The majority of
the centers bill and collect globally for their technical services and the
professional services of the interpreting physicians.

    Imaging revenues are dependent to a large extent upon the acceptance of
outpatient diagnostic imaging procedures as covered benefits under various
third-party payor programs. In order to receive reimbursement for these
services, payment must be approved by private insurers or the Medicare and
Medicaid reimbursement programs. Although the Company intends to continue
participation in such reimbursement programs, there can be no assurance that its
imaging procedures will continue to qualify for reimbursement.

    In February 1997, the Company acquired Medical Diagnostics, Inc. ("MDI"),
which is based in Wilmington, Massachusetts. The Company, through its newly
acquired subsidiary, MDI, owns and manages fixed and mobile imaging centers in
three distinct regions covering five states, Massachusetts, New York, Virginia,
West Virginia and Tennessee. MDI owns and operates two fixed-site hospital based
MRI centers in Massachusetts, owns and operates an additional eight mobile MRI
systems, manages two others which service over 40 hospitals in these five states
and operates a fleet of nuclear SPECT cameras.

    RADIATION THERAPY

    Radiation oncology therapy, the treatment of cancer with high energy
radiation, is commonly used to destroy localized tumors and to reduce pain and
other symptoms. This therapy is typically provided under the care of a radiation
oncologist, a physician with additional subspecialty training in radiation
oncology. Due to cost-containment initiatives, the trend in cancer therapy, like
that of diagnostic imaging, has been to provide this treatment in an outpatient
setting. The Company believes that radiation oncology services are complementary
to the imaging services business currently conducted by the Company and that
there are significant acquisition opportunities in this area.

    In 1996, the Company purchased 50.1% of a company that owns and operates
three therapy centers in northern California, one of which is next to the
Company's Modesto Facility.

    MANAGEMENT SERVICES

    In addition to providing practice management services to its own Facilities,
the Company recently began offering its management services to independent
diagnostic centers and radiology practices. The Company believes that its
expertise will be useful for practices that have not had the benefit of
professional management. Each client is able to contract for individual services
or a full range of services, including accounting, billing, collections,
management information systems, purchasing and human resources. The Company
anticipates that it will price its services using a number of methods, including
fee-for-services, percentage of revenue or savings, capitation or on a project
basis.

    CLIENTS AND PAYORS

    The Company is highly dependent on referrals from physicians who have no
contractual obligation or economic incentive to refer patients to the Company's
Facilities. Each Facility currently receives referrals from several hundred
physicians. If a sufficiently large number of physicians elected at any time to
stop referring patients to the Company, it would have a material adverse effect
on the Company's revenues and results of operations. In particular, due to the
potential for disruption of the physician relationship in connection with the
assumption of control of a Facility, there can be no assurance that the 

                                       10
<PAGE>

Company will retain all of the business conducted by that Facility at the time
of its acquisition.

      In 1996, revenues from Blue Cross/Blue Shield and other insurance carriers
accounted for approximately 11% of the Company's revenues, Medicare and Medicaid
accounted for approximately 15% of revenues, managed care accounted for
approximately 45% of revenues and the remainder was derived directly from
patients and worker's compensation cases.

      The Company is a party to over 1,000 managed care contracts which require
it to provide services on a fixed-fee for service basis. All Facilities are
attempting to obtain additional managed care contracts.

      During 1996, the Company began to centralize billing and collection, on a
regional basis. It is anticipated that this process will be completed by the end
of 1997. Due to cash flow and technical considerations, the Company generally
takes several months to consolidate billings of a Facility after its
acquisition. None of the Facilities has experienced any significant collection
problems. The collection period is currently averaging 95 days for the Company.

COMPETITION

      The market for diagnostic imaging services is highly competitive. The
market is highly fragmented, with over 2,200 outpatient diagnostic imaging
centers nationwide and no dominant national imaging services provider.
Competition varies by market and is generally higher in larger metropolitan
areas where there is likely to be more Facilities and more managed care
organizations putting pricing pressure on the market. The Company competes with
larger healthcare providers, such as hospitals, as well as other private clinics
and radiology practices that own diagnostic imaging equipment. Competition often
focuses on physician referrals at the local market level. Successful competition
for referrals is a result of many factors, including participation in healthcare
plans, quality and timeliness of test results, type and quality of equipment,
facility location, convenience of scheduling and availability of patient
appointment times. Most of the Company's Facilities are the largest
non-hospital-affiliated outpatient diagnostic imaging facilities in their
geographic area. Competition in the radiation oncology therapy market is similar
to the competition in the imaging market.

REGULATION AND REIMBURSEMENT

      OVERVIEW. The healthcare industry is highly regulated and is undergoing
significant change as third-party payors, such as Medicare and Medicaid and Blue
Cross/Blue Shield plans, increase efforts to control the cost, utilization and
delivery of healthcare services. Legislation has been proposed or enacted at
both the federal and state levels to regulate healthcare delivery in general and
radiology services in particular. The Company believes that reductions in
reimbursement for Medicare services may be implemented from time to time, which
may lead to reductions in the reimbursement rates of other third party payors as
well. The Company cannot predict the effect healthcare reforms may have on its
business, and there can be no assurance that such reforms will not have a
material adverse effect on the Company's operations. All of the Company's
Facilities are subject to governmental regulation at the federal, state and
local levels.

      REGULATION OF OUTPATIENT IMAGING SERVICES. The operation of outpatient
imaging centers requires a number of licenses, including licenses for technical
personnel and certain equipment. Licensure requirements may vary somewhat from
state to state in the states in which the Company does business. The Company
believes that it is in material compliance with applicable licensure
requirements. The Company further believes that diagnostic testing will continue
to be subject to intense regulation at the 


                                       11
<PAGE>

federal and state levels and cannot predict the scope and effect thereof.

      Diagnostic imaging centers performing mammography services must meet
federal, and in some jurisdictions, state standards for quality as well as
certification requirements. Under regulations issued by the Federal Food and
Drug Administration ("FDA") pursuant to the Mammography Quality Standards Act of
1992 ("MQSA"), all mammography Facilities are required to be accredited by an
approved non-profit organization or state agency. Pursuant to the accreditation
process, each Facility providing mammography services must: undergo an annual
mammography facility physics survey; be inspected annually and pay an annual
inspection fee; meet qualification standards for interpreting physicians,
mammography technologists, and medical physicists; meet certification
requirements for adequacy and training and experience of personnel; meet quality
standards for equipment and practices; and meet various requirements governing
record keeping of patient files. Conformance with these standards is required to
obtain payment for Medicare services, and to avoid various sanctions, including
monetary penalties, or suspension of certificates. Although all of the Company's
Facilities are currently accredited by the Mammography Accreditation Program of
the American College of Radiology and the Company anticipates continuing to meet
the requirements for accreditation, the withdrawal of such accreditation could
result in the revocation of certification.

      REIMBURSEMENT FOR RADIOLOGY SERVICES. In general, Medicare reimburses
radiology services under a physician fee schedule which covers services provided
not only in a physician's offices, but also in freestanding Facilities, portable
X-ray suppliers, hospitals and other entities. The scheduled amount is based on
a resource-based relative value scale, recognizing three separate components of
the physician's services: professional, technical and malpractice. For radiology
there are separate Medicare scheduled amounts for the professional component of
a service or procedure (I.E., the physician's time) and the technical component
of the service or procedure (I.E., services and supplies necessary to perform
the procedure).

       Congress and the U.S. Department of Health and Human Services ("HHS")
have taken various actions over the years to reduce reimbursement rates for
radiology services and proposals to reduce rates further are anticipated. There
have been many proposals discussed within the last few years to further modify
reimbursement. The Company is unable to predict which, if any, proposals will be
adopted. Any reductions in Medicare reimbursement for radiology services could
have a material adverse effect on the Company. In 1990, Congress extended
Medicare benefits to include coverage of screening mammography. To receive
Medicare reimbursement for such services, mammography Facilities must meet
existing prescribed quality standards for screening mammography. The regulations
apply to diagnostic mammography and image quality examination as well as
screening mammography. The Company's Facilities meet all prescribed quality
standards.

      REIMBURSEMENT FOR RADIATION ONCOLOGY THERAPY SERVICES. Radiation therapy
services are regulated on the federal level similar to imaging services, and
Medicare reimbursement for treatment is calculated using a similar physician fee
schedule.

      REGULATION OF RADIOLOGY OWNERSHIP; FRAUD AND ABUSE. Medicare payment rules
discourage physicians from maintaining an investment interest in radiology
operations. The Omnibus Budget Reconciliation Act of 1989 ("OBRA 89") contains
provisions which, effective as of January 1, 1992, prohibit physicians from
referring Medicare or Medicaid patients to clinical laboratories in which the
physician has an economic interest. In 1993, Congress extended the physician
self-referral prohibition, effective January 1, 1995, to entities providing
other designated health care services, including radiology or other diagnostic
services, including magnetic resonance imaging, CAT scans and ultrasound
services, 


                                       12
<PAGE>

and radiation therapy services. Violations of these provisions (commonly known
as the "Stark Laws") may result in denial of payments for the service, an
obligation to refund payment for the service, payment of civil monetary
penalties and/or exclusion from the Medicare and Medicaid programs.

      The Anti-Fraud and Abuse Amendments to the Social Security Act prohibit
the solicitation, payment, receipt or offer, directly or indirectly, of any
remuneration for the referral of Medicare or Medicaid patients or for the
provision of services, items or equipment which may be covered by the Medicare
or Medicaid programs. Violations of these provisions may result in civil and
criminal penalties and exclusion from participation in the Medicare and Medicaid
programs.

      In addition to federal restrictions, which are generally applicable to
Medicare and Medicaid patients, a number of states in which the Company operates
Facilities have enacted prohibitions against physicians referring patients to
entities in which they have an ownership interest. Such state laws generally
apply to all patients, not just participants in the Medicare and Medicaid
programs. The Company has structured its acquisitions of physician-owned
ventures in a manner which it believes does not raise significant issues under
federal or state anti-kickback and self-referral regulations.

      CORPORATE PRACTICE OF MEDICINE; FEE SPLITTING. The operation of the
Facilities may be subject to the laws of certain states which prohibit the
practice of medicine by non-physicians and/or the splitting of fees between
physicians and non-physicians. The Company believes its operations are conducted
in material compliance with existing applicable laws relating to the corporate
practice of medicine and fee splitting. In response to such laws, in certain
states, the Company may operate Facilities pursuant to a management agreement
with a physician group rather than operating the Facility directly and
contracting with the physicians for professional medical services.

      INFECTIOUS WASTES. The Company is also subject to licensing and regulation
under federal and state laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. The sanctions for failure to
comply with these regulations may be denial of the right to conduct business,
significant fines and criminal penalties, any of which, if imposed, could have a
material adverse effect on the Company. The Company believes that it is in
substantial compliance with all applicable laws and regulations relating to
these materials.

    INSURANCE

      The Company could be subject to legal actions arising out of the
performance of its diagnostic imaging services. Damages assessed in connection
with, and the cost of defending, any such actions could be substantial. The
Company has readily obtained and currently maintains liability insurance which
it believes is adequate for its present operations. There can be no assurance
that the Company will be able to continue or increase such coverage or to do so
at an acceptable cost, or that the Company will have other resources sufficient
to satisfy any liability or litigation expense that may result from any
uninsured or underinsured claims. The Company also requires all of its
affiliated physicians to maintain malpractice and other liability coverage.

       EMPLOYEES

      At March 15, 1997, the Company had approximately 1,300 full time
employees, none of whom are represented under union contracts. The Company
considers its relations with its employees to be good.



                                       13
<PAGE>

      RECENT DEVELOPMENTS

      The Company confirmed that it has retained Smith Barney, Inc. for a 
variety of purposes including considering and advising on possible financings,
acquisitions and diversitures and other strategic alternatives. In connection
with this engagement, Smith Barney has been authorized to explore a variety of
possible business combinations. No decision has been made, however, to sell the
Company nor is there any assurance that any transaction of any nature will take
place.

      Jeffrey A. Goffman, former Chief Executive Officer, and Michael Karsch,
former Executive Vice President, General Counsel and Secretary, submitted
letters in which they purported to invoke constructive termination provisions of
their employment contracts.

      At this point, the Company has not made or agreed to make any severance
payments to either of Messrs. Goffman or Karsch. Both have employment contracts
with the Company, and both have asserted their rights to termination benefits.
On the other hand, the Company has reserved its rights under the employment
contracts, and is currently investigating potential claims against Messrs.
Goffman and Karsch. The Company is currently exploring, through counsel, the
possibility of resolving Mr. Goffman's employment contract claims while
reserving certain of its rights to pursue claims against him. Also, the Board
elected Joseph A. Paul as Chief Executive Officer effective March 31, 1997.

      ITEM 2.   PROPERTIES.

      The Company maintains its executive office in West Palm Beach, Florida
occupying approximately 13,300 square feet of space. This lease has an annual
rent of $476,000 and expires in 2009. The Company has imaging centers that range
in size from approximately 800 to 21,600 square feet. The Company also has 10
regional billing and operational centers, with leases expiring between 1997 and
2006. The aggregate lease expense for 1996 for such leases was approximately
$5.9 million. The Company believes that its current Facilities are in adequate
condition and otherwise suitable for its current operations.

      ITEM 3.   LEGAL PROCEEDINGS.

    In January 1996, certain shareholders of the Company filed complaints
against the Company, Jeffrey A. Goffman, Robert D. Burke, Joseph A. Paul, Amos
Almand, III, Coyote Consulting and Financial Services, LLC, and Keith G.
Greenberg. Five of six complaints filed are pending currently in the United
States District Court for the Southern District of Florida.

      (i)  Golden v. U.S. Diagnostic Inc., et al., Case No. 97-8010 CIV-ZLOCH
           (S.D. Fla.) (filed January 6, 1997);

      (ii) Edelstein v. U.S. Diagnostic Inc., et al., Case No. 97-8011
           CIV-RYSKAMP (S.D. Fla.) (filed January 6, 1997; Amos Almand and
           Coyote Consulting are not named as defendants);

      (iii) Shapiro v. U.S. Diagnostic Inc., et al. Case No. 97-8016 CIV-RYSKAMP
           (S.D. Fla.) (filed January 7, 1997) (voluntary dismissal filed March
           31, 1997);

      (iv) Neuman v. U.S. Diagnostic Inc., et al., Case No. 97-8017CIV-HURLEY
           (S.D. Fla.) 


                                       14
<PAGE>

           (filed January 7, 1997);

      (v)  Harris v. U.S. Diagnostic Inc., et al., Case No. 97-8054 CIV-RYSKAMP
           (S.D. Fla.) (filed January 27, 1997); and

      (vi) Levine v. U.S. Diagnostic Inc., et al., case No. 97-8068 CIV-RYSKAMP
           (S.D. Fla.) (filed January 30, 1997; Coyote Consulting is not named
           as a defendant).

      In addition to pursuing their respective actions in individual capacities,
named plaintiffs seek to certify and represent classes consisting of purchasers
of the Company's common stock. Four of the remaining complaints allege a class
period from March 15, 1996, through December 23, 1996. The EDELSTEIN complaint
alleges a class period from October 20, 1994 through December 22, 1996.

       All complaints similarly allege violations of Section 10(b) and 20(a) of
the Securities Exchange Act of 1934, and of Rule 10b-5 promulgated thereunder,
with respect to the adequacy of the Company's disclosures concerning its
relationship with Coyote Consulting and Financial Services, LLC, and Keith G.
Greenberg, and Mr. Greenberg's background. The complaints generally allege that
Mr. Greenberg was an undisclosed officer and employee of the Company and that
the stock price for the Company was artificially inflated by the nondisclosure
of Mr. Greenberg's prior criminal convictions, an order of permanent injunction
obtained by the Securities and Exchange Commission ("SEC") and various civil
default judgments. The complaints assert that on June 8, 1993, Mr. Greenberg
consented to the entry of an order and judgment of permanent injunction in
response to a complaint filed by the SEC. Further, the complaints allege that on
August 24, 1995, Mr. Greenberg was adjudged guilty of conspiracy to commit mail
fraud and to defraud the Internal Revenue Service. Mr. Greenberg's SEC
injunction, criminal convictions and civil default judgments do not relate in
any way to the Company.

      Plaintiffs further allege that they and the class they purport to
represent were damaged when Mr. Greenberg's history was disclosed in a
securities analyst report dated December 23, 1996 disseminated by the firm of
Bear Stearns & Co. resulting in an immediate and sharp decline in the Company's
stock price.

      Certain of the plaintiff shareholders are seeking the consolidation of all
complaints and the appointment of lead plaintiffs in accordance with the
Securities Reform Act of 1995. Plaintiffs have not alleged a claim for any
specific amount of damages in the above-referenced actions. The Company intends
to defend vigorously against these actions.

      The SEC and the NASDAQ Stock Market Inc. are investigating the Company's
former relationship with Coyote Consulting and Financial Services, LLC, and
Keith Greenberg, and the adequacy of the Company's disclosure concerning that
relationship. The inquiries appear to be focused on whether the Company's and
management's disclosures with respect to Greenberg and Coyote have been in
compliance with federal securities laws and NASDAQ's listing standards,
respectively. The Company is cooperating fully with NASDAQ and the SEC.

      Certain current and former officers and directors have requested that the
Company advance the cost of their legal expenses in defense of these actions and
investigations in accordance with the provisions of Delaware law and the
Company's By-Laws, subject to their undertaking to repay expenses should it be
determined ultimately that they are not entitled to be indemnified by the
Company. The Company is honoring these requests. The Company has rejected a
demand for indemnification by Coyote Consulting and Financial Services, LLC and
Mr. Greenberg.

                                       15
<PAGE>

      In September, 1992, MDI and its affiliate Greater Springfield MRI Limited
Partnership ("Springfield") (through its general partner, Western Massachusetts
Magnetic Resonance Services, Inc. a subsidiary of MDI ("WMMRS")), filed suits
against Raytel Corporation, Inc. and certain other parties (collectively, the
"Raytel Defendants") seeking a declaration, damages and equitable relief against
the Raytel Defendants. Plaintiffs alleged that, among other things, the Raytel
Defendants violated their fiduciary and/or contractual obligations in attempting
(i) to interfere with plaintiffs' plans to provide imaging services on the
campus of Mercy Hospital in Springfield, Massachusetts and (ii) to coerce
plaintiffs into granting an affiliate of one of the Raytel Defendants a greater
interest in the profits of a now-dissolved joint venture in which MDI and one of
the Raytel Defendants directly or indirectly held an interest. The Raytel
Defendants have filed counterclaims against the Company seeking up to $8 million
in damages and injunctive relief. The Company acquired MDI (of which Springfield
and WMMRS are direct or indirect subsidiaries) in February 1997. As part of
this acquisition the seller, Advanced NMR Systems, Inc. ("ANMR"), agreed to
indemnify the Company and MDI for losses incurred in connection with the
foregoing litigation. To secure this indemnity obligation, ANMR escrowed $1
million and 1,250,000 shares in Advanced Mammography Systems, a publicly-traded
company. The Company believes that there are meritorious defenses to the claims
of the Raytel Defendants and intends to prosecute and defend this matter
vigorously.

       The Company is also a party to, and has been threatened with, a number of
other legal proceedings. While it is not feasible to predict or determine the
outcome of these matters, the Company does not anticipate that an adverse
outcome in any of these matters individually would have a material adverse
effect on the Company.

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

      During the Company's fiscal quarter ended December 31, 1996, there were no
matters submitted to a vote of the holders of the Company's securities.

                                       16
<PAGE>

                                     PART II

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

      The Company's Common Stock has traded under the symbol USDL on the NASDAQ
National Market since October 9, 1995 and prior to that on the NASDAQ Small Cap
Market since October 20, 1994. The following table sets forth the high and low
last sale prices for the Company's Common Stock for each quarter within the two
years ended December 31,1996 as reported by NASDAQ. These prices do not reflect
retail mark-ups, markdowns or commissions and may not represent actual
transactions.

      1995                                           HIGH              LOW
      ----                                           ----              ---
      January 1 through March 31, 1995............   5 3/8            3 3/4
      April 1 through June 30, 1995...............   5                3 9/16
      July 1 through September 30, 1995...........   5 3/4            4 3/4
      October 1 through December 31, 1995.........   7 13/16          5 3/8


      1996
      ----
      January 1 through March 31, 1996............   9                6
      April 1 through June 30, 1996...............  14 3/4            7
      July 1 through September 30, 1996...........  13 5/8            8 3/8
      October 1 through December 31, 1996.........  13 3/4            7 7/8

      The number of record holders of the Company's Common Stock as of March 15,
1997 was approximately 337. The Company believes that the number of beneficial
owners exceeds 8,100.

      The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. The Company has outstanding debt which prohibits the payment of
dividends by the Company without the consent of the lender.

       NASDAQ has initiated an inquiry focusing on the Company's former
relationship with Coyote Consulting and Financial Services, LLC and Keith
Greenberg, and the adequacy of the Company's disclosure concerning that
relationship. This inquiry is being conducted to determine whether the Company's
and management's disclosures with respect to the foregoing have been in
compliance with NASDAQ's listing standards. The Company is cooperating fully
with this inquiry. An unfavorable determination by NASDAQ would have a material
adverse effect on the Company and the price and liquidity of the Company's
Common Stock.

      NASDAQ, has recognized the need to accommodate companies that are unable
to satisfy the net tangible asset test as a result of goodwill associated with
merger and acquisition activities, and has proposed new alternative maintenance
standards. As a result of the accounting conventions associated with the
Company's business combinations in 1996, the Company does not satisfy the net
tangible asset test of the NASDAQ's current maintenance standards. The Company
satisfies all of the tests under the proposed new maintenance standards.

      In connection with the Company's initial public offering in 1994, all of
the Company's stockholders at that time entered into an escrow agreement
pursuant to which they placed into escrow approximately 1.1 million shares (the
"IPO Escrow Shares") of the Company's Common Stock owned 


                                       17
<PAGE>

by them. Because the Company did not meet specified minimum income goals, all of
the IPO escrow shares will be canceled soon after March 31, 1997. The IPO Escrow
Shares are included in authorized, issued and outstanding shares at December 31,
1996.

         Set forth below is a list of equity securities sold by the Company
during 1996 which were not registered by the Company under the Securities Act of
1933, as amended (the "Securities Act"). All of such issuances were made in
reliance on Section 4(2) of the Securities Act.

On March 7, 1996, the Company issued 20,000 shares of Common Stock to one
individual in connection with the settlement of litigation between that
individual and the Company.

On December 26, 1996, the Company issued 68,400 shares of Common Stock to two
entities in connection with the settlement of claims by such entities against
the Company.

On January 5, 1996, the Company issued 68,070 shares of Common Stock to a
partnership, the assets of which the Company purchased, as partial consideration
for such acquisition.

On May 31, 1996, the Company issued an aggregate of 206,000 shares of Common
Stock to the only two stockholders of an entity which the Company purchased, as
partial consideration for such acquisition.

On June 24, 1996, the Company issued an aggregate of 1,671,000 shares of Common
Stock to the sole stockholder of an entity which the Company purchased, as
partial consideration for such acquisition.

On June 26, 1996, the Company issued an aggregate of 750,000 shares of Common
Stock to the six partners of a partnership, the assets of which the Company
purchased, as partial consideration for such acquisition.

On October 17, 1996, the Company issued an aggregate of 39,217 shares of Common
Stock to the stockholders of an entity which the Company purchased, as
consideration for such acquisition.

On September 3, 1996, the Company issued an aggregate of 186,783 shares of
Common Stock to the sole stockholder of an entity which the Company purchased,
as partial consideration for such acquisition.

On October 30, 1996, the Company issued an aggregate of 150,038 shares of Common
Stock to sixteen partners of three partnerships, the assets of which the Company
purchased, as consideration for such acquisition.

      ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
              AND RESULTS OF OPERATIONS.

      FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

      Except for historical information contained herein, certain matters
discussed herein are forward-looking statements made pursuant to the safe harbor
provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, including but not limited
to, economic, competitive, regulatory, growth strategies, available financing,
and other factors discussed elsewhere in this report and the documents filed by
the Company with the SEC. Many of these factors are beyond the Company's
control. Actual results could differ materially from the forward-looking
statements. In 


                                       18
<PAGE>

light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will, in fact, occur.

      OVERVIEW

      The Company did not commence operations until the completion of its first
acquisition in October 1993. The acquisitions completed by the Company are
listed under Item 1 "Acquisitions".

      The Company has historically grown through acquisitions of diagnostic
imaging centers and businesses. The Company intends to continue to seek to
acquire additional diagnostic imaging centers and businesses. Any such
acquisitions would be consummated only after an analysis of those factors
described in "Item 1 - Description of Business - Strategy." Additional
acquisitions of diagnostic imaging centers or businesses could be financed with
cash, notes, equipment leases, assumption of indebtedness, public and private
offerings of debt and equity securities or any combination of the foregoing.
Although the Company has received a commitment letter from DVI Financial
Services, Inc. ("DVI") for up to $25 million in additional financing for the
acquisition of imaging centers and equipment, there is no assurance that the DVI
financing or other debt or equity financing will be available for acquisitions
on satisfactory terms, if at all, or that the Company will consummate additional
acquisitions.

      The Company believes that its cash (and cash equivalents) and cash
generated from operations will be sufficient to meet its working capital
requirements of the next 12 months. The Company also believes that such
resources, together with funds provided in connection with DVI's $25 million
commitment letter would allow the Company to pursue growth through acquisitions.
There is no assurance, however, that additional funds will be available on terms
satisfactory to the Company. To the extent the Company is not able to obtain
additional capital or to borrow funds in a manner acceptable to the Company, the
Company will be required to delay or reduce its planned acquisition and growth
strategy. Additionally, various class action lawsuits have been filed against
the Company as described in "Item 3 - Litigation" and elsewhere herein. While
the Company is unable to predict the outcome of any of these lawsuits or any
other class action lawsuits that may be filed against the Company, any of such
lawsuits, if determined adversely to the Company, could have a material adverse
effect on the Company's financial condition and result of operations and on the
Company's ability to meet its cash requirements.

      The Company's financial performance is substantially dependent upon its
ability to integrate the operations of acquired Facilities into the Company's
infrastructure and reduce operating expenses of acquired entities, its ability
to deliver equivalent service to clients immediately after an acquisition
without significant interruption or inconvenience and various other risks
associated with the acquisition of businesses, including expenses associated
with the integration of the acquired businesses. The Company will be required to
hire additional management and implement new systems. Although to date the
acquired entities have generally been operated by the Company on a profitable
basis and generally been successfully integrated into the Company, there can be
no assurance that the Company will be able to successfully operate these and
other operations that may be acquired in the future. If the Company is unable to
manage growth effectively, the Company's operating results could be materially
adversely affected.

        Approximately 96% all of the Company's revenues are derived from third
party payors. For 1996, the Company derived approximately 81% of its revenues
from non-government payors and approximately 15% from government sponsored
healthcare programs (principally Medicare and 


                                       19
<PAGE>

Medicaid). The Company's revenues and profitability may be materially adversely
affected by the current trend in the healthcare industry toward cost containment
as government and private third party payors seek to impose lower reimbursement
and utilization rates and negotiate reduced payment schedules with services
providers. Continuing budgetary constraints at both the federal and state level
and the rapidly escalating costs of healthcare and reimbursement programs have
led, and may continue to lead, to significant reductions in government and other
third party reimbursements for certain medical charges and to the negotiation of
reduced contract rates or capitated or other financial risk-shifting payment
systems by third party payors with service providers. In addition, rates paid by
private third party payors, including those that provide Medicare supplemental
insurance, are generally higher than Medicare payment rates. Changes in the mix
of the Company's patients among the non-government payors and government
sponsored healthcare programs, and among different types of non-government payor
sources, could have a material adverse effect on the Company. Further reductions
in payments to physicians or other changes in reimbursement for healthcare
services could have a material adverse effect on the Company, unless the Company
is otherwise able to offset such payment reductions through cost reductions,
increased volume, introduction of new procedures or otherwise.

      The Company reports revenue at the estimated net realizable amounts from
patients, third-party payors and others for services rendered including
estimated contractual adjustments under reimbursement agreements with
third-party payors. These adjustments are accrued on an estimated basis in the
period the related services are rendered and are adjusted in future periods as
final settlements are determined.

      The selected financial data presented below summarizes certain historical
financial data and should be read in conjunction with the more detailed
historical and financial statements of the Company and the notes thereto
included elsewhere herein.

                                       20
<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:                                    YEARS ENDED DECEMBER 31,
                                                            -------------------------------
                                                               1996             1995
                                                            -----------         -----------

<S>                                                         <C>                 <C>
REVENUE:
Net Patient Revenue                                         $91,569,260         $29,416,164
Other Revenue                                                10,492,022                  --
                                                            -----------         -----------
Total Revenue                                               102,061,282          29,416,164

OPERATING EXPENSES:
   General and Administrative                                72,199,558          19,485,339
   Bad Debt Expense                                           4,015,944             576,787
   Depreciation                                               6,595,022           2,169,557
   Amortization                                               5,039,437             833,542
   Stock Based Compensation                                   2,168,370             213,499
   Loss on Sale of Stock of Subsidiaries, net                 3,076,584                  --
   Loss on Settlement of Claims                               2,125,000                  --
   Compensation to Terminated Consultant                      5,596,750             138,126
                                                            -----------         -----------
   TOTAL OPERATING EXPENSES                                 100,816,665          23,416,850
                                                            -----------         -----------
   INCOME FROM OPERATIONS                                     1,244,617           5,999,314
                                                            -----------         -----------

OTHER INCOME [EXPENSE]:
   Interest Income                                            2,347,156             227,140
   Interest Expense                                          (8,974,246)         (1,275,504)
   Other Income (Expense)                                        27,944            (502,697)
   Non-Cash Finance Charge                                           --            (414,375)
                                                            -----------         -----------
   TOTAL OTHER EXPENSE                                       (6,599,146)         (1,965,436)
                                                            -----------         -----------

INCOME (LOSS) BEFORE MINORITY INTEREST, PROVISION         
     (BENEFIT) FOR INCOME TAXES AND EXTRAORDINARY ITEM       (5,354,529)          4,033,878

MINORITY INTEREST IN INCOME OF SUBSIDIARIES                   1,576,637             279,907

PROVISION (BENEFIT) FOR INCOME TAXES                           (600,318)            729,382
                                                            -----------         -----------
   INCOME  (LOSS) BEFORE EXTRAORDINARY ITEM                  (6,330,848)          3,024,589

EXTRAORDINARY ITEM - NET OF TAXES                                    --             306,042
                                                            -----------         -----------
   NET INCOME (LOSS)                                        ($6,330,848)        $ 3,330,631
                                                            ===========         ===========
EARNINGS PER COMMON SHARE:
   PRIMARY:
     Earnings Before Extraordinary Item                     $      (.47)        $       .61
     Extraordinary Item                                              --                 .06
                                                            -----------         -----------
   NET INCOME (LOSS)                                        $      (.47)        $       .67
                                                            ===========         ===========
FULLY DILUTED:
     Earnings Before Extraordinary Item                     $      (.47)        $       .57
     Extraordinary Item                                              --                 .03
                                                            -----------         -----------
   NET INCOME (LOSS)                                        $      (.47)        $       .60
                                                            ===========         ===========

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING:
     Primary                                                 13,575,775           4,996,021
                                                            ===========         ===========
     Fully Diluted                                           13,575,775          11,761,427
                                                            ===========         ===========
</TABLE>

                                       21
<PAGE>


BALANCE SHEET DATA AT DECEMBER 31, 1996:

Working capital..................................   $   7,982,792
Total assets.....................................     339,023,383
Total liabilities................................     197,361,493
Minority interest................................       8,149,805
Stockholders' equity.............................     133,512,085

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

       Net revenues increased $72,645,118 from $29,416,164 in 1995 to
$102,061,282 in 1996. The net revenue increase reflects (i) primarily the
acquisition of Facilities which accounted for approximately $70 million of the
increase, and (ii) enhanced marketing efforts by the Company.

       General and administrative expenses for 1996 increased $52,714,219 from
$19,485,339 in 1995 to $72,199,558 in 1996, and increased as a percentage of net
revenues from approximately 66% to 71%. The increase in expense relates to (i)
the acquisition of imaging centers, (ii) the increase in corporate overhead as
the Company consolidated or commenced consolidation of most administrative
operations at its headquarters and regional operating offices and (iii) legal,
accounting and other general expenses. Bad debt expense increased $3,439,157
from $576,787 in 1995 to $4,015,944 in 1996. This was related to the increase in
net revenues discussed above and specified write offs of certain accounts
receivable.

       Amortization expense resulting from the goodwill and other intangibles
arising from acquisitions increased $4,205,895 from $833,542 in 1995 to
$5,039,437 in 1996.

       Depreciation expense increased $4,425,465 from $2,169,557 in 1995 to
$6,595,022 in 1996, primarily due to the acquisitions during the year and a full
year's depreciation of 1995 acquisitions.

       Interest expense increased $7,698,742 from $1,275,504 in 1995 to
$8,974,246 in 1996. This resulted primarily from the convertible debenture
financing of $57.5 million at 9% interest which was consummated in March 1996,
and also as a result of equipment and other debt associated with acquisitions.
Interest income increased $2,120,016 from $227,140 in 1995 to $2,347,156 in 1996
due to the proceeds raised from the debentures as well as from conversion of
warrants during 1996 which increased cash balances for portions of the year
1996.

       In addition, during 1996 the Company recognized $5,596,750 of
compensation expense related to Coyote Consulting. See Item 7 - Notes to
Consolidated Financial Statements - Note 17. Further, the Company recognized
$2,125,000 of expenses in relation to losses on settlements of claims. See Item
7 - Notes to Consolidated Financial Statements - Note 9, and the Company
incurred a net loss on the sale of its clinical blood labs of $3,389,305. See
Item 7 - Notes to Consolidated Financial Statements - Note 16. Stock-based
compensation increased $1,954,871 from $213,499 in 1995 to $2,168,370 in 1996 as
a result of issuance of Common Stock to employees and directors, as well as
non-employees.

       For the year ended December 31,1996 a net loss of $6.3 million was
generated. This was significantly impacted by certain non-recurring or unusual
expenses such as: (i) $5.6 million of compensation expense related to Coyote
Consulting; (ii) $2.1 million of expenses related to losses on settlements of
claims; (iii) $3.4 million of a net loss on the sale of the Company's clinical
blood labs; 


                                       22
<PAGE>

and (iv) $3.2 million of unusual accruals associated with legal and accounting
fees.

       Same center revenues for Facilities open more than one year increased
approximately 9% from 1995 to 1996.

LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 1996, the Company had approximately $18.6 million in cash
and cash equivalents and working capital of $8 million. For the year ended
December 31, 1996, the Company generated $14,266,853 in cash. The Company
generated $6,699,825 from operations primarily due to non-cash depreciation and
amortization, used $121,951,295 in investing activities (primarily acquisitions)
and generated $129,518,323 from financing activities, primarily from a public
offering, the exercise of the Class A and Class B warrants described below, and
the refinancing of certain notes and capital leases. The Company generally
collects its receivables within 95 days, although, in accordance with industry
practice, it records its receivables net of an allowance for contractual 
adjustments (approximately one-third of gross receivables) as many third party
payors do not reimburse for the full amount of bills.

      In March 1996, the Company consummated a $57.5 million offering of 9%
Subordinated Convertible Debentures due 2003. Net proceeds, after deducting
transaction fees, of $54,492,532 were raised.

      Further, in accordance with the terms of warrants which were issued in
connection with the Company's public stock offerings in 1994 and 1995, the
Company called for redemption in 1996 all of the outstanding Class A and Class B
warrants. Substantially all such warrants were exercised prior to the redemption
date thereof and the Company received $90,492,996 in proceeds from such
exercises (net of fees).

      In February 1997, the Company entered into a financing agreement with DVI.
The credit facility has up to $50 million in borrowing ability. The first $25
million is a revolving credit loan secured by accounts receivable. The second
$25 million will be utilized to finance future acquisitions. The Company
borrowed $25 million under the revolving credit loan in February, 1997.

      The Company had an unused line of credit of $15 million at the prime
interest rate with a bank. In January 1997, this line of credit was mutually
terminated by both parties. The Company is currently negotiating with another
bank a new line of credit.

      As of December 31, 1996, the Company had an aggregate of approximately
$70.4 million of notes payable of which approximately $28.1 million is
classified as current. Also, the Company had approximately $29 million of
capital lease obligations of which approximately $10.3 million is current.
Substantially all of these obligations are related to completed acquisitions.
The Company's monthly payments for capitalized lease obligations now aggregate
approximately $1.0 million. The Company also pays aggregate annual rent of
approximately $11.9 million for all of its facilities combined. The Company has
employment and consulting agreements with its executive officers and consultants
providing for annual aggregate base compensation of approximately $2.7 million.

      As a result of the five class action lawsuits described in Item 3 - Legal
Proceedings, there will be substantial legal fees and expenses incurred by the
Company. Since the plaintiffs in these lawsuits have not specified the amount of
any damages, the Company does not know what amount, if any, it may have 


                                       23
<PAGE>

to pay in the event of one or more unfavorable outcome(s) with respect to these
matters.

      The Company has granted contractual rights to certain persons to whom the
Company has issued securities to register such securities under the Securities
Act of 1933 and state securities registration statutes, and in some instances
the Company is required to repurchase its Common Stock issued to these persons
or to pay specified liquidated damages to these persons if such registration is
not effected in a timely manner. The Company believes that it may be unable to
comply with at least some of these obligations to register such securities,
primarily because of the events relating to the Company described elsewhere
herein. If such persons assert their rights to have their securities repurchased
or to liquidated damages or make claims against the Company for damages for
breach of the agreements to register their securities, and if the Company is not
able to negotiate modifications to such agreements, the Company's liquidity
could be materially adversely affected.

      The Company's liquidity may also be materially adversely effected to the
extent that persons to whom the Company has issued securities successfully
assert claims against the Company based upon the recent events relating to the
Company described in Item 3 and elsewhere herein.

       ITEM 7. FINANCIAL STATEMENTS.

       The response to this item is included in a separate section of this
Report. See Index to Consolidated Financial Statements. Accounting adjustments
reflected in the audited financial statements herein as of and for the year
ended December 31, 1996 have been made which will result in the restatement of
the Company's Forms 10-QSB, filed with the SEC for the quarters ended March 31,
1996, June 30, 1996 and September 30, 1996. These accounting adjustments
primarily relate to the Company's accounting for acquisitions, dispositions,
issuance of equity securities and stock options and provisions for state and
federal income taxes.

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

       Effective June 13, 1996 the Company changed its independent accountants
from Moore Stephens, P.C. formerly known as Mortenson and Associates, P.C.
("Mortenson") to Arthur Andersen LLP because of its desire to have a "Big Six"
accounting firm as its auditors. The Mortenson's report on the Company's
financial statements for the two years ended December 31, 1995 did not contain
an adverse opinion or disclaimer of opinion and was not qualified as to
uncertainty, audit scope or accounting principles. The decision to change
accountants was recommended and approved by the Board of Directors of the
Company. Since January 1, 1994, there were no disagreements with Mortenson on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure. No reportable events as defined under Rule
304(v) of Regulation S-K occurred since January 1, 1994. The Company did not
consult Arthur Andersen LLP with respect to any accounting principles.

                                       24
<PAGE>

                                    PART III

       The information required in Part III of this Form 10-KSB is incorporated
by reference to information to be filed with the SEC pursuant to General
Instruction E.3. to Form 10-KSB.

                                       25
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                       US DIAGNOSTIC INC.

Date: April 11,  1997                By:/S/ JOSEPH A. PAUL
                                            -----------------------------------
                                            Joseph A. Paul
                                            Chief Executive Officer, President,
                                            and Director

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

<TABLE>
<CAPTION>
NAME                                 TITLE                                      DATE
----                                 -----                                      ----
<S>                                  <C>                                        <C>

/S/ LAURANS A. MENDELSON             Chairman of the Board                      April 11,  1997
----------------------------------
Laurans A. Mendelson


/S/ JOSEPH A. PAUL                  Chief Executive Officer, President,         April 11,  1997
----------------------------------  and Director
Joseph A. Paul                                  


/S/ PAUL ANDREW SHAW                Vice President, Chief Financial Officer     April 11,  1997
----------------------------------  and Assistant Secretary (Principal
Paul Andrew Shaw                    Financial Accounting Officer)

/S/ AMOS F. ALMAND, III             Senior Vice President and Director          April 11,  1997
----------------------------------  
Amos F. Almand, III


/S/ C. KEITH HARTLEY                Director                                    April 11,  1997
----------------------------------      
C. Keith Hartley


/S/ CHARLES J. JACOBSON             Director                                    April 11,  1997
----------------------------------      
Charles J. Jacobson


/S/ GORDON RAUSSER                  Director                                    April 11, 1997
----------------------------------      
Gordon Rausser


JEFFREY A. GOFFMAN                  Director                                    April 11,  1997
----------------------------------      
Jeffrey A. Goffman


MICHAEL D. KARSCH                   Director                                    April 11,  1997
----------------------------------      
Michael D. Karsch
</TABLE>


                                       26
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS

1996 Report of Independent  Certified Public Accountants...............   F-1

1995 Independent Auditor's Report......................................   F-2

Consolidated Balance Sheet  as of December 31, 1996  ..................   F-3

Consolidated Statements of Operations for the years ended
  December 31, 1996 and 1995...........................................   F-5

Consolidated Statements of Cash Flows for the years
  ended December 31, 1996 and 1995.....................................   F-6

Consolidated Statements of Stockholders' Equity for the years
  ended December 31, 1996 and 1995.....................................   F-8

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

                                       27

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
US Diagnostic Inc.:

We have audited the accompanying consolidated balance sheet of US Diagnostic
Inc. (a Delaware corporation) and its subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of US Diagnostic Inc. and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.

Arthur Andersen LLP

West Palm Beach, Florida,
March 28, 1997.

                                       F-1
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

To the Stockholders and Board of Directors of
US Diagnostic Inc.

         We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows of US Diagnostic Inc. [formerly US
Diagnostic Labs Inc.] and its subsidiaries for the year ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of US Diagnostics Inc. [formerly U.S. Diagnostic Labs Inc.] and
its subsidiaries for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.

                                            MOORE STEPHENS, P.C.
                                            Certified Public Accountants

Cranford, New Jersey,
February 20, 1996.

                                       F-2
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

   ASSETS:
   CURRENT ASSETS:
   <S>                                                                          <C>
   Cash and Cash Equivalents                                                     $18,640,729
   Accounts Receivable, Net of Allowance for Bad Debts of $9,670,150              38,265,792
   Other Receivables, Net of Allowance for Bad Debts of $923,000                  11,853,652
   Investment in Marketable Equity Securities, ($6,425,291 at cost)                7,280,000
   Prepaid Expenses                                                                4,321,957
   Other Current Assets                                                              997,843
                                                                                ------------

   TOTAL CURRENT ASSETS                                                           81,359,973
                                                                                ------------
   Property and Equipment, Net of Accumulated Depreciation
     and Amortization of $11,824,836                                              79,945,956
                                                                                ------------
   INTANGIBLE ASSETS:
   Goodwill                                                                      154,255,268
   Covenants Not to Compete                                                        4,474,454
   Customer Lists                                                                  4,322,036
   Other Intangibles                                                                 623,047
                                                                                ------------

   TOTAL INTANGIBLE ASSETS, Net of Accumulated Amortization of $4,875,131        163,674,805
                                                                                ------------

   Other Assets                                                                    5,397,906
                                                                                ------------

   Investment in Unconsolidated Subsidiaries                                       8,644,743
                                                                                ------------

   TOTAL ASSETS                                                                 $339,023,383
                                                                                ------------
</TABLE>


          The accompanying notes to consolidated financial statements
                   are an integral part of this balance sheet.

                                      F-3
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
<S>                                                                             <C>
Accounts Payable                                                                $  5,937,709
Accrued Expenses                                                                  15,116,594
Short-Term Borrowings                                                                750,000
Current Portion of Long-Term Debt                                                 27,335,986
Obligations Under Capital Leases - Current Portion                                10,291,327
Other Current Liabilities                                                          5,607,734
Purchase Price Due on Companies Acquired                                           8,337,831
                                                                                ------------

TOTAL CURRENT LIABILITIES                                                         73,377,181

Subordinated Convertible Debentures                                               56,006,652
Long-Term Debt - Net of Current Portion                                           42,358,837
Obligations Under Capital Leases - Net of Current Portion                         18,704,608
Other Liabilities                                                                    229,837
Deferred Income Taxes                                                              6,684,378
                                                                                ------------

TOTAL LIABILITIES                                                                197,361,493
                                                                                ------------

MINORITY INTEREST                                                                  8,149,805
                                                                                ------------

COMMITMENTS AND CONTINGENCIES (NOTES 12 AND 17)

STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 Par Value;
   5,000,000 Shares Authorized, None Issued                                               --
Common Stock $.01 Par Value; 50,000,000 Shares
   Authorized, and 23,749,217 Shares Issued and Outstanding                          237,492
Additional Paid-in Capital                                                       141,941,301
Unrealized Gain on Marketable Equity Securities, Net of Tax                          525,646
Deferred Stock Based Compensation                                                 (5,357,184)
Accumulated Deficit                                                               (3,835,170)
                                                                                ------------

TOTAL STOCKHOLDERS' EQUITY                                                       133,512,085
                                                                                ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $339,023,383
                                                                                ============
</TABLE>

          The accompanying notes to consolidated financial statements
                   are an integral part of this balance sheet.

                                      F-4
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                 -----------------------------
                                                                      1996            1995
                                                                 -------------    ------------
<S>                                                              <C>              <C> 
   REVENUE:
   Net Patient Revenue                                           $  91,569,260    $ 29,416,164
   Other Revenue                                                    10,492,022            --
                                                                 -------------    ------------
   TOTAL REVENUE                                                   102,061,282      29,416,164
                                                                 -------------    ------------
   OPERATING EXPENSES:
   General and Administrative                                       72,199,558      19,485,339
   Bad Debt Expense                                                  4,015,944         576,787
   Depreciation                                                      6,595,022       2,169,557
   Amortization                                                      5,039,437         833,542
   Stock Based Compensation                                          2,168,370         213,499
   Loss on Sale of Stock of Subsidiaries, Net                        3,076,584            --
   Loss on Settlement of Claims                                      2,125,000            --
   Compensation to Terminated Consultant (Note 17)                   5,596,750         138,126
                                                                 -------------    ------------
   TOTAL OPERATING EXPENSES                                        100,816,665      23,416,850
                                                                 -------------    ------------

   INCOME FROM OPERATIONS                                            1,244,617       5,999,314
                                                                 -------------    ------------

   OTHER INCOME (EXPENSE):
   Interest Income                                                   2,347,156         227,140
   Interest Expense                                                 (8,974,246)     (1,275,504)
   Other Income (Expense)                                               27,944        (502,697)
   Non-Cash Finance Charge                                                --          (414,375)
                                                                 -------------    ------------
   TOTAL OTHER EXPENSE                                              (6,599,146)     (1,965,436)
                                                                 -------------    ------------
   INCOME (LOSS) BEFORE MINORITY INTEREST, PROVISION (BENEFIT)
   FOR INCOME TAXES AND EXTRAORDINARY ITEM                          (5,354,529)      4,033,878

   MINORITY INTEREST IN INCOME OF SUBSIDIARIES                       1,576,637         279,907

   PROVISION (BENEFIT) FOR INCOME TAXES                               (600,318)        729,382
                                                                 -------------    ------------

   INCOME  (LOSS) BEFORE EXTRAORDINARY ITEM                         (6,330,848)      3,024,589

   EXTRAORDINARY ITEM, NET OF TAXES                                       --           306,042
                                                                 =============    ============

   NET INCOME (LOSS)                                             ($  6,330,848)   $  3,330,631
                                                                 =============    ============
   EARNINGS PER COMMON SHARE:
   PRIMARY:
   Income (Loss) Before Extraordinary Item                       $        (.47)   $        .61
   Extraordinary Item                                                       --             .06
                                                                 -------------    ------------

   NET INCOME (LOSS)                                             $        (.47)   $        .67
                                                                 =============    ============
   FULLY DILUTED:

   Income (Loss) Before Extraordinary Item                       $        (.47)   $        .57
   Extraordinary Item                                                     --               .03
                                                                 -------------    ------------

   NET INCOME (LOSS)                                             $        (.47)   $        .60
                                                                 =============    ============
   WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING:
   Primary                                                          13,575,775       4,996,021
                                                                 =============    ============

   Fully Diluted                                                    13,575,775      11,761,427
                                                                 =============    ============
</TABLE>

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

                                      F-5
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                                    -----------------------------
                                                                         1996            1995
                                                                    -------------    ------------
<S>                                                                 <C>              <C>
OPERATING ACTIVITIES:
   Net Income (Loss)                                                $  (6,330,848)   $  3,330,631
     Adjustments to Reconcile Net Income
      to Net Cash Provided by Operating Activities:
     Depreciation and Amortization                                     11,634,459       3,003,099
      Bad Debt Expense                                                  4,015,944         576,787
     Deferred Income Tax Provision (Benefit)                           (2,813,595)        581,561
     Stock Based Compensation Expense                                   3,317,120         235,374
     Amortization of Non-Cash Financing and Other Costs                   543,675         414,375
     Minority Interest in Income of Subsidiaries                        1,576,637         279,907
     Common Stock Issued to Cancel Consulting Agreement                   581,250            --
     Common Stock Issued for Settlement of Claims                         779,075            --
     Gain on Extinguishment of Debt                                          --          (510,042)
     Gain on Sale of Subsidiary                                          (312,721)           --
     Loss on Sale of Subsidiary                                         3,389,305            --

   Changes in Assets and Liabilities:
     (Increase) Decrease in:
     Accounts Receivable                                              (10,806,619)     (3,371,734)
     Other Receivables                                                 (2,617,822)        430,000
     Prepaid Expenses                                                  (1,950,190)       (763,252)
     Other Assets                                                      (1,049,303)        394,995

     Increase (Decrease) in:
     Accounts Payable                                                  (1,318,292)      1,014,938
     Accrued Expenses                                                   4,205,872        (616,953)
     Other Liabilities                                                  3,855,878         950,259
                                                                    -------------    ------------
     Total Adjustments                                                 13,030,673       2,619,314
                                                                    -------------    ------------

     NET CASH - OPERATING ACTIVITIES                                    6,699,825       5,949,945
                                                                    -------------    ------------

INVESTING ACTIVITIES:
     Investment in Subsidiaries                                        (6,731,795)           --
     Marketable Equity Securities                                      (6,425,291)           --
     Equipment Purchases                                               (3,806,666)     (1,746,702)
     Pending Acquisitions                                                (160,169)        543,118
     Acquisitions, Net of Cash Acquired                              (106,627,374)    (10,217,500)
     Sale of Subsidiaries                                               1,800,000            --
                                                                    -------------    ------------
     NET CASH - INVESTING ACTIVITIES                                 (121,951,295)    (11,421,084)
                                                                    -------------    ------------

FINANCING ACTIVITIES:
     Proceeds from Issuance of Subordinated Convertible Debt, Net      54,492,532            --
     Common Stock Issued                                               91,568,852       9,900,646
     Repayments of Notes Payable and
     Obligations Under Capital Leases                                 (20,480,042)     (8,727,997)
     Proceeds from Notes Payable                                        3,936,981       5,847,926
                                                                    -------------    ------------

     NET CASH - FINANCING ACTIVITIES                                  129,518,323       7,020,575
                                                                    -------------    ------------
</TABLE>

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

                                      F-6
<PAGE>


US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                                          --------------------------
                                                                              1996           1995
                                                                          ------------   -----------
<S>                                                                       <C>            <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS                                   14,266,853     1,549,436

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                                4,373,876     2,824,440
                                                                          ------------   -----------

CASH AND CASH EQUIVALENTS - END OF YEAR                                   $ 18,640,729   $ 4,373,876
                                                                          ============   ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash Paid During the years for:
   Interest                                                               $  5,979,745   $ 1,181,004
   Income Taxes                                                           $  3,443,028   $   514,678
</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

The fair market value of common stock and options issued in connection with
acquisitions totaled $15,376,035 and $2,988,000 in 1996 and 1995, respectively.

Restricted common stock with a value of $4,867,375 and $525,000 in 1996 and
1995, respectively was issued for services rendered to the Company.

The fair market value of common stock issued in connection with settlements of
claims totaled $779,075 in 1996.

Common stock issued in connection with the conversion of debt totaled $762,790
in 1996.

In 1996, warrants issued with Subordinated Convertible Debentures were valued at
$1,672,550.

Capitalized leases in 1996, were $9,504,051.

The fair market value of common stock issued in connection with the cancellation
of a consulting agreement totaled $581,250 in 1996.

In 1995, the Company received from a vendor medical equipment with a value of
$486,000 in exchange for an obligation to purchase medical supplies from the
vendor.

Information with regard to the Company's acquisitions, all of which are
accounted for under the purchase method of accounting, is as follows:

<TABLE>
<CAPTION>
                                                                     1996           1995
                                                                 ------------   ------------
<S>                                                              <C>            <C>
Fair Value of Non-Cash Assets Acquired, Net of Liabilities       $ 23,676,672   $  9,776,759
Goodwill                                                          143,836,206     11,378,741
Non-Cash Consideration Paid                                       (60,885,504)   (10,938,000)
                                                                 ------------   ------------
Cash, Net of Cash Acquired                                       $106,627,374   $ 10,217,500
                                                                 ============   ============
</TABLE>

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

                                      F-7
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                     RETAINED
                                    COMMON       COMMON      PAID-IN     UNREALIZED    DEFERRED      EARNINGS      STOCKHOLDERS'
                                    SHARES        STOCK      CAPITAL        GAIN     COMPENSATION    (DEFICIT)        EQUITY
                                   ----------   --------   ------------  ----------  ------------   -----------    -------------
<S>                                <C>          <C>        <C>           <C>         <C>            <C>            <C>
 BALANCE - JANUARY 1, 1995          4,078,560   $ 40,786   $  9,431,484   $   --     $  (599,275)   $  (834,953)   $   8,038,042

 Warrants Exercised                   235,332      2,353        802,226       --            --             --            804,579

 Common Stock Issued for
 Acquisitions                         683,880      6,838      2,981,162       --            --             --          2,988,000

 Restricted Stock Issued              150,000      1,500        523,500       --        (525,000)          --               --

 Common Stock Issued to
 Unrelated Individuals                 27,600        276        137,724       --        (138,000)          --               --

 Common Stock Issued -
 Secondary Offering                 1,857,250     18,573      9,077,494       --            --             --          9,096,067

 Amortization of Deferred
 Compensation                            --         --             --         --         235,374           --            235,374

 Net Income                              --         --             --         --            --        3,330,631        3,330,631
                                   ----------   --------   ------------   --------   -----------    -----------    -------------

 BALANCE - DECEMBER 31, 1995        7,032,622     70,326     22,953,590       --      (1,026,901)     2,495,678       24,492,693

 Common Stock and Options
 Issued for Acquisitions            3,046,108     30,461     15,345,574       --            --             --         15,376,035

 Stock Options Exercised              211,411      2,114      1,073,742       --            --             --          1,075,856

 Compensation Cost - Stock
 Options Granted                         --         --        2,780,028       --      (2,559,298)          --            220,730

 Warrants Exercised                13,128,646    131,287     90,361,709       --            --             --         90,492,996

 Common Stock Issued in
 Settlement of Litigation              88,400        884        778,191       --            --             --            779,075

 Restricted Stock Issued                 --         --        4,867,375       --      (4,867,375)          --               --

 Common Stock Issued to
 Cancel Consulting Agreement           93,000        930        580,320       --            --             --            581,250

 Common Stock Issued for
 Debt Conversion                      149,030      1,490        761,300       --            --             --            762,790

 Fair Value of Detachable Warrants -
 Convertible Debentures (Note 6)         --         --        1,672,550       --            --             --
                                                                                                                       1,672,550

 Income Tax Benefit from Options
 Exercised                               --         --          766,922       --            --             --
                                                                                                                         766,922
 Unrealized Gain - Marketable
 Equity Securities                       --         --             --      525,646          --             --            525,646

 Amortization of Deferred
  Compensation                           --         --             --         --       3,096,390           --          3,096,390

 Net Loss                                --         --             --         --            --       (6,330,848)      (6,330,848)
                                   ----------   --------   ------------   --------   -----------    -----------    -------------

 BALANCE -DECEMBER 31, 1996        23,749,217   $237,492   $141,941,301   $525,646   $(5,357,184)   $(3,835,170)   $ 133,512,085
                                   ==========   ========   ============   ========   ===========    ===========    =============
</TABLE>

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

                                      F-8
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[1] DESCRIPTION OF THE COMPANY

The accompanying consolidated financial statements include the accounts of US
Diagnostic Inc. (formerly U.S. Diagnostic Labs Inc., the "Company"), its
wholly-owned subsidiaries and non-wholly-owned but controlled subsidiaries.

The Company was incorporated in Delaware on June 17, 1993, and is a medical
services provider specializing in the acquisition, operation and management of
multi-modalty diagnostic imaging centers and related medical facilities. As of
December 31, 1996 the Company operates 118 centers located throughout the United
States. The Company provides a variety of medical diagnostic testing and
evaluation service procedures including magnetic resonance imaging, computerized
tomography scanning, ultrasound, cardiology and various radiological services.

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECLASSIFICATIONS - Certain prior year amounts in the financial statements have
been reclassified to conform with the current year presentation.

CONSOLIDATION POLICY - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and
non-wholly-owned but controlled subsidiaries. Investments in affiliates which
are not majority owned are reported using the equity method. Significant
intercompany transactions and balances have been eliminated in consolidation.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of certain
highly liquid investments with a maturity of three months or less when
purchased. The carrying amount of cash equivalents approximates fair value due
to their short-term nature.

INVESTMENTS IN MARKETABLE EQUITY SECURITIES - Investments in marketable equity
securities are classified as available for sale and reported at fair value.
Unrealized gains and losses, net of tax, are reported as a separate component of
stockholders' equity.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated useful lives of
the related assets or the remaining lease term. The equipment used by the
Company is technologically sophisticated and subject to accelerated obsolescence
in the event of significant technological change.

INTANGIBLE ASSETS - Intangible assets relate primarily to acquisitions including
investments in unconsolidated subsidiaries accounted for under the equity
method. Goodwill consists of the cost of purchased businesses in excess of the
fair value of net tangible assets acquired. Goodwill is amortized on a
straight-line basis for a period of twenty years. Accumulated amortization of
goodwill at December 31, 1996, is $3,149,369. Customer lists and covenants not
to compete are amortized on a straight line basis for a period of ten years and
three to five years, respectively.

                                      F-9
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

On an ongoing basis, the Company measures realizability of goodwill by the
ability of the acquired business to generate current and expected future
operating income in excess of annual amortization. If such realizability is in
doubt, an adjustment is made to reduce the carrying value of the goodwill.

NET PATIENT REVENUE - Net patient revenues are reported at the estimated net
realizable amounts from patients, third-party payors and others for services
rendered including estimated prospectively determined adjustments under
reimbursement agreements with third-party payors. These adjustments are accrued
on an estimated basis in the period the related services are rendered and
adjusted in future periods as final settlements are determined.

OTHER REVENUE - Other revenue is primarily comprised of fees charged by the
Company for management services provided at Company owned, as well as
non-Company owned imaging facilities. These services include management, billing
and collecting, and marketing. Also included as part of Other Revenue is income
generated from the sublease of real property and equipment.

INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets, liabilities,
income and expense and disclosures of contingencies. The most significant
estimates relate to contractual and bad debt allowances on accounts receivable,
useful lives of medical equipment and reserves for litigation contingencies.
Future events could alter such estimates in the near term. In addition,
healthcare industry reforms and reimbursement practices will continue to impact
the Company's operations and the determination of contractual and other
allowance estimates.

EARNINGS [LOSS] PER SHARE - Primary earnings (loss) per share are computed by
dividing net income (loss) by the weighted average number of common shares and,
as appropriate, dilutive common stock equivalents outstanding during the period.

Fully diluted earnings per share reflect the maximum dilution that would have
resulted from the exercise of stock options, warrants to purchase common stock
and convertible debentures. Fully diluted earnings per share for 1996, is the
same as primary earnings per share.

                                      F-10
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

LONG-LIVED ASSETS - On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Adoption did
not have a material effect on the consolidated financial statements.

STOCK-BASED COMPENSATION PLANS - In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
allows either adoption of a fair value method of accounting for stock-based
compensation plans or continuation of accounting under Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations with supplemental disclosures.

The Company has chosen to account for all stock-based compensation arrangements
under which employees receive shares of its stock under APB Opinion No. 25 with
related disclosures under SFAS No. 123. Pro forma net earnings (loss) per common
share amounts as if the fair value method had been adopted are presented in
Note 11.

FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS No. 107, "Disclosure About Fair Value
of Financial Instruments" requires companies to disclose the fair value of
financial instruments. Management believes that the carrying values of its
financial instruments approximates their fair values and any differences which
may exist between the carrying values and fair values are not material.

[3] PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of December 31, 1996:

                                                                ESTIMATED
                                                                USEFUL LIFE

Land                                     $  1,118,270                --  Years
Buildings                                   5,281,968                40  Years
Medical Equipment                          35,435,492                 7  Years
Furniture and Fixtures                      2,556,400              7-10  Years
Office and Data Processing Equipment       11,182,384              7-10  Years
Leasehold Improvements                     10,152,741                10  Years
Equipment under Capital Leases             26,043,537               5-7  Years
                                         ------------

Total                                      91,770,792
Less:  Accumulated Depreciation
   and Amortization                       (11,824,836)
                                         ------------

Property and Equipment, Net              $ 79,945,956
                                         ============

Depreciation expense amounted to $6,595,022 and $2,169,557 for the years ended
December 31, 1996 and 1995, respectively, of which $1,517,587 and $1,231,827 was
attributed to the equipment under capital leases.

                                      F-11
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[4] SHORT-TERM BORROWINGS

Short-Term borrowings of $750,000 at December 31, 1996 consits of a $750,000
line of credit, secured by equipment, due March 1997, with a variable interest
rate of prime (8.25% at December 31, 1996).

At December 31, 1996, the Company had an unused line of credit of $15 million at
the prime interest rate with a bank. In January 1997, the line of credit was
mutually terminated by both parties.

[5] LONG-TERM DEBT

<TABLE>
<CAPTION>

Long-term debt consists of the following at December 31, 1996:
<S>                                                                        <C>
6 1/2% Convertible Note, discounted to yield 9%, due in June, 2001         $ 9,209,778

Other Convertible Notes with stated interest rates ranging from
   6% to 7%, discounted to yield 9%, maturing through March, 2001            5,146,419

6% to 14% notes payable to lending institutions, due in
  monthly installments through March 2004.  Collateralized
  by medical equipment.                                                     32,914,375

6% to 9.75% notes payable related to acquisitions, due in
  monthly installments through August 2000.  Collateralized
  by substantially all assets of the companies acquired.                    22,424,251
                                                                           -----------
Total                                                                       69,694,823
Less: Current portion                                                      (27,335,986)
                                                                           -----------

                                                                           $42,358,837
                                                                           ===========
Principal payments on long-term debt are as follows:

1997                                                                       $27,335,986
1998                                                                         9,794,581
1999                                                                         9,382,856
2000                                                                        13,157,657
2001                                                                         6,971,800
Thereafter                                                                   3,051,943
                                                                           -----------

                                                                           $69,694,823
                                                                           ===========
</TABLE>

The 6 1/2% Convertible Note (the "Note") is convertible into shares of the
Company's Common Stock ("Common Stock") at the conversion price of $9.25 per
share for an aggregate of 1,081,081 shares. The Note was issued by the Company
as partial consideration for the acquisition of MediTek Health Corporation from
HEICO Corporation in 1996 (See Note 18). The Note may be prepaid, at its $10
million face value, upon 60 days written notice, by the Company after December
31, 1997.

The Company can require the holder to convert the Note at the conversion price
if the last sale price of the Common Stock averages at least $9.25 per share for
the ten trading days immediately preceding the "required conversion date". The
"required conversion date" is any time commencing on the later of December 31,
1997 or the date that the shares of Common Stock into which the Note is
convertible are registered for resale by the Company under the Securities Act of
1933. The Company granted to the holder of the Note registration rights to the
Common Stock that the Note is convertible into.

                                      F-12
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[5] LONG-TERM DEBT [CONTINUED]

At December 31, 1996, the Company has not registered for resale the Common Stock
into which the Note is convertible. Until such time as the shares are
registered, the holder may require the Company to redeem the Note for cash at
its face value of $10 million. Accordingly, the Note balance of $9,209,778, net
of unamortized discounts of $790,222, is included in the current portion of
Long-Term Debt at December 31, 1996.

The Other Convertible Notes are convertible into shares of the Common Stock at
an average conversion price of $10.03 per share or approximately 546,903 shares.

[6] SUBORDINATED CONVERTIBLE DEBENTURES

In 1996, the Company consummated a $57.5 million offering of 9% Subordinated
Convertible Debentures (the "Debentures") due in 2003. Holders of the Debentures
are entitled to convert 100% of the principal amount into Common Stock of the
Company at a conversion price of $9.00 per share. The conversion price is
subject to adjustment under certain circumstances as described in the Debenture
Indenture ("Indenture"). The Company may not redeem the Debentures, in whole or
in part at any time prior to March 31, 1999. Thereafter, the Debentures are
redeemable at certain redemption prices as set forth in the Indenture. In the
event of a "change of control" as defined in the Indenture, the Company shall
offer to repurchase each holder's Debenture at a purchase price equal to 100% of
the principal amount, plus accrued interest.

Warrants to acquire 319,445 shares of the Company's Common Stock at $9.00 per
share were issued to the underwriter of the offering of the Debentures (See
Notes 11 and 18). The estimated fair value of the warrants at the date of the
offering was $1,672,550. This amount is being amortized to interest expense over
the term of the related Debentures.

Pursuant to the Indenture, the Company is required to maintain consolidated net
worth of at least $18 million. In the event that the Company's consolidated net
worth at the end of two consecutive fiscal quarters is below $18 million, the
Company shall offer to repurchase 12.5% of the aggregate principal amount of
Debentures originally issued (or lesser amount outstanding at the time of the
deficiency). Under certain covenants of the Indenture, the Company is limited in
the amount of debt, as defined, it may incur. The Company and its subsidiaries
may generally incur debt, as defined, if the ratio of Debt to Operating Cash
Flow, of the Company and its subsidiaries after giving pro forma effect to such
debt is 6.5 to 1 or less.

The Indenture also prohibits the Company from paying any dividends on Common
Stock. In addition, the Indenture requires that the Company and its subsidiaries
engage solely in the acquisition, operation and management of multi-modality
diagnostic imaging centers and other medical service facilities.

                                      F-13
<PAGE>


US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[6] SUBORDINATED CONVERTIBLE DEBENTURES [CONTINUED]

Debenture issuance costs of $3,463,785 are being amortized as interest expense
over the term of the related Debentures. The unamortized balance at December 31,
1996, is $3,099,457 and is included in Other Assets in the accompanying
consolidated balance sheet.

[7] OBLIGATIONS UNDER CAPITAL LEASES

Obligations under capital leases are stated on the balance sheet at the present
value of future minimum lease payments. Interest rates on capital leases ranged
primarily between 7 1/2% and 13%. Future minimum lease payments under capital
leases, together with the present value of minimum lease payments subsequent to
December 31, 1996, are as follows:

             1997                                          $12,368,430
             1998                                            9,904,116
             1999                                            6,411,183
             2000                                            2,807,863
             2001                                            1,434,856
             Thereafter                                        166,930
                                                           -----------

             Total                                          33,093,378
             Less: Amount representing interest             (4,097,443)
                                                           -----------

             Total                                          28,995,935
             Less: Current portion                         (10,291,327)
                                                           -----------

             Long-term portion                             $18,704,608
                                                           ===========
[8] INCOME TAXES

The provision [benefit] for income taxes shown in the consolidated statements of
operations consist of the following:

                                             1996               1995  
                                          ----------          --------
CURRENT:                                                              
   Federal                                $1,764,727          $122,812
   State                                     448,550            25,009
                                          ----------          --------
                                                                      
                                           2,213,277           147,821
                                          ----------          --------
DEFERRED:                                                             
                                                                      
   Federal                                (2,243,385)          494,327
   State                                    (570,210)           87,234
                                          ----------          --------
                                                                      
                                          (2,813,595)          581,561
                                                                      
    Total                                 $ (600,318)         $729,382
                                          ==========          ========
                                        
                                      F-14
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[8] INCOME TAXES [CONTINUED]

The difference between the effective income tax rate and the federal income tax
rate is summarized as follows:
                                                             1996    1995
                                                             ----    ----
                                                                         
   Federal Tax Rate                                           34%     34%
   Non-Deductible Amortization of Intangible Assets          (10)    --  
   Minority Interest                                          (2)     (3)
   State Taxes, Net of Federal Benefit                        (4)     (3)
   Non-Deductible Capitalized Costs                          (16)    --  
   Tax Loss Carry-forwards Benefited                           2     (15)
   Restricted Stock and Stock Options                         10     --  
   Extraordinary Item                                        --        6 
   Other                                                      (5)      3 
                                                             ---     --- 
                                                                         
   Effective Tax Rate                                          9%     22%
                                                             ====    ====
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1996, are as follows:

CURRENT

Deferred Tax Assets:
   Allowance for Bad Debts                                    $   627,576
   Other Allowances and Reserves                                2,972,908

Deferred Tax Liabilities:
   Cash to Accrual Differences on Acquired Entities            (1,487,556)

Valuation Allowance                                            (2,000,000)
                                                              -----------

Net Current Deferred Tax Assets                                   112,928
                                                              -----------
NON-CURRENT

Deferred Tax Assets:
   Net Operating Losses                                         8,775,256
   Basis Differences Intangible Assets                          2,617,665
   Compensatory Options                                           591,437
   Other                                                          669,055

Deferred Tax Liabilities:
   Equipment Basis Differences                                 (6,139,341)
   Cash to Accrual Differences                                 (2,975,109)
   Unrealized Gain on Investments                                (329,063)
   Other                                                         (253,078)

Valuation Allowance                                            (9,641,200)
                                                              -----------

Net Non-Current Deferred Tax Liability                         (6,684,378)
                                                              -----------

Net Deferred Income Tax Liability                             $(6,571,450)
                                                              ===========

                                      F-15
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[8] INCOME TAXES [CONTINUED]

The Company has operating loss carryforwards of approximately $22,300,000
expiring through the year 2010. These operating loss carryforwards relate to
acquired companies (See Note 10). Utilization of these operating loss
carryforwards is limited to approximately $3,280,000 per year. Management has
provided a valuation allowance for the deferred tax assets relating to these net
operating loss carryforwards and other deferred tax assets existing at the dates
of certain acquisitions. Future reduction in this valuation allowance due to
utilization of net operating losses and realization of deferred tax assets of
acquired entities will reduce goodwill.

[9] CAPITAL TRANSACTIONS

In connection with the Company's initial public offering in 1994, all of the
Company's stockholders at that time entered into an escrow agreement pursuant to
which they placed into escrow 1,163,853 shares (the "IPO Escrow Shares") of the
Company's Common Stock owned by them. Because the Company did not meet specified
minimum income goals, all of the IPO Escrow Shares will be canceled during 1997.
The IPO Escrow Shares are included in authorized, issued and outstanding shares
on December 31, 1996. The Company has an additional 991,785 shares of its common
stock in escrow relating to companies acquired. The shares will be released to
the former owners of the companies acquired upon the achievement of certain
earnings in future periods (See Note 10).

In 1995, 50,000 shares of restricted Common Stock were issued to each of the
Company's former Chief Executive Officer (replaced in March 1997, See Note 17),
the Company's former President and to Coyote Consulting and Financial Services,
LLC ("Coyote Consulting" - See Note 17) in connection with the Company's 1995
Long-Term Incentive Plan. These 150,000 restricted shares were recorded by the
Company as a deferred charge in the amount of $525,000 in 1995 and are being
amortized over the two year vesting period of the restricted stock. The
unamortized portion pertaining to Coyote Consulting and the Company's former
president were expensed in 1996 (See Note 17).

In connection with the Company's public stock offerings in 1994 and 1995, a
total of 4,237,250 Class A Warrants (including 425,000 warrants issued in
connection with a $850,000 bridge financing in 1995) and 3,812,250 Class B
Warrants were issued. The Class A Warrants entitled each registered holder to
purchase one share of Common Stock and one Class B Warrant at an exercise price
of $6.25. The Class B Warrants entitled each registered holder to purchase one
share of Common Stock at an exercise price of $8.00. In 1996, in accordance with
the terms of the warrants, the Company called for the redemption of all of the
outstanding Class A and Class B Warrants. As a result, in 1996, substantially
all of the registered holders of Class A and Class B Warrants exercised their
warrants. The Company received $90,492,996 in proceeds from the exercise (net of
fees to the IPO underwriter of $2,201,567). There were no Class A or Class B
Warrants outstanding at December 31, 1996.

                                      F-16
<PAGE>


US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[9] CAPITAL TRANSACTIONS [CONTINUED]

In December, 1996, the Company and Jeffrey Goffman, who was at the time the
Company's Chief Executive Officer, entered into a Settlement Agreement with
Consolidated General Ltd., U.K. Errington Ltd., and certain other persons
(collectively, the "Claimants"). Under the Settlement Agreement, the Company
issued an aggregate of 68,400 shares of its Common Stock, with a fair market
value of $654,075 at the date of issuance, to the Claimants and paid to the
Claimants an aggregate of $1,345,925 in cash. In exchange, the Claimants
executed general releases in favor of the Company and Mr. Goffman. Under the
Settlement Agreement, the Claimants settled claims relating to allegations that
they had escrowed too many shares of their Common Stock under the escrow
agreement entered into in connection with the Company's initial public offering.
The Claimants also released their claims relating to promissory notes in the
aggregate principal amount of $850,000 executed by Mr. Goffman in favor of the
Claimants, which promissory notes were collateralized by 150,000 shares of the
Company's Common Stock owned by Mr. Goffman. After the execution of these
promissory notes, Mr. Goffman executed an assignment and assumption agreement on
behalf of himself and the Company, under which the Company purportedly assumed
Mr. Goffman's obligations under such promissory notes. These promissory notes
were executed by Mr. Goffman in payment of consideration to the Claimants under
consulting agreements between Mr. Goffman and the Claimants, which Mr. Goffman
asserted were entered into by him for the benefit of the Company. Under the
terms of these consulting agreements, the Claimants were to provide consulting
and advisory services to Mr. Goffman, purportedly on behalf of the Company, to
assist in funding, evaluating and structuring business opportunities and
transactions. The fair market value of the shares issued and the cash paid
totaled $2,000,000 and is included in loss on settlement of claims in the
accompanying consolidated statements of operations. The Company is reviewing
this transaction further.

In 1996, 149,030 shares of the Company's Common Stock were issued upon
conversion of convertible debt securities in accordance with the conversion
terms.

In connection with a settlement agreement, dated January 30, 1996, the Company
issued 20,000 shares of Common Stock in consideration for the alleged improper
termination of employment and cancellation of options to purchase 40,000 shares
of the Company's Common Stock. The aggregate market value of these 20,000 shares
of Common Stock was approximately $125,000 and is included in loss on settlement
of claims in the accompanying consolidated statement of operations.

A former director of the Company is one of three stockholders of Med LNC, Inc.,
to which the Company was obligated to pay monthly consulting fees of $15,000
through June 1999. This consulting agreement was entered into in conjunction
with an acquisition. In January 1996, the Company issued 93,000 shares of Common
Stock in full payment of the remaining 41 months of the agreement. The aggregate
market value of the stock issued was $581,250 at the date the shares were
issued. This amount is included in general and administrative expense in the
accompanying consolidated statements of operations.

                                      F-17
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[9] CAPITAL TRANSACTIONS [CONTINUED]

The Company is required to file a registration statement with the SEC, no later
than June 4, 1997, to register 1,671,000 shares of the Company's Common Stock
issued in connection with a 1996 acquisition. Under certain circumstances the
required filing of the registration statement may be extended for up to sixty
days. If on the date that the registration statement is declared effective by
the SEC, the last sales price for the Company's Common Stock for the five
preceding trading days has not averaged $7.00 per share, then the sellers have
the right to put up to 1,000,000 shares of the Company's Common Stock back to
the Company for $7.00 per share. The put must be exercised by the seller in
writing within ten business days after the Company informs the sellers in
writing of the effective date of the registration statement. As of March 28,
1997, the Company has not filed a registration statement with the SEC to
register the Company's Common Stock issued in connection with this acquisition.

The Company has granted contractual rights to certain persons to whom the
Company has issued securities to register such securities under the Securities
Act of 1933 and state securities registration statutes, and in some instances
the Company is required to repurchase its Common Stock issued to these persons
or to pay specified liquidated damages to these persons if such registration is
not effected in a timely manner. The Company believes that it may be unable to
comply with at least some of these obligations to register such securities,
primarily because of the events relating to the Company described in Note 17.
If such persons assert their rights to have their securities repurchased
or to liquidated damages or make claims against the Company for damages for
breach of the agreements to register their securities, and if the Company is not
able to negotiate modifications to such agreements, the Company's liquidity
could be materially adversely affected.

The Company's liquidity may also be materially adversely effected to the extent
that persons to whom the Company has issued securities successfully assert
claims against the Company based upon the recent events relating to the Company
described in Note 17.

At December 31, 1996, the Company had 23,749,217 shares issued and outstanding
which includes the 1,163,853 IPO Escrow Shares which will be canceled during
1997.

A summary of Common Stock reserved for potential future issuance as of December
31, 1996, is as follows:

$57.5 Million Subordinated Convertible Debentures        6,388,880
Stock Option Plans                                       2,569,464
Underwriter Options and Warrants                         1,645,445
$10.0 Million Convertible Note                           1,081,081
Warrants Outside of Stock Option Plans                     625,000
Other Convertible Debt                                     546,903
1996 Restricted Stock Grants Not Yet Issued                379,000
Bridge Warrants                                             60,000
                                                        ----------
                                                        13,295,773
                                                        ==========

                                      F-18
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[10]  ACQUISITIONS

All of the acquisitions made by the Company during the two years ended December
31, 1996, were accounted for under the purchase method of accounting. The
Company allocates the purchase price to net assets acquired based upon their
estimated fair market values. The Company may adjust the allocation of the
purchase price subsequent to the initial allocation as more information becomes
available.

During 1995, the Company and its subsidiaries acquired 12 multi-modality
diagnostic imaging businesses. The combined purchase price for the businesses
was $21,876,000. The purchase price was comprised of $10,938,000 in cash,
$7,950,000 of debt and shares of Company's Common Stock with an aggregate market
value of $2,988,000 at the respective valuation dates of the acquisitions. The
excess of the purchase price over the fair value of net assets acquired relating
to these acquisitions totaled $11,378,741.

During 1996, the Company and its subsidiaries acquired at least a majority
interest in 22 multi-modality diagnostic businesses. The combined purchase price
for the businesses was $174,856,759. The purchase price was comprised of
$122,309,086 in cash (of which $8,337,831 is unpaid at December 31, 1996),
$37,171,638 in debt, and common stock and options of the Company with an
aggregate market value of $15,376,035 at the respective valuation dates of the
acquisitions. The excess of the purchase price over the fair value of net
tangible assets acquired relating to these acquisitions totaled $143,836,206.
Subsequent to year end, $5,179,117 of the purchase price due on companies
acquired was paid. The remaining balance will be paid when the shareholders of a
publicly held company acquired tender their shares.

Certain of the above acquisition agreements provide for contingent consideration
upon the achievement of certain earnings in future periods by the acquired
company. When and if the consideration is paid, goodwill will be increased by
the amount of the additional consideration. Goodwill will be amortized on a
prospective basis over its remaining estimated life.

In connection with the aforementioned acquisitions, the Company entered into
consulting and employment contracts with certain individuals of the acquired
companies. Payments relating to these contracts are charged to operations in the
period in which the related services are provided.

The Company also entered into non-compete agreements with certain individuals of
some of the companies acquired. The cost of these non-compete agreements is
recorded as an intangible asset as of the date of the related acquisition and
amortized over the contractual life of the agreement.

The results of operations of the acquired businesses are included in the
Company's consolidated results of operations from the date of acquisition.

                                      F-19
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[10]  ACQUISITIONS [CONTINUED]

The following summarizes the unaudited pro forma effect of the businesses
acquired in 1996 and 1995, and accounted for under the purchase method as if the
businesses had been acquired as of January 1, 1995. This presentation is
prepared in accordance with APB Opinion No. 16 and does not reflect estimates
for potential operating efficiencies and other cost savings.

       
                                               1996               1995
                                          ---------------    ---------------
                                                     (UNAUDITED)

    Revenue as reported                   $   102,061,282    $    29,416,164
    Effect of Acquisitions                     94,475,000        155,894,000
                                          ---------------    ---------------
            Pro Forma revenue             $   196,536,282    $   185,310,164
                                          ===============    ===============

    Net Income (Loss) as Reported         $    (6,330,848)   $     3,330,631
    Effect of Acquisitions                      1,808,000          1,990,000
                                          ---------------    ---------------
            Pro Forma Net Income (Loss)   $    (4,522,848)   $     5,320,631
                                          ===============    ===============
    Earnings Per Share
    Primary:  
    Historical                            $          (.47)   $           .67
      Effect of Acquisitions                          .18                .04 
                                          ---------------    ---------------
            Pro Forma Net Income (Loss)   $          (.29)   $           .71
                                          ===============    ===============
    Fully Diluted:
      Historical                          $          (.47)   $           .60
      Effect of Acquisitions                          .18               (.01)
                                          ---------------    ---------------
            Pro Forma Income (Loss)       $         (.29)    $           .59
                                          ===============    ===============

[11] STOCK OPTION PLANS AND WARRANTS

At December 31, 1996, the Company has two stock-based compensation plans. In
accordance with Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation", ("FAS 123"), the Company has accounted for all
1996, stock-based grants to non-employees as provided for by FAS 123. The
Company has elected to continue to account for its stock-based grants to
employees and directors in accordance with the provisions of APB Opinion No. 25
"Accounting for Stock Issued to Employees". The fair value of each option
granted to non-employees and employees for purposes of disclosure under FAS 123
was estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for 1996: risk-free interest rates ranging from
5.8 percent through 7.1 percent; dividend yield of zero percent; expected lives
ranging from 4 to 7 years; and volatility of 73 percent. Compensation cost
charged to operations in connection with the Company's stock-based compensation
plans totaled $235,374 for the year ended December 31, 1995, and $3,317,120
(including $1,148,750 classified as Compensation to Terminated Consultant) for
1996.

                                      F-20
<PAGE>


US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[11] STOCK OPTION PLANS AND WARRANTS [CONTINUED]

The following represents the pro forma effect had the Company valued all of its
stock-based compensation in accordance with FAS 123 using the option - pricing
model assumptions described above.
                                                 1996               1995
                                                 ----               ----
       Net income (loss)
         As reported                         $(6,330,848)        $3,330,631
         Pro forma                           $(7,060,580)        $2,170,530

       Primary earnings (loss) per share
         As reported                               $(.47)              $.67
         Pro forma                                 $(.52)              $.43

       Fully diluted earnings per share
         As reported                               $(.47)              $.60
         Pro forma                                 $(.52)              $.43

The Company's 1993 Stock Option Plan (the "1993 Plan") provides for the issuance
of incentive stock options and non-qualified stock options. Under the terms of
the 1993 Plan, a maximum of 200,000 shares of the Company's common stock may be
issued upon the exercise of stock options granted thereunder. The 1993 Plan
provides for administration by the Company's Board of Directors (or a committee
of the Board of Directors) which, subject to the terms of the 1993 Plan,
determines to whom grants are made and the vesting, timing, amounts and other
terms of such grants. Incentive stock options may be granted only to employees
of the Company, while non-qualified stock options may be granted to the
Company's employees, officers, directors, consultants and advisors. The exercise
price of incentive stock options may not be less than the fair market value of
the Company's stock on the date of grant and the term of these options may not
exceed 10 years; however, with respect to incentive stock options granted to
holders of more than 10% of the Company's common stock, the exercise price may
not be less than 110% of the fair market value of the Company's common stock on
the date of grant and the term of these options may not exceed five years.

The Company's 1995 Long-Term Incentive Plan (the "1995 Plan") provides for the
issuance of incentive stock options and non-qualified stock options. The 1995
Plan also provides for awards of restricted stock. Under the terms of the 1995
Plan, as amended, a maximum of 2,300,000 shares of the Company's common stock
may be issued upon the exercise of stock options granted thereunder and a
maximum of 700,000 shares of common stock are available for restricted stock
awards. The 1995 Plan provides for administration by the Company's Board of
Directors (or a committee of the Board of Directors) which, subject to the terms
of the 1995 Plan, determines to whom grants are made and the vesting, timing,
amounts and other terms of such grants. The 1995 Plan provides that the total
number of shares of common stock that may be subject to stock options or
restricted stock awards granted to any person in any calendar year may not
exceed 750,000 shares.

                                      F-21
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[11] STOCK OPTION PLANS AND WARRANTS [CONTINUED]

A summary of the status of the Company's two fixed stock option plans at
December 31, 1996, and 1995, and changes during the years ended on those dates
is presented below:
<TABLE>
<CAPTION>
                                                   1996                         1995
                                                   ----                         ----

                                                 WEIGHTED-                   WEIGHTED-
                                         SHARES  AVERAGE            SHARES   AVERAGE
                                         (000)   EXERCISE PRICE     (000)    EXERCISE PRICE
                                        ------   --------------     ------   --------------
<S>                                     <C>      <C>                <C>      <C>
Outstanding at
     beginning of year                   1,057      $  5.23            190    $ 5.33
Granted:
    Exercise Price equals
      market price                       1,206        11.29            552      5.10
    Exercise Price is less
      than market price                    545         7.23            315      5.38
Exercised                                 (195)       (5.30)           --         --
Forfeited                                  (43)       (5.28)           --         --
                                        ------        ------        ------     ------
Outstanding at end of year               2,570        $ 8.51         1,057     $ 5.23
                                        ======        ======        ======     ======

Options exercisable at end of year     465,905                     225,000
Weighted average fair
    value of options granted
    during the year:
     Exercise Price equals
        market price                                  $ 6.00                   $ 3.28
      Exercise Price is less
        than market price                             $ 9.70                   $ 3.99
</TABLE>

                                      F-22
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[11] STOCK OPTION PLANS AND WARRANTS [CONTINUED]

The following table summarizes information about fixed stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                 --------------------------------------------------   -------------------------------
                     SHARES                                             SHARES
RANGE OF          OUTSTANDING   WEIGHTED- AVERAGE  WEIGHTED-AVERAGE   EXERCISABLE    WEIGHTED-AVERAGE
EXERCISE PRICE    AT 12/31/96    REMAINING LIFE    EXERCISE PRICE     AT 12/31/96     EXERCISE PRICE
--------------   ------------   -----------------  ----------------   ------------   ----------------
<S>               <C>            <C>                  <C>              <C>               <C>
$ 4.00              35,000        5.03 years            $4.00             7,000            $4.00
  5.00             210,000        4.16 years             5.00           102,000             5.00
  5.00 -  7.00     613,464        3.84 years             5.51           266,905             5.63
  7.00 - 10.00     831,000        4.48 years             7.99            40,000             7.50
 10.00 - 14.00     880,000        4.91 years            12.10            50,000            12.13
                 ---------                                               ------

$4.00 - $14.00   2,569,464        4.46 years            $8.51           465,905            $6.33
==============   =========        ==========            =====           =======            =====
</TABLE>


Not included in the above plans are a total of 625,000 warrants outstanding at
December 31, 1996, issued in prior years to individuals to purchase common stock
at exercise prices ranging from $5.00 to $5.13. In addition, the Company has
60,000 warrants outstanding at an exercise price of $5.00 per share which were
issued in connection with financing arrangements in prior years. The Company
issued 400,000 of the warrants to a current member of the Company's Board of
Directors and 50,000 of the warrants were issued to the former Executive Vice
President, General Counsel and Director of the Company prior to his employment
with the Company (See Note 18).

In connection with the Company's 1994 and 1995 public stock offerings, the
Company issued unit purchase options to the underwriters. The 1994 options allow
the holder to acquire 170,000 shares of Common Stock at $7.25 per share, 170,000
warrants convertible into Common Stock at $6.25 per share and 340,000 warrants
convertible into Common Stock at $8.00 per share. The 1995 options allow the
holder to acquire 161,500 shares of Common Stock at $7.82 per share, 161,500
warrants convertible into Common Stock at $6.25 per share and 323,000 warrants
convertible into Common Stock at $8.00 per share. All of the options and related
warrants, which are convertible into a total of 1,326,000 shares, are
outstanding at December 31, 1996.

In connection with the issuance of the Company's Subordinated Convertible
Debentures, warrants to acquire 319,445 shares of the Company's Common Stock at
$9.00 per share were issued to the underwriter. All of these warrants are
outstanding at December 31, 1996.

The Company granted 100,000 and 324,000 shares of restricted Common Stock to
officers and directors of the Company in 1995 and 1996, respectively. These
restricted stock grants have vesting periods ranging from two to five years. In
1995, the Company recorded a deferred charge in the amount of $350,000. The
aggregate market value at grant date of the restricted stock granted in 1996,
was $4,159,250. Such amounts are being amortized over the vesting periods.

                                      F-23
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[11] STOCK OPTION PLANS AND WARRANTS [CONTINUED]

In 1995 and 1996, the Company also granted 50,000 and 55,000 shares respectively
of restricted Common Stock to Coyote Consulting. These restricted stock grants
vested over two and five years, respectively. In 1995, the Company recorded a
deferred charge in the amount of $175,000. In 1996, the market value at grant
date was $708,125. The related consulting agreement with Coyote Consulting was
terminated subsequent to December 31, 1996. The unamortized deferred
compensation was expensed in the fourth quarter of 1996 (See Note 17).

[12] COMMITMENTS

The Company and its subsidiaries have non-cancelable operating leases for use of
their facilities and various equipment. These leases may require payment of
various expenses as additional rent. Certain leases contain renewal options and
escalation clauses.

Minimum future rental payments for each of the next five years and thereafter
under non-cancelable operating leases having remaining terms in excess of one
year as of December 31, 1996, are:

               DATE                                         AMOUNT
               ----                                       -----------
               1997                                       $11,920,015
               1998                                        10,049,254
               1999                                         7,133,333
               2000                                         4,786,520
               2001                                         3,803,471
               Thereafter                                  10,780,188
                                                          -----------
               Total                                      $48,472,781
                                                          ===========

Rent expense for the year ended December 31, 1996, and 1995, under various
operating leases amounted to $5,557,405 and $1,629,302, respectively.

The Company has comprehensive maintenance contracts with its equipment vendors
for the magnetic resonance imaging ("MRI"), computerized tomography ("CT") and
other diagnostic medical equipment. The terms of these contracts are between one
and five years, but may be canceled by the Company under certain circumstances.

The Company has entered into employment agreements with certain officers. The
employment agreements have original terms of two to five years. All of the
agreements provide for a specific amount of annual base salary. Certain of the
agreements provide for incentive bonuses, stated minimum base salary increases,
and options to acquire the Company's Common Stock. In addition, certain of the
employment agreements provide that in the event of certain changes in control of
the Company, the officers may deem their employment terminated and receive lump
sum payments

                                      F-24
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[12] COMMITMENTS [CONTINUED]

pursuant to terms provided in each of the applicable employment agreements.
Messrs. Goffman and Karsch have purported to give notice under this provision to
the Company (See Note 17). The aggregate amount of compensation under all
existing employment agreements, based upon the base salaries in effect at
December 31, 1996, for the remaining terms of the respective employment
agreements, was approximately $10 million at December 31, 1996.

Each of the Company's Facilities have agreements with radiologists as
independent contractors under long-term agreements to provide all radiology
services to the Facilities. Radiologist compensation averages 15-18% of net
collections attributable to radiology services performed by the radiologist. 

[13] CONCENTRATION OF CREDIT RISKS

The Company's imaging centers grant credit without collateral to its patients,
most of whom are residents of the areas where the centers are located and are
insured under third-party payor agreements.

   
The mix of receivables from third-party payors and patients at December 31,
1996, are as follows:
                                            % OF TOTAL
                                            ----------

               Medicare & Medicaid               15%
               Workers' Compensation               7
               Commercial                         11
               Managed Care                       45
               Self Pay                            4
               Other                              18
                                                ----
               Total                            100%
                                                ====
   

[14] 401(K) PROFIT SHARING PLAN

Effective in October 1996, the Company amended its 401(k) Pension Plan to a
401(k) Profit Sharing Plan (the "Plan"). The Plan is offered to full-time
employees who have completed six months of service. Eligible employees may make
elective deferrals in any amount up to 15% of their compensation. The Company
contributes 100% of the amount withheld from the Participant's compensation (up
to a maximum of 3%) and may make additional discretionary contributions.
Employer contributions to the Plan in 1996, totaled $179,889.

                                      F-25
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[15] EXTRAORDINARY ITEM

During fiscal 1995, the Company settled a note payable principal balance in an
amount less than the recorded liability. In addition, the Company received an
upgrade to the related equipment at no additional cost. The transaction resulted
in a net gain of $306,042 after taxes of approximately $204,000.

[16]  INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES

In 1996, the Company sold its clinical laboratory business, with a net book
value of $3,389,305, to a non-affiliated entity ("Buyer"). The Company received
30,000 Preference Shares of the Buyer valued pursuant to the terms of the Asset
Purchase Agreement at $3,000,000. The Buyer's audited financial statements
reflect negative working capital and a tangible net deficit applicable to common
stockholders. In addition, the Buyer has incurred operating losses for the past
year. Due to the Buyer's deficit positions in working capital and equity, and
its operating losses, the Company wrote off its entire investment in the
clinical laboratory business and recognized a loss of $3,389,305.

Effective July 1, 1996, the Company entered into a 50 - 50 joint venture with
Phycor of Jacksonville, Inc., a wholly-owned subsidiary of Phycor, Inc., to
lease outpatient imaging equipment and facilities and equipment to affiliated
providers in South Georgia and North Florida through Diagnostic Equity Partners,
("DEP"), a partnership. The Company initially contributed the fixed assets and
related debt of its Orange Park facility and subsequently the fixed assets of
its Salisbury facility with a combined net book value of $1,093,878. In July
1996, the Company acquired the remaining 20% of the common stock of Salisbury
owned by a Director and Officer of the Company for $567,437. Two additional
centers were opened in 1996, with a combined investment of $825,108 each by the
Company and Phycor of Jacksonville. At December 31, 1996, the Company's
investment in DEP was $1,907,983, including $1,198,637 of goodwill which is
being amortized over 20 years.

Condensed unaudited financial data of DEP as of December 31, 1996, and for the
six months ended December 31, 1996, is as follows:

               Current Assets                         $ 3,344,383
               Fixed Assets, Net                        7,161,075
               Goodwill                                 1,412,455
               Other Assets                               247,963
                                                      -----------
               Total Assets                           $12,165,876
                                                      ===========

               Current Liabilities                    $ 3,643,663
               Long-Term Liabilities                    5,691,066
               Partner's Capital                        2,831,147
                                                      -----------
               Total Liabilities and Capital          $12,165,876
                                                      ===========

                                      F-26
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[16]  INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES [CONTINUED]

               Results of Operations
                  Revenue                        $   2,614,375
                  Expenses                           2,827,322
                                                 -------------
                  Net Loss                       $    (212,947)
                                                 =============

Pursuant to the terms of a Subscription Agreement dated December 1, 1996, the
Company acquired approximately five million shares of common stock of
Diversified Therapy Corporation ("DTC") for $3.5 million. This represents
approximately 20% of the outstanding common stock of DTC at December 31, 1996.
DTC commenced operations in 1996, to develop, acquire and operate wound care
treatment facilities utilizing hyperbaric chambers. At the date of the
subscription agreement and on December 31, 1996, the President and a founder of
DTC was Keith Greenberg. Mr. Greenberg, on behalf of Coyote Consulting provided
consulting services to the Company (See Note 17). Subsequent to year end, Mr.
Greenberg resigned as President of DTC and no longer has an equity interest in
DTC. In addition, certain executive officers of the Company and members of the
Company's Board of Directors are officers, shareholders and members of the Board
of Directors of DTC. At December 31, 1996, the Company's investment of
$3,500,000 includes $2,789,000 of goodwill which will be amortized over 20
years. Based upon unaudited results of operations for the period from inception,
July 1, 1996, to December 31, 1996, DTC incurred a loss of $294,000 and had
revenues of $183,000.

Condensed unaudited financial data of DTC as of December 31, 1996, is as
follows:
               Current Assets                    $ 5,573,065
               Goodwill                            5,215,284
               Other Assets                          555,818
                                                 -----------
               Total Assets                      $11,344,167
                                                 ===========

               Current Liabilities               $ 1,054,814
               Long-Term Liabilities               1,516,895
               Shareholder's Equity                8,772,458
                                                 -----------
               Total Liabilities and Equity      $11,344,167
                                                 ===========


The following is a combined unaudited financial summary of five diagnostic
centers acquired in 1996, which the Company is accounting for under the equity
method. The Company's combined investments in these entities was $3,196,383 at
December 31, 1996, including $2,241,821 of goodwill, which is being amortized
over 20 years. Results of operations are from the respective dates that the
Company acquired its ownership interests:

                                      F-27
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[16]  INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES [CONTINUED]

               Current Assets                    $5,356,551
               Non-Current Assets                 3,098,445
                                                 ----------
               Total Assets                      $8,454,996
                                                 ==========

               Current Liabilities               $4,212,776
               Non-Current Liabilities            1,798,144
               Equity                             2,444,076
                                                 ----------
               Total Liabilities and Equity      $8,454,996
                                                 ==========

               Results of Operations
                  Revenue                        $2,678,361
                  Expense                         1,928,767
                                                 ----------
                  Net Income                     $  749,594
                                                 ==========

[17]  LITIGATION

In January 1997, six separate lawsuits were filed against the Company and
certain officers, directors and other parties related to the Company. Five
remain pending. The plaintiffs brought each action individually and as a
purported class action consisting of all persons who purchased shares of the
Company's common stock on the open market during the respective class periods.

The lawsuits purport to allege violations of the federal securities laws.
Specifically, the lawsuits allege disclosures were not made by the Company and
named officers and directors about the role played by Keith Greenberg in the
affairs of the Company and about Mr. Greenberg's criminal and regulatory
background. Mr. Greenberg, a convicted felon, also entered into a consent
judgment for permanent injunction with the Securities and Exchange Commission
and had default judgments entered against him in separate civil proceedings, all
of which were unrelated to the Company. Mr. Greenberg, on behalf of Coyote
Consulting provided various consulting services to the Company. The plaintiff's
further allege that when this information became public on December 23, 1996,
the Company's stock price dropped significantly. The lawsuits allege that as a
direct result of the wrongful conduct, plaintiffs and other members of the class
suffered damages in connection with the purchase of the Company's securities
during the respective class periods.

The remaining lawsuits seek certification of the actions as a class action, an
unspecified amount for compensatory damages in favor of plaintiffs and other
members of the class for all damages sustained as a result of the defendants
alleged wrongdoing and awarding plaintiff and the class reasonable costs and
expenses incurred as a result of the lawsuits and such other relief as the court
deems just and proper. Plaintiffs have not alleged a claim for any specific
amount of damages, but generally describe the loss in the millions of dollars.
The outcome of this litigation is uncertain at this time, however, the effect on
the Company's financial position and results of operations could be

                                      F-28
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[17]  LITIGATION [CONTINUED]

material. In connection with the litigation, the Company's Board of Directors
appointed a special committee of outside independent directors to review the
Company's prior relationship with Coyote Consulting and Keith Greenberg and its
prior disclosure regarding that relationship. In February 1997, the Company's
Board of Directors, based upon the recommendations of the special committee,
voted to place the Company's Chief Executive Officer, Jeffrey Goffman, and the
Company's Executive Vice President, General Counsel and Secretary, Michael
Karsch, on administrative leave. Messrs. Goffman and Karsch consented to take
administrative leave. In March 1997, the Company disclosed that Messrs. Goffman
and Karsch were no longer employed by the Company. The Special Committee
recommended, and the Board adopted, certain procedures including background
investigations of management and consulting candidates, strengthening disclosure
review, and the election of two additional outside directors to the Board.

The Securities and Exchange Commission ("SEC") and the NASDAQ Stock Market Inc.
are investigating the Company's former relationship with Coyote Consulting and
Keith Greenberg, and the adequacy of the Company's disclosure concerning that
relationship. The inquiries appear to be focused on whether the disclosures with
respect to Mr. Greenberg and Coyote Consulting have been in compliance with the
federal securities laws and NASDAQ's listing standards, respectively. The
Company is cooperating fully with the NASDAQ and the SEC. An unfavorable
determination by NASDAQ would have a material adverse effect on the Company and
the liquidity of the Company's Common Stock.

In December 1994, the Company entered into a five-year consulting agreement
with Coyote Consulting amended in October 1995, and amended and restated on June
1, 1996, effective January 1, 1996, pursuant to which it paid an annual draw of
$185,000. Coyote Consulting was also entitled to a finder's fee of 2% of the
aggregate purchase price of any entity acquired by the Company as a result of an
introduction by Coyote Consulting. It is believed that Coyote Consulting is
owned by Mr. Greenberg's wife, Elise Nulman Greenberg, and a family trust. Mrs.
Greenberg is a former employee of the Company.

In 1995, the Company paid Coyote Consulting a minimum cash draw of approximately
$116,000 against which no commissions were earned for that year. Also in 1995,
Coyote Consulting was granted 150,000 options to purchase Common Stock at an
exercise price of $5.125 and 50,000 shares of restricted Common Stock recorded
as deferred compensation by the Company in 1995, in the amount of $175,000.

In 1996, the Company paid Coyote Consulting cash compensation of $3,828,000.
This amount represents 2% of the purchase price of completed acquisitions
introduced by Coyote Consulting. In addition, the Company granted to Coyote
Consulting 100,000 options to purchase Common Stock at an exercise price of
$7.125 and 55,000 shares of restricted Common Stock with a fair market value of
$708,125 at the date of grant. Pursuant to the terms of the consulting
agreement, Coyote Consulting was paid a minimum annual draw of $185,000 which
was credited against finder's fees earned by Coyote Consulting in 1996. Pursuant
to the terms of the consulting agreement, the Company leased or paid the
cost of two automobiles for use by Coyote Consulting during the

                                      F-29
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[17]  LITIGATION [CONTINUED]

term of the agreement, for which $27,919 was paid in 1996, and $16,851 in 1995.
Coyote was also reimbursed for all expenses relating to acquisition
searches for the Company. The Company paid for two insurance policies on the
life of Keith Greenberg. The Company was the beneficiary of one policy for
$2,000,000 and his wife was the beneficiary on the second policy for $600,000.

In January 1997, the Company negotiated a Termination Agreement with Coyote
Consulting (the "Agreement"), which terminated the existing Consulting
Agreement, subject to ratification by the Company's Board. Coyote Consulting has
recently indicated that it may seek to treat the tentative termination agreement
as no longer binding. As of this date the Company's Board has deferred the issue
of ratification pending further study. In connection with the terms of the
unratified agreement, the Company paid to Coyote Consulting the sum of $620,000
representing one-half of the finder's fees due Coyote Consulting upon closing of
the pending acquisition of Medical Diagnostics, Inc., which was closed in
February 1997, (See Note 20) and the pending acquisition of American Shared
Hospital Services. Under the terms of the unratified agreement the remaining
portion of the finder's fees on such acquisitions is payable at closing of the
acquisitions. In the event that the Company's acquisition of American Shared
Hospital Services does not close, the payment on account of the finder's fee
will be credited toward finder's fees on future acquisitions as discussed below,
but shall not otherwise be refundable to the Company by Coyote Consulting.

Under the terms of the unratified agreement, the Company agreed to pay Coyote
Consulting a finder's fee on 32 potential acquisitions that Coyote Consulting
introduced to the Company, if such acquisitions are consummated by the Company.
Under the terms of the unratified agreement the Company also agreed that all
unvested shares of restricted stock and unvested stock options for Company
Common Stock held by Coyote Consulting will vest as of the date of the
Agreement, except that 50,000 unvested stock options granted June 1, 1996, with
an exercise price of $7.125 per share will, pursuant to the terms of the
original grant, vest only if the Company's Common Stock trades at a price in
excess of $15.00 per share prior to June 1, 1999. At the date of the Agreement,
Coyote Consulting held 105,000 shares of restricted stock of which 25,000 were
vested prior to the Agreement and a total of 250,000 stock options of which
50,000 were vested prior to the Agreement.

Cash compensation paid to and the value of restricted stock granted and
compensatory stock options issued to Coyote Consulting included in the
accompanying consolidated statement of operations as Compensation to Terminated
Consultant for the years ended December 31, 1996 and 1995, are as follows:
                                                           1996         1995
                                                        -----------   ---------
   Finders' fees for 1996 acquisitions                  $ 3,828,000    $    --
   Payments in connection with termination agreement        620,000         --
   Restricted stock grants                                  861,250      21,875
   Compensatory stock options granted                       287,500
   
   Cash Draws                                                   --      116,251
                                                        -----------   ---------
                                                        $ 5,596,750   $ 138,126
                                                        ===========   =========

                                      F-30
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[17]  LITIGATION [CONTINUED]

The Company could be subject to legal actions arising out of the performance of
its diagnostic imaging services. Damages assessed in connection with, and the
cost of defending, any such actions could be substantial. The Company has
readily obtained and currently maintains liability insurance which it believes
is adequate for its present operations. There can be no assurance that the
Company will be able to continue or increase such coverage or to do so at an
acceptable cost, or that the Company will have other resources sufficient to
satisfy any liability or litigation expense that may result from any uninsured
or underinsured claims. The Company also requires all of its affiliated
physicians to maintain malpractice and other liability coverage.

The Company is also a party to, and has been threatened with, a number of other
legal proceedings. While it is not feasible to predict or determine the outcome
of these matters, the Company does not anticipate that an adverse outcome in any
of these matters individually would have a material adverse effect on the
Company.

[18] RELATED PARTY TRANSACTIONS

As of January 1, 1995, and amended effective September 1995, the Company entered
into a consulting agreement with Gordon Rausser, a member of the Company's Board
of Directors, to retain his services as an economic consultant to the Company.
The compensation under this agreement is (a) $25,000 cash for each quarter
commencing January 1, 1995, through December 31, 1999, for which he offers or
agrees to serve on the Company's Board of Directors and to provide other
consulting services to the Company; and (b) warrants to acquire 400,000 shares
of the Company's Common Stock immediately exercisable at $5.00 per share through
December 31, 1999.

During 1995, and 1996, respectively, the Company paid legal fees in the amount
of $352,756 and $429,468, respectively, to the law firm of Bachner, Tally,
Polevoy & Misher LLP of which Michael Karsch, a former executive officer and
director of the Company, was a partner until July, 1996 (See Note 17). In 1995,
prior to his employment with the Company, Mr. Karsch was granted options
to acquire 50,000 shares of the Company's common stock immediately exerciable at
$5.125 per share for a term of five years. In connection with his employment
agreement, the Company provided to Mr. Karsch a loan of up to $100,000 for
relocation expenses of which approximately $51,000 was outstanding as of
December 31, 1996.

A member of the Company's Board of Directors, Keith Hartley, is the managing
partner of Forum Capital Markets L.P. ("Forum"). Forum was the underwriter of
the Company's $57,500,000 Subordinated Convertible Debenture Offering and was
paid an underwriting fee of $2,875,000. In addition, the Company sold to Forum,
for nominal consideration, warrants which entitle Forum to purchase 319,445
shares of common stock of the Company at an exercise price of $9.00 per share.
Mr. Hartley was elected to the Board of Directors of the Company on September
19, 1996, subsequent to the Debenture offering.

The Company entered into an Installation Agreement ("Agreement") dated February
27, 1997, with CIERRA Solutions, Inc. ("CSI"). A brother of Todd Smith, Vice
President and Chief Information Officer of the Company, is a substantial
minority shareholder with CSI. CSI has been providing

                                      F-31
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[18] RELATED PARTY TRANSACTIONS [CONTINUED]

project management services to the Company in connection with the deployment of
a wide area computer network to over 100 of the Company's locations and other
services, since February, 1996.

The effective date of the Agreement is February 1, 1997, and has a one-year
term. Payments made to CSI in the year ended December 31, 1996, totaled
$332,604, including reimbursement for expenses and equipment purchases of
$64,197.

In July 1996, the Company consummated the acquisition of all of the outstanding
capital stock of MediTek Health Corporation from HEICO Corporation. Laurans A.
Mendelson is the Chief Executive Officer and Chairman of the Board of HEICO
Corporation. In accordance with the terms of the acquisition documents, Mr.
Mendelson, as designee of HEICO, was elected by the Shareholders to the
Company's Board of Directors on September 19, 1996. Mr. Mendelson became
Chairman of the Board of the Company on February 2, 1997.

In June 1996, the Company loaned the Company's former Chief Executive Officer,
Jeffrey Goffman, $360,000 for 30 days in connection with a private transaction.
Such loan bore interest at a rate of 10% per annum and was repaid in July 1996.

In July 1996, the Company purchased from a member of the Company's Board of
Directors the remaining 20% interest in a subsidiary of the Company. The Company
had purchased an 80% interest in 1995. Of this 80% interest, 13.3% was acquired
from the director and the remaining 66.7% was acquired from non-affiliates. The
purchase price for such transaction was $567,437, which was equal to the
pro-rata price for the original purchase in 1995.

[19] RESTATEMENT OF  UNAUDITED QUARTERLY FINANCIAL INFORMATION

Accounting adjustments reflected in the audited financial statements herein as
of and for the year ended December 31, 1996, have been made which will result in
the restatement of the Company's Forms 10-QSB, filed with the Securities and
Exchange Commission, for the quarters ended March 31, 1996, June 30, 1996, and
September 30, 1996. These accounting adjustments primarily relate to the
Company's accounting for acquisitions, dispositions, issuance of equity
securities and stock options and provisions for state and federal income taxes.

[20] SUBSEQUENT EVENTS

In February 1997, the Company acquired Medical Diagnostic, Inc. ("MDI") for a
total consideration of $22 million in cash. MDI had approximately $21.4 million
in revenue for its fiscal year ended September 30, 1996. MDI provides fixed and
mobile diagnostic imaging services to approximately 40 hospitals.

In February 1997, the Company entered into a financing agreement with DVI
Financial Services, Inc. ("DVI"). The credit facility has up to $50 million in
borrowing ability. The first $25 million is a revolving credit loan secured by
accounts receivable. The second $25 million will be utilized to finance future

                                      F-32
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
[20] SUBSEQUENT EVENTS [CONTINUED]

acquisitions. Advance of funds on the second $25 million line will be based upon
a review by DVI of the entity being acquired and a review of the assets securing
the loan. The Company borrowed $25 million under the revolving credit loan in
February 1997.

In December 1996, the Company entered into a letter of intent to acquire all of
the outstanding Common Stock of American Shared Hospital Services. In February
1997, both companies stated that, there would be a delay in the consummation of
the proposed merger. The parties have not entered into a definitive merger
agreement.

                                      F-33

<PAGE>

                               INDEX TO EXHIBITS
                                                                   SEQUENTIALLY
EXHIBIT                                                               NUMBERED
NUMBER     DESCRIPTION                                                 PAGE
-------    -----------                                             ------------
11         Statement re Computation of Per Share Earnings

27         Financial Data Schedule