<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   -----------

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

    For the quarter ended June 30, 1999

[ ] 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.
               (Exact name of registrant specified in its charter)

          DELAWARE                                     11-3164389
-------------------------------          ---------------------------------------
(State or Other Jurisdiction of          (I.R.S. Employer Identification Number)
Incorporation or Organization)


                              777 S. Flagler Drive
                                 Suite 1201 East
                         West Palm Beach, Florida 33401
                    (Address of Principal Executive Offices)

                                 (561) 832-0006
              (Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.


                Class                       Outstanding at August 12, 1999:
                -----                       -------------------------------
    Common Stock, $ .01 par value                  22,741,233 shares




<PAGE>   2


                               US DIAGNOSTIC INC.

      SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
                                   ACT OF 1995

Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as will likely result, are
expected to, will continue, is anticipated, estimated, projection, outlook) are
not statements of historical facts and may be forward-looking. Forward-looking
statements involve estimates, assumptions and uncertainties that could cause
actual results to differ materially from those expressed in the forward-looking
statements. 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, legal, growth and
integration strategies, collections of accounts receivable, available financing
or available refinancing for existing debt, any unanticipated impact of the Year
2000, including delays or changes in costs of the Company's Year 2000 compliance
program, or the failure of major vendors, payers, service providers and others
with whom the Company does business to resolve their own Year 2000 issues on a
timely basis, the Company's inability to carry out its strategy and other
factors discussed elsewhere in this report and in other documents filed by the
Company with the Securities and Exchange Commission ("SEC"). Many of these
factors are beyond the Company's control. Actual results could differ materially
from the forward-looking statements made. In light of these risks and
uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report will, in fact, occur.

Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.























                                       2

<PAGE>   3


PART I   -   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

    In thousands, except per share data                                       JUNE 30,       DECEMBER 31,
                                                                                1999            1998
                                                                              ---------       ---------
                                                                            (UNAUDITED)

<S>                                                                           <C>             <C>

ASSETS
CURRENT ASSETS
   Cash and cash equivalents ...........................................      $   8,737       $   9,177
   Accounts receivable, net of allowance for bad debts of
       $7,103 and $8,300 in 1999 and 1998,  respectively ...............         40,698          43,405
    Other receivables ..................................................          4,679           6,886
    Prepaid expenses and other current assets ..........................          4,575           5,263
                                                                              ---------       ---------
       TOTAL CURRENT ASSETS ............................................         58,689          64,731
                                                                              ---------       ---------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
   amortization of $42,366 and $39,475 in 1999 and 1998, respectively ..         87,632          91,345

INTANGIBLE ASSETS, net of accumulated amortization of $14,097
    and $11,773 in 1999 and 1998, respectively .........................         73,671          75,445


OTHER ASSETS ...........................................................          4,195           5,049

INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES ..............          1,023           1,260
                                                                              ---------       ---------
    TOTAL ASSETS .......................................................      $ 225,210       $ 237,830
                                                                              =========       =========


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses .............................      $  26,277       $  24,695
     Current portion of long-term debt .................................         21,640          20,982
     Obligations under capital leases - current portion ................          5,478           6,257
     Other current liabilities .........................................          2,170           4,522
                                                                              ---------       ---------
         TOTAL CURRENT LIABILITIES .....................................         55,565          56,456
                                                                              ---------       ---------


Subordinated convertible debentures ....................................         21,704          33,969
Long-term debt, net of current portion .................................         99,139         100,956
Obligations under capital leases, net of current portion ...............         12,874          10,227
Other liabilities ......................................................          2,239           2,549
                                                                              ---------       ---------
         TOTAL LIABILITIES .............................................        191,521         204,157
                                                                              ---------       ---------
MINORITY INTEREST ......................................................          2,824           2,120

COMMITMENTS AND CONTINGENCIES (NOTE 9)                                               --              --

Stockholders' Equity
     Preferred stock, $1.00 par value; 5,000,000 shares authorized; none
        issued .........................................................             --              --
     Common stock, $.01 par value; 50,000,000 shares authorized;
        22,741,233 and 22,712,433 shares issued and outstanding,
        respectively ...................................................            227             227
     Additional paid-in capital ........................................        148,047         148,047
     Deferred stock-based compensation                                             (620)           (973)
     Accumulated deficit ...............................................       (116,789)       (115,748)
                                                                              ---------       ---------
        TOTAL STOCKHOLDERS' EQUITY .....................................         30,865          31,553
                                                                              ---------       ---------

    TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ...........................      $ 225,210       $ 237,830
                                                                              =========       =========
</TABLE>






 See Notes to Condensed Consolidated Financial Statements.


                                       3

<PAGE>   4


US DIAGNOSTIC INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)
--------------------------------------------------------------------------------

    In thousands, except per share data

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                                   -------------------------       -------------------------
                                                      1999           1998            1999            1998
                                                   ---------       ---------       ---------       ---------
<S>                                                <C>             <C>             <C>             <C>
NET REVENUE .................................      $  39,929       $  52,459       $  79,857       $ 106,917
                                                   ---------       ---------       ---------       ---------
OPERATING EXPENSES
     General and administrative .............         29,430          38,239          59,503          78,172
     Bad debt expense .......................          1,356           1,655           2,701           2,913
     Depreciation ...........................          4,604           4,946           9,313          10,076
     Amortization ...........................          1,213           1,137           2,418           2,736
     Stock-based compensation ...............            158             282             353             638
                                                   ---------       ---------       ---------       ---------
       TOTAL OPERATING EXPENSES .............         36,761          46,259          74,288          94,535
                                                   ---------       ---------       ---------       ---------

GAIN ON SALE OF SUBSIDIARIES ................             --           5,805              --           5,805
                                                   ---------       ---------       ---------       ---------

INCOME FROM OPERATIONS ......................          3,168          12,005           5,569          18,187
                                                   ---------       ---------       ---------       ---------
OTHER INCOME (EXPENSE)

     Interest expense .......................         (4,274)         (5,160)         (8,645)        (10,612)
     Amortization of lender equity
         participation fees .................           (463)             --            (926)             --
     Interest and other income ..............            625             320           1,093           1,412
                                                   ---------       ---------       ---------       ---------
       TOTAL OTHER INCOME (EXPENSE) .........         (4,112)         (4,840)         (8,478)         (9,200)
                                                   ---------       ---------       ---------       ---------
Income (loss) before minority interest,
   provision (benefit) for income taxes
   and extraordinary item ...................           (944)          7,165          (2,909)          8,987
Minority interest in income of subsidiaries .          1,002             621           1,572           1,361
                                                   ---------       ---------       ---------       ---------

Income (loss) before provision (benefit) for
   income taxes and extraordinary item ......         (1,946)          6,544          (4,481)          7,626
Provision (benefit) for income taxes ........            266           3,133            (842)          3,469
                                                   ---------       ---------       ---------       ---------

     INCOME (LOSS) BEFORE EXTRAORDINARY

         ITEM ...............................         (2,212)          3,411          (3,639)          4,157

EXTRAORDINARY ITEM, NET OF TAXES ............             --              --           2,598              --
                                                   ---------       ---------       ---------       ---------


NET INCOME (LOSS) ...........................      $  (2,212)      $   3,411       $  (1,041)      $   4,157
                                                   =========       =========       =========       =========

BASIC EARNINGS PER COMMON SHARE
      Income (loss) before extraordinary item      $    (.10)      $     .15       $    (.16)            .18
      Extraordinary item ....................             --              --             .11              --
      Net income (loss) .....................      $    (.10)      $     .15       $    (.05)            .18
                                                   =========       =========       =========       =========

     Average common shares outstanding ......         22,736          22,821          22,730          22,759
                                                   =========       =========       =========       =========

DILUTED EARNINGS PER COMMON SHARE
      Income (loss) before extraordinary item      $    (.10)      $     .15       $    (.16)      $     .18
      Extraordinary item ....................             --              --             .11              --
      Net income (loss) .....................      $    (.10)      $     .15       $    (.05)      $     .18
                                                   =========       =========       =========       =========

      Average common and dilutive
          equivalent shares outstanding .....         22,736          23,117          22,730          23,115
                                                   =========       =========       =========       =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements



                                       4
<PAGE>   5





US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS
ENDED JUNE 30, 1999 (UNAUDITED)
-------------------------------------------------------------------------------


In thousands

<TABLE>
<CAPTION>
                                                                                                                 Total
                                      Common       Common         Paid-in         Deferred     Accumulated   Stockholders'
                                      Shares       Stock          Capital       Compensation      Deficit        Equity
                                      ------       ------         -------       ------------   ------------  -------------
<S>                                    <C>          <C>            <C>             <C>           <C>             <C>
BALANCE - JANUARY 1, 1999              22,712       $227           $148,047        $ (973)       $(115,748)      $31,553

Restricted stock issued                    29         --                 --                             --            --
Amortization of deferred
  Compensation                             --         --                 --           353               --           353
 Net income
                                           --         --                 --            --           (1,041)       (1,041)
                                       ------       ----           --------        ------        ---------       -------
BALANCE -  JUNE 30, 1999               22,741       $227           $148,047        $ (620)       $(116,789)      $30,865
                                       ======       ====           ========        ======        =========       =======

</TABLE>

See Notes to Condensed Consolidated Financial Statements.



                                       5
<PAGE>   6


US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)
-------------------------------------------------------------------------------

In thousands

<TABLE>
<CAPTION>

                                                                               Six Months Ended June 30,
                                                                            -------------------------------
                                                                              1999                   1998
                                                                            --------               --------
<S>                                                                         <C>                    <C>
OPERATING ACTIVITIES
      NET CASH - OPERATING ACTIVITIES                                       $ 10,273               $    772
                                                                            --------               --------
INVESTING ACTIVITIES
      Purchases of equipment                                                  (9,456)               (12,224)
      Acquisitions, net of cash                                                  (44)                    --
      Proceeds from the sale of subsidiaries, net of
        cash retained by purchasers                                            9,098                 31,678
      Other                                                                      124                    144
                                                                            --------               --------
      NET CASH - INVESTING ACTIVITIES                                           (278)                19,598
                                                                            --------               --------
FINANCING ACTIVITIES
      Proceeds from borrowings                                                24,031                 15,162
      Purchase of subordinated convertible debentures                         (7,925)                    --
      Repayments of notes payable and
          obligations under capital leases                                   (26,541)               (39,928)
                                                                            --------               --------
      NET CASH - FINANCING ACTIVITIES                                        (10,435)               (24,766)
                                                                            --------               --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                       (440)                (4,396)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                9,177                 17,460
                                                                            --------               --------
CASH AND CASH EQUIVALENTS - END OF PERIOD                                   $  8,737               $ 13,064
                                                                            ========               ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid during the period for:
      Interest                                                             $   7,958               $ 11,310
      Income taxes paid                                                    $     220               $  2,616

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Borrowings under capitalized leases were $3.7 million and $1.7 million during
1999 and 1998, respectively.

The value of shares of common stock released from escrow in 1998 relating to
prior acquisitions was $1.3 million.

The value of 206,000 shares of common stock repurchased by issuing debt and
subsequently retired in 1998 was $1.9 million.

During 1998 long-term debt and capital lease obligations decreased $10.7 million
as a result of the sale of certain subsidiaries, and increased by $6.4 million
as a result of the purchase and consolidation of the remaining 50% interest in a
subsidiary.



See Notes to Condensed Consolidated Financial Statements.



                                       6
<PAGE>   7


US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-------------------------------------------------------------------------------

[1]  BASIS OF PRESENTATION

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements as of June 30,
1999, include the accounts of US Diagnostic Inc., its wholly-owned subsidiaries
and non-wholly-owned but controlled subsidiaries (the "Company"), and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). All significant intercompany accounts and
transactions have been eliminated. Certain information related to the Company's
organization, significant accounting policies and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements reflect, in the opinion of management, all
material adjustments (consisting only of normal and recurring adjustments)
necessary to fairly state the financial position and the results of operations
for the periods presented and the disclosures herein are adequate to make the
information presented not misleading. Operating results for interim periods are
not necessarily indicative of the results that can be expected for a full year.

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

The condensed consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed with the SEC
for the year ended December 31, 1998.

In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified from the previously reported financial
statements in order to conform with the financial statement presentation of the
current period.

RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires
reporting every derivative instrument at its fair value on the balance sheet.
This statement also requires recognizing any change in the derivatives' fair
value in earnings for the current period unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for fiscal years that begin after
June 15, 2000. Management has not determined the effect, if any, of adopting
SFAS No. 133.



                                       7
<PAGE>   8

[2]  PROPERTY AND EQUIPMENT

A summary of property and equipment is as follows:

In thousands

<TABLE>
<CAPTION>

                                                                      June 30,    December 31,         Estimated
                                                                       1999           1998             Useful Life
                                                                     --------    ------------         -----------
<S>                                                                  <C>           <C>                 <C>
  Land                                                               $  1,868      $  1,868                    --
  Buildings                                                             5,561         5,561              40 Years
  Medical equipment                                                    90,289        90,462               7 Years
  Furniture and fixtures                                                2,913         3,451            7-10 Years
  Office, data processing equipment and software                       10,542        11,351            3-10 Years
  Vehicles                                                                572           626               3 Years
  Leasehold improvements                                               18,253        17,501              10 Years
                                                                     --------      --------
    Total                                                             129,998       130,820
  Less:  accumulated depreciation and amortization                    (42,366)      (39,475)
                                                                     --------      --------
      Property and equipment, net                                    $ 87,632      $ 91,345
                                                                     ========      ========
</TABLE>

Included in property and equipment is equipment under capital leases amounting
to $33.5 million and $28.9 million at June 30, 1999 and December 31, 1998,
respectively. Accumulated depreciation for equipment under capital leases was
$10.9 million and $9.1 million as of June 30, 1999 and December 31, 1998,
respectively.

Depreciation expense amounted to $4.6 million and $9.3 million during the three
and six months ended June 30, 1999, respectively, of which $1.0 million and $2.0
million, respectively, was attributed to equipment under capital leases.
Depreciation expense amounted to $4.9 million and $10.1 million during the three
and six months ended June 30, 1998, respectively, of which $1.0 million and $2.1
million, respectively, was attributed to equipment under capital leases.

[3]  INTANGIBLE ASSETS

A summary of intangible assets is as follows:

  In thousands

<TABLE>
<CAPTION>

                                                                      June 30,    December 31,         Estimated
                                                                       1999           1998             Useful Life
                                                                     --------    ------------         -----------
<S>                                                                  <C>           <C>                 <C>
  Goodwill                                                           $ 81,210      $ 80,660              20 Years
  Covenants not to compete                                              3,192         3,192            3-10 Years
  Customer lists                                                        3,189         3,189              15 Years
  Other intangibles                                                       177           177             3-5 Years
                                                                     --------      --------
  Total                                                                87,768        87,218
  Less: accumulated amortization                                      (14,097)      (11,773)
                                                                     --------      --------
           Intangibles, net                                          $ 73,671      $ 75,445
                                                                     ========      ========
</TABLE>

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. The Company believes that a twenty year
amortization policy for goodwill is reasonable based upon current and expected
operating results of the businesses acquired. On an ongoing basis, the Company
measures realizability of goodwill. If such realizability is in doubt, an
adjustment is made to reduce the carrying value of the goodwill.



                                       8
<PAGE>   9

[4]  INCOME TAXES

Income taxes have been provided for based upon the Company's anticipated annual
effective income tax rate.

[5]  DEBT

In connection with consummation of the sale of US Imaging, Inc. and Integrated
Health Concepts, Inc. during the first quarter of 1999, long term debt and
capital leases decreased by an aggregate of $8.8 million.

In January 1999, the Company repurchased approximately $12.5 million of its
Subordinated Convertible Debentures (the "Debentures") in the open market, and
immediately retired the Debentures. The Company financed the purchase of the
Debentures from borrowings under a $25.0 million loan agreement entered into
with DVI Financial Services, Inc. ("DVIFS") in December 1998, which originally
matured on June 21, 2000 and was subsequently extended to July 1, 2001. The
Debentures were purchased at a total price of $9.1 million, consisting of $7.9
million paid directly to the Debenture holders, $238,000 paid to DVIFS
representing a 3% loan origination fee on amounts borrowed under the loan
agreement, and $922,000 paid to DVI Private Capital ("DVIPC"), an affiliate of
DVIFS, as equity participation for services rendered by DVI Private Capital.
This equity participation was paid to DVIPC in lieu of normal and customary
investment banking fees and amounted to 20% of the difference between the face
amount of the Debentures repurchased and the amount paid to the Debenture
holders. The loan origination fees were capitalized to other assets in the
accompanying Condensed Consolidated Balance Sheets and the amortization of such
amount is included in interest expense. The equity participation fees were
capitalized to other assets in the accompanying Condensed Consolidated Balance
Sheets and the amortization of such amount is classified as amortization of
lender equity participation fees. The difference between the aggregate carrying
value of the Debentures (as well as pro rata portions of unamortized capitalized
financing costs and unamortized fair value of certain warrants issued to the
underwriter when the Debentures were originally issued), and the amounts paid to
the Debenture holders, was recorded as an extraordinary gain after taxes of $2.6
million during the first quarter of 1999. As of June 30, 1999, the balances
outstanding under the Debentures was $21.7 million, and $22.0 million was drawn
against the loan agreement.

The maturity date of the Company's $35.0 million revolving credit loan from DVI
Business Credit Corporation has been extended to February 28, 2001.


                                       9

<PAGE>   10

[6]  EARNINGS PER SHARE

Earnings (loss) per common share ("EPS") data were computed as follows:

<TABLE>
<CAPTION>

                                                           THREE MONTHS ENDED JUNE 30,           SIX MONTHS ENDED JUNE 30,
                                                           ---------------------------           -------------------------
                                                             1999               1998                1999            1998
                                                             ----               ----                ----            ----
<S>                                                        <C>               <C>                  <C>              <C>
In thousands, except per share data

Income (loss) before extraordinary item                    $(2,212)          $ 3,411              $ (3,639)        $ 4,157
Extraordinary item                                              --                --                 2,598              --
                                                           -------           -------              --------         -------
Net income (loss)                                          $(2,212)          $(3,411)             $ (1,041)        $ 4,157
                                                           =======           =======              ========         =======
BASIC EPS:

Weighted-average common shares outstanding                  22,736            22,821                22,730          22,759
                                                           =======           =======              ========         =======
EPS - income (loss) before extraordinary item              $  (.10)          $   .15              $   (.16)        $   .18
EPS - extraordinary item                                        --                --              $    .11              --
                                                           -------           -------              --------         -------
EPS - net income (loss)                                    $  (.10)          $   .15              $   (.05)        $   .18
                                                           =======           =======              ========         =======
DILUTED EPS:

Weighted-average common shares outstanding                  22,736            22,821                22,730          22,759
Stock options and warrants                                      --                 2                    --               6
Restricted stock grants                                         --               114                    --             126
Contingent shares                                               --               180                    --             224
                                                           -------           -------              --------         -------
Shares applicable to diluted earnings                       22,736            23,117                22,730          23,115
                                                           =======           =======              ========         =======
EPS - income (loss) before extraordinary item              $  (.10)          $   .15              $   (.16)        $   .18
EPS - extraordinary item                                        --                --              $    .11              --
                                                           -------           -------              --------         -------
EPS - net income (loss)                                    $  (.10)          $   .15              $   (.05)        $   .18
                                                           =======           =======              ========         =======
</TABLE>


The Company had a loss before extraordinary item for the three and six months
ended June 30, 1999, and all potentially dilutive securities were excluded from
basic and diluted earnings per share during such period since the effect would
be anti-dilutive. Additionally, certain potentially dilutive securities were
excluded from basic and diluted earnings per share for the three months and six
months ended June 30, 1998 because their effect would be anti-dilutive. Such
potentially dilutive securities consist of the following: (i) unexercised stock
options and warrants to purchase 5.9 million and 5.8 million shares of the
Company's Common Stock as of June 30, 1999 and 1998, respectively; (ii) 3.6
million and 7.8 million shares of the Company's Common Stock issuable upon
conversion of convertible debt as of June 30, 1999 and 1998, respectively; (iii)
unexercised restricted stock amounting to 170,400 shares of the Company's Common
Stock as of June 30, 1999.

[7] SALES AND ACQUISITIONS OF BUSINESSES

During the second quarter of 1999, the Company acquired a facility for
approximately $900,000 and merged its operations with an existing facility, and
sold its interest in two facilities for approximately $1.3 million (which
approximated the net carrying value of the assets sold).


                                       10

<PAGE>   11

[8] LITIGATION

Two suits have been filed against the Company by sellers of diagnostic imaging
centers who received shares of the Company's Common Stock in partial payment of
the purchase price for their centers and who allege that undisclosed facts
regarding the background of Keith Greenberg, who had provided consulting
services to the Company, were material to their decision to sell. In connection
with the first of these actions (Centre Commons MRI Ltd., et al. v. US
Diagnostic et al.), in the United States District Court for the Western District
of Pennsylvania, the sellers of multiple centers in Pennsylvania seek to compel
the Company to repurchase approximately 750,000 shares of its Common Stock at a
price of $12.125 per share and also allege that the Company's failure to
register such shares under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a written contract, diminished their value. Even
if registered, the shares were subject to limited releases from lock-up until
July 1997 when they became tradable pursuant to Rule 144 without the need for
registration. Non-binding mediation was held in June 1999, recessed and
discussions continue. In the second such suit (Sanders et al. v. US Diagnostic
et al.) in the United States District Court for the Eastern District of New
York, four participants in limited partnerships which sold the Company three
imaging centers in New York seek to recover damages of up to $2.0 million but
have been unable to substantiate this amount. A motion by the Company to dismiss
the action is pending with the Court and non-binding mediation is scheduled for
August 1999. The Company is vigorously defending both suits but there can be no
assurances that the Company will prevail.

In June 1999, Lisa Brockett, as Trustee for the Reese General Trust, filed suit
against the Company, and certain former officers and directors and other
parties, in the 333rd Judicial District Court of Harris County, Texas, alleging,
among other claims, that (a) undisclosed facts regarding the background of Keith
Greenberg who had provided consulting services to the Company, were material to
the Trust's decision to sell the stock of U.S. Imaging, Inc. ("USI") to the
Company in June 1996 and to receive 1,671,000 shares of Company Common Stock as
partial consideration for the sale; and (b)the Trust was harmed by the Company's
failure to register the shares under the Securities Act and by the Company's
subsequent restatement of its quarterly report for the quarter ended March 31,
1996. Lisa Brockett is the daughter of Dr. L.E. Richey, a former director and
Chairman of the Board of the Company. The Plaintiff has not specified the amount
of actual damages sought and the suit is in a very early stage. The Company
intends to vigorously defend the suit, and believes it has substantive defenses
and counterclaims but there can be no assurances that the Company will prevail.
In April 1999, the Company sued United Radiology Associates, Inc. ("URA") for
breach of contract and related claims relating to the sale of the stock of USI
to URA by the Company in February 1999, and the Company simultaneously filed a
claim against Dr. Richey for breach of a personal guaranty in connection
therewith. Dr. Richey is the chief executive officer and a director of URA.

In December 1996, the SEC commenced an investigation into the Company's former
relationship with Coyote Consulting and Keith Greenberg to determine whether the
Company's disclosure concerning that relationship was in compliance with the
federal securities laws. The Company is cooperating fully with the SEC.

In June 1997, Shelby Radiology, P.C. ("Shelby Radiology"), filed suit against
the Company in the Circuit Court of Montgomery County, Alabama, alleging breach
of an alleged oral contract to provide radiology services (and subsequently
amended its complaint to include additional related claims). Under its various
claims, Shelby Radiology was seeking compensatory damages in the amount of $1.2
million. In addition, Shelby Radiology sought punitive damages. On May 7, 1999
the jury returned a verdict against the Company in the amount of $1.1 million as
compensatory damages. The jury did not award any punitive damages. The verdict
is not subject to execution during the post trial and appeals process due to the
posting of a bond by the Company. The Company believes the verdict is
unjustifiable and without merit. The Company intends to vigorously challenge the
verdict through post-trial motions which have been filed with the trial court
and, if relief is not granted, to appeal the verdict to the Alabama Supreme
Court. There can be no assurances that the Company will prevail in its efforts.




                                       11
<PAGE>   12

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 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 in the ordinary course of business. While it is not feasible
to predict or determine the outcome of these matters, and although there can be
no assurances, management of the Company does not anticipate that the ultimate
disposition of any such proceedings will have a material adverse effect on the
Company.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Certain matters discussed herein are forward-looking statements made pursuant to
the safe harbor provisions of the Private 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.

OVERVIEW AND RECENT DEVELOPMENTS

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 Company's revenues and profitability may be materially adversely affected by
the current trend in the healthcare industry toward cost containment, continuing
governmental budgetary constraints, reductions in reimbursement rates, changes
in the mix of the Company's patients and other changes in reimbursement for
healthcare services, among other factors, which may put downward pressure on
revenue per scan.

Since late 1997 the Company has pursued a four part strategy to: (i) reduce
operating costs; (ii) divest non-core and underperforming assets; (iii) reduce
and refinance debt; and (iv) develop new facilities and, under appropriate
financial circumstances, engage in prudent acquisitions. In January and February
of 1999, in two separate transactions, the Company sold its interest in certain
subsidiaries located in Texas, for an aggregate price of $23.4 million in cash,
a promissory note and assumption of certain liabilities. The proceeds from the
sales of both non-core assets and underperforming facilities were used by the
Company to reduce debt and to bolster the Company's cash reserves. In January
1999, the Company completed the repurchase in the open market of $12.5 million
aggregate principal amount of its 9% Convertible Subordinated Debentures due
2003 for $9.1 million, resulting in a decrease in long-term debt and related
interest expense. During the second quarter of 1999, the Company (i) acquired a




                                       12
<PAGE>   13

facility for approximately $900,000 and merged its operations with an existing
facility; (ii) sold its interest in two facilities for approximately $1.3
million (which approximated the net carrying value of the assets sold) and
closed two centers; and (iii) opened three new centers.

The Company's strategy for the remainder of 1999 will be to continue the cost
and debt reduction efforts, divest a few remaining underperforming centers, seek
advantageous refinancing when and as market conditions permit, and pursue its
long-term strategy set forth in Item 1, Business, in the Company's Form 10-K for
the year ended December 31, 1998 ("Form 10-K").

The following table sets forth items of income and expense as a percentage of
total revenues:

<TABLE>
<CAPTION>

                                               Three Months Ended     Six Months Ended
                                                     June 30,             June 30,
                                               ------------------    -----------------
                                               1999       1998       1999       1998
                                               ----       ----       ----       ----
<S>                                           <C>        <C>        <C>        <C>
Net revenue                                    100.0%     100.0%     100.0%     100.0%
                                               -----      -----      -----      -----
Operating Expenses

     General and administrative                 73.7       72.9       74.5       73.1
     Bad debt expense                            3.4        3.2        3.4        2.7
     Depreciation                               11.5        9.4       11.7        9.4
     Amortization                                3.0        2.2        3.0        2.6
     Stock-based compensation                     .4         .5         .4         .6
                                               -----      -----      -----      -----

Total Operating Expenses                        92.0       88.2       93.0       88.4
                                               -----      -----      -----      -----

Gain on Sale of Subsidiaries                      --       11.1         --        5.4
                                               -----      -----      -----      -----

Income from Operations                           8.0       22.9        7.0       17.0

Total Other Income (Expense)                   (10.3)      (9.2)     (10.7)      (8.6)
                                               -----      -----      -----      -----

Income (loss) before minority interest,
provision (benefit) for income taxes and
   Extraordinary items                          (2.3)      13.7       (3.7)       8.4

Minority interest and income tax
  provision (benefit)                            3.2        7.2         .9        4.5
                                               -----      -----      -----      -----
Income (Loss) Before Extraordinary
  Item                                          (5.5)       6.5       (4.6)       3.9

Extraordinary item, net of taxes                  --         --        3.3         --
                                               -----      -----      -----      -----
Net Income (Loss)                               (5.5)%      6.5%      (1.3)%      3.9%
                                               =====      =====      =====      =====
</TABLE>

In May 1998, the Company sold certain non-core assets consisting of the
Company's mobile subsidiary, Medical Diagnostics, Inc. During 1998 and the first
quarter of 1999, the Company sold several underperforming facilities which
include United States Cancercare, Inc., US Heartcare Management, Inc.,
Integrated Health Concepts, Inc., and US Imaging, Inc. See "Overview" above and



                                       13
<PAGE>   14

the Company's Form 10-K for the year ended December 31, 1998 for further
information relating to these dispositions. During the second quarter of 1999,
the Company sold its interest in two additional underperforming facilities.
Collectively, these non-core assets and underperforming facilities are referred
to as the "sold facilities".

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 1998.

Net revenue for the three months ended June 30, 1999 (the "1999 three month
period") decreased to $39.9 million from $52.5 million for the three months
ended June 30, 1998 (the "1998 three month period"). The decrease resulted from
the sale of the sold facilities. Excluding the net revenue generated by the sold
facilities, net revenue increased by 4.8% to $39.8 million during the 1999 three
month period, from $37.9 million during the 1998 three month period. The
increase from 1998 to 1999 was due primarily to three new center openings as
well as providing additional modalities at certain centers. For centers which
were operational during the entire comparable 1998 and 1999 periods, revenue was
approximately equal. However, second quarter 1999 revenues increased by
approximately 4.0% over first quarter 1999 revenues for centers which were
operational during both those periods.

General and Administrative ("G&A") expense decreased to $29.9 million (or 74.5%
of revenue) during the 1999 three month period, compared to G&A expense of $38.2
(or 73.1% of revenue) million during the 1998 three month period. The decrease
in G&A expense from 1998 to 1999 resulted to a large degree from the sale of the
sold facilities. Excluding the sold facilities, G&A expense was $29.1 million
(or 73.3% of revenue) during the 1999 three month period compared to $27.7
million (or 73.1% of revenue) during the 1998 three month period. As discussed
in the paragraph above, the Company has opened three new centers and began
providing additional modalities in certain facilities which results in
additional G&A costs. However, new centers traditionally operate at a loss
during the first six to nine months of operation contributing to the increase in
G&A expense as a percentage of revenue. Additionally, certain of the Company's
cost reduction plans implemented during 1999 did not have a full impact on the
results for the 1999 three month period and are expected to be more fully
realized throughout the remainder of the year. Overall, the Company has
experienced an increase in it payroll expenses, which the Company believes is a
result of wage inflation across the country, particularly for technical
salaries.

Bad debt expense was $1.4 million (or 3.4% of revenue) during the 1999 three
month period, compared to $1.7 million (or 3.2% of revenue) during the 1998
period. The 1998 amount is net of approximately $199,000 of bad debt recoveries
of accounts receivable written off in 1997 in conjunction with the conversion of
the billing system during that period. Excluding the bad debt recoveries, bad
debt expense was $1.9 million (or 3.5% of revenue) during the 1998 three month
period. Excluding the sold facilities, bad debt expense was $1.4 million (or
3.4% of revenue) during the 1999 three month period. For the 1998 three month
period, bad debt expense excluding the sold facilities and excluding the bad
debt recoveries was $1.2 million (or 3.2% of revenue).

Depreciation expense was $4.6 million during the 1999 three month period,
compared to $4.9 million during the 1998 three month period. Depreciation
expense decreased from 1998 to 1999 resulting from the sale of the sold
facilities, which was partially offset by an increase relating to increases in
property and equipment in connection with medical equipment upgrades,
enhancement of single modality centers to multi-modality centers, ongoing
improvements to facilities, and continued enhancements to the new billing
system.

Amortization expense was $1.2 million during the 1999 three month period
compared to $1.1 million during the 1998 three month period.





                                       14
<PAGE>   15
Interest expense (excluding amortization of lender equity participation fees)
decreased to $4.3 million, during the 1999 three month period, compared to $5.2
million during the 1998 three month period, resulting primarily from reduced
debt in connection with the sale of the sold facilities. Total debt including
capital leases outstanding amounted to $160.8 million as of June 30, 1999,
compared to $192.0 million as of June 30, 1998.

As further discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, during late December 1998 and January 1999, the Company paid an
aggregate of $2.8 million in equity participation fees in connection with
financing obtained for the repurchase of a portion of the Company's Subordinated
Convertible Debentures during such periods. Such aggregate amount was
capitalized and is being amortized over an 18 month period (the life of the
related indebtedness). The amortization expense during 1999 three month period
amounted to $463,000 and has been classified as amortization of lender equity
participation fees. All such fees will be fully amortized by June 2000.

The Company had a basic and diluted loss per share of $.10 during the 1999 three
month period compared to basic and diluted earnings per share of $.15 during the
1998 three month period.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 1998.

Net revenue for the six months ended June 30, 1999 (the "1999 six month period")
decreased to $79.9 million from $106.9 million for the six months ended June 30,
1998 (the "1998 six month period"). The decrease resulted from the sale of the
sold facilities. Excluding the net revenue generated by the sold facilities, net
revenue increased by 4.6% to $78.0 million during the 1999 six month period,
from $74.5 million during the 1998 six month period. The increase from 1998 to
1999 was due primarily to certain new center openings as well as providing
additional modalities at certain centers. For centers opened during the entire
comparable 1998 and 1999 periods, revenue was approximately equal.

General and Administrative ("G&A") expense decreased to $59.5 million (or 73.7%
of revenue) during the 1999 six month period, compared to G&A expense of $78.1
million (or 72.9% of revenue) during the 1998 six month period. The decrease
from 1998 to 1999 resulted primarily from the sale of the sold facilities.
Excluding the sold facilities, G&A expense was $57.3 million (or 73.5% of
revenue) during the 1999 six month period compared to $55.0 million (or 73.8% of
revenue) during the 1998 six month period. G&A expense for the 1999 six month
period was affected by the same factors discussed above with respect to the 1999
three month period.

Bad debt expense was $2.7 million (or 3.4% of revenue) during the 1999 six month
period, compared to $2.9 million (or 2.7% of revenue) during the 1998 period.
The 1998 amount is net of approximately $917,000 of bad debt recoveries of
accounts receivable written off in 1997 in conjunction with the conversion of
the billing system during that period. Excluding the bad debt recoveries, bad
debt expense was $3.8 million (or 3.6% of revenue) during the 1998 six month
period. Excluding the sold facilities, bad debt expense was $2.6 million (or
3.4% of revenue) during the 1999 six month period. For the 1998 six month
period, bad debt expense excluding the sold facilities and excluding the bad
debt recoveries was $2.3 million (or 3.1% of revenue).

Depreciation expense was $9.3 million during the 1999 six month period, compared
to $10.1 million during the 1998 six month period. Depreciation expense
decreased from 1998 to 1999 resulting from the sale of the sold facilities,
which was partially offset by an increase relating to increases in property and
equipment in connection with medical equipment upgrades, enhancement of single
modality centers to multi-modality centers, ongoing improvements to facilities,
and continued enhancements to the new billing system.

Amortization expense was $2.4 million during the 1999 six month period compared
to $2.7 million during the 1998 six month period.




                                       15
<PAGE>   16
Interest expense (excluding amortization of lender equity participation fees)
decreased to $8.6 million during the 1999 six month period, compared to $10.6
million during the 1998 six month period. The reduction in interest expense from
1998 to 1999 resulted primarily from reduced debt in connection with the sale of
the sold facilities, as well as debt reduction relating to the Debenture
repurchases described above. Total debt including capital leases outstanding
amounts to $160.8 million as of June 30, 1999, compared to $192.0 million as of
June 30, 1998.

As further discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, the Company recorded an extraordinary gain net of taxes of $2.6
million during the 1999 six month period related to the repurchase of
approximately $12.5 million aggregate principal amount of its Subordinated
Convertible Debentures for amounts less than the recorded amounts. Additionally,
during late December 1998 and January 1999, the Company paid an aggregate of
$2.8 million in equity participation fees in connection with financing obtained
for the repurchase of the Debentures during such periods. Such aggregate amount
was capitalized and is being amortized over an eighteen month period (the life
of the related indebtedness). The amortization expense during the 1999 six month
period amounted to $963,000 and has been classified as amortization of lender
equity participation fees. All such fees will be fully amortized by June 2000.

On a basic and diluted per share basis, the Company had a loss before
extraordinary item of $.16, an extraordinary gain of $.11, and a net loss of
$.05 during the 1999 six month period. The Company had basic and diluted
earnings per share of $.18 during the 1998 six month period.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1999, the Company had working capital of $3.1 million, compared to
$8.3 million at December 31, 1998. The decrease in working capital resulted
primarily from a decrease in accounts receivable and certain other current
assets relating to the facilities sold during the first quarter of 1999. The
Company's primary short-term liquidity requirements as of June 30, 1999 include
the current portion of long-term debt and capital leases (totaling $27.1
million), accounts payable, other current liabilities and capital expenditures
related to the opening of new facilities, the replacement and enhancement of
existing imaging equipment and facilities, and continued improvements and
enhancements to the Company's management information systems.

Net cash provided by operating activities during the 1999 six month period was
$10.3 million, compared to $772,000 provided by operating activities during the
1998 six month period. During the 1998 six month period, the Company paid $5.3
million in shareholder class action settlement payables. Additionally, excluding
changes in accounts receivable relating to the sold facilities, during the 1998
six month period, accounts receivable and other receivables increased by $9.7
million, compared to an increase of $2.4 million during the 1999 six month
period. The reduced increase in accounts receivable and other receivables from
1998 to 1999 resulted from improved collection efforts during the 1999 six month
period.

Net cash used in investing activities was $278,000 during the 1999 six month
period, compared to net cash provided by investing activities of $19.6 million
during the 1998 six month period. During the 1999 six month period, the Company
received $9.1 million in net cash proceeds from the sale of certain facilities,
compared to $31.7 million received from the sale of certain facilities during
the 1998 six month period. Equipment purchases were $9.5 million during the 1999
six month period, compared to $12.2 million during the 1998 six month period.

Net cash used in financing activities was $10.4 million during the 1999 six
month period, compared to $24.8 million used in financing activities during the
1998 six month period. Proceeds from new borrowings totaled $24.0 million during
the 1999 six month period, compared to $15.2 million during the 1998 six month




                                       16
<PAGE>   17

period. Repayments of notes and capital leases totaled $26.5 million during the
1999 six month period, compared to $39.9 million during the 1998 six month
period. As discussed in Note 5 of Notes to Condensed Consolidated Financial
Statements, the Company borrowed approximately $9.1 million in January 1999 to
repurchase on the open market and retire approximately $12.5 million principal
amount of Debentures.

The Company continues to implement its strategy to reduce debt and increase cash
flows as more fully described in "Overview" above. Although there can be no
assurance, based on its current operations and financial condition, the Company
believes that it has or can obtain sufficient financial resources to satisfy its
liquidity and working capital requirements for the foreseeable future. As of
June 30, 1999, the Company has approximately $4.2 million of purchase
commitments for capital expenditures which it either already has or expects to
have financing available to meet such commitments. This forward-looking
statement is subject to a number of uncertainties, including the Company's
ability to collect accounts receivable, to manage expenses, to obtain financing
or refinancing of existing debt on acceptable terms, regulatory changes in
Medicare reimbursement rates, and other factors discussed elsewhere in this
report.

For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Part II - Item 3 - Legal Proceedings and
Note 8 of Notes to Condensed Consolidated Financial Statements.

YEAR 2000 COMPLIANCE

The Company is aware of the issues associated with the programming and embedded
code that may exist in computer systems as of January 1, 2000. Systems and
applications that use two digits to store the years might produce unpredictable
results when their digits turn to "double-zero" on January 1, 2000. The issues
are (1) whether such code exists in the Company's mission-critical applications
and/or computer hardware and if that code will produce accurate date-sensitive
calculations on or after January 1, 2000; and (2) whether certain embedded
applications that control certain medical imaging systems should be upgraded to
ensure Year 2000 compliance and the cost of such upgrades, if any.

The Company has established a multi-phased Year 2000 Readiness Program
consisting of an "Assessment Phase", "Planning Phase", "Implementation Phase",
"Testing/Certification Phase" and a "Recovery Plan Phase" and a timetable to
address Year 2000 compliance issues for all of its internal information
technology ("IT") consisting of computer software, hardware, bundled components,
development and support tools. The Company has adopted a rigorous battery of
tests to ensure Year 2000 compliance in its IT. The majority of the PCs in use
throughout the offices and facilities were purchased within the past two years.
The Company will be using testing products to test the PCs basic input-output
system. As a part of the Assessment and Planning Phases, the Company performed a
ground-up review of its software application design and application code-review
processes to ensure Year 2000 compliance from project initialization to
completion.

In the event that any compliance issues are identified during the Implementation
or Testing/Certification Phases, the Company will, through its internal systems
support programs, provide the necessary corrections, upgrades, and software
releases as part of the Recovery Plan Phase to make all software and services
Year 2000 compliant. In the event that there is a Year 2000 failure during the
transition to the next millennium, the Company is prepared through its
comprehensive Recovery Plan Phase. Characteristics of the plan include making
additional hardware, R & D support and client support personnel available.





                                       17
<PAGE>   18

The Company's primary billing and collection, accounting, word processing,
spreadsheet and small database applications have all been warranted by the
manufacturers to be Year 2000 compliant. The underlying operating systems and
network software are also warranted to be Year 2000 compliant.

The Company's compliance policy requires that new computer applications and/or
hardware equipment acquired by the Company be warranted as Year 2000 compliant
by the manufacturer. To ensure that all purchased business systems (hardware and
software components) will operate reliably into the new millennium, the Company
is verifying that all suppliers of services and products have effective Year
2000 compliance processes.

The Company is reviewing the computer applications of its significant payors,
consisting of Medicare, Medicaid and private insurance carriers, to determine
whether such applications will be upgraded before January 1, 2000. News reports
have indicated that various agencies of the federal government, including the
Health Care Financing Administration, which administers Medicare, may have
difficulty becoming fully Year 2000 compliant before January 1, 2000. During the
six months ended June 30, 1999 revenue generated under Medicare billings
amounted to approximately 12.4% of gross billings for such period. The Company
has requested written confirmation from each of its private insurance
carriers and Medicare of their Year 2000 compliance status.

The Company's Assessment and Planning Phases with respect to IT issues have been
completed at a cost of approximately $25,000; the next phase to be executed is
the Implementation Phase to be followed by the Testing/Certification Phase. The
Company is 90% complete in its Year 2000 Readiness Program for IT issues and has
spent approximately $70,000, all of which has been expensed to operations. IT
Y2K issue compliance is projected to be completed by the end of August 1999.

The Company anticipates completing its Assessment and Planning Phases for non-IT
imaging systems for Year 2000 issues by the end of the third quarter of 1999.
The Company is testing 100% of the imaging equipment (CT and MRI) in its
facilities during non-business hours and has completed approximately 60% of its
facility reviews. To date, the Company has tested at least one of every type of
other system owned and has determined that there are no substantial Year 2000
related issues that need to be addressed. As part of the Implementation Phase,
the Company has completed conversion of about 60% of its non-compliant
equipment, which represents approximately 20% of the Company's total imaging
equipment. All testing and conversion of critical and non-critical medical
imaging systems is scheduled for completion by the end of the third quarter of
1999.

The majority of the costs associated with replacements or upgrades necessary to
achieve Year 2000 compliance for the Company's non-IT imaging systems are
covered under service contracts with the Company's vendors, providing minimum
financial exposure to the Company. The Company anticipates that its vendors will
commence upgrading the non-IT imaging systems in the third quarter of 1999. The
majority of the upgrades not covered under service contracts include features
enhancements that are beneficial to the Company's operations. The costs of such
upgrades will be depreciated over the remaining life of the upgraded asset.
Although no material funds have been expended to date, the Company expects to
incur expenses of approximately $45,000 in connection with its review of non-IT
medical imaging systems, which includes all of the testing and repairs required
to attain Year 2000 compliance. The Company will include non-IT Year 2000
compliance expenses in operations in the periods in which they are incurred.

The most reasonably likely worst case scenario of the impact of Year 2000 issues
on the Company's operations is that the Company's collection of cash could be
disrupted if payors whose IT is not Year 2000 compliant are unable to submit
payments to the Company. The financial impact of such a disruption could
adversely affect the Company's ability to conduct normal business operations.




                                       18
<PAGE>   19

However, the Company believes that the majority of its payors could process
payments manually in the event of a computer system failure.

Because of the nature of the uncertainty surrounding Year 2000 issues, there can
be no assurance that the Company's assessment will be correct or that a failure
resulting from the impact of Year 2000 issues on the Company's operations will
not have a material adverse effect on its financial condition.





                                       19
<PAGE>   20

ITEM 3. QUANTITATIVE INFORMATION ABOUT INTEREST RATE RISK

The table below represents in tabular form contractual balances of the Company's
capitalized lease and long-term debt financial instruments at June 30, 1999. The
expected maturity categories take into consideration actual amortization of
principal and do not take prepayments into consideration. The weighted average
interest rates for the various liabilities presented are as of June 30, 1998.

  In thousands
<TABLE>
<CAPTION>

                                                    Principal Amount Maturing on June 30:
                                    -------------------------------------------------------------------     Fair Value
                                    2000       2001      2002        2003     2004   Thereafter   Total     at 6/30/99
                                    ----       ----      ----        ----     ----   ----------   -----     ----------
<S>                               <C>        <C>        <C>        <C>       <C>        <C>       <C>         <C>
Interest Sensitive
 Liabilities:

Long-term debt
 Adjustable-rate
 borrowings                       $    48    $13,860    $    58    $   64    $    70    $  826    $ 14,926    $ 14,926

Average interest Rate                9.07%      9.75%      9.07%     9.07%      9.07%     9.07%       9.70%

Long-term debt
 Fixed-rate Borrowings             21,571     31,040     39,404     6,473     25,732     3,337     127,557     127,557

Average interest Rate               10.15%      8.83%     10.45%    10.26%      9.02%    10.38%       9.41%

Capitalized lease obligations
 Fixed-rate borrowings              5,499      4,602      3,977     3,058      1,216        --      18,352      18,352

Average interest Rate               10.20%     10.31%     10.56%    10.56%     10.38%       --       10.38%
                                  -------    -------    -------    ------    -------    ------    --------    --------
Total long-term debt and
  Obligation under
  capital Leases                  $27,118    $49,502    $43,439    $9,595    $27,018    $4,163    $160,835    $160,835
                                  =======    =======    =======    ======    =======    ======    ========    ========
Total weighted average
  interest rate of all
  debt and capital leases           10.14%      9.23%     10.46%    10.35%      9.08%     9.34%       9.76%
                                  =======    =======    =======    ======    =======    ======    ========
</TABLE>



                                       20
<PAGE>   21


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In June 1999, Lisa Brockett, as Trustee for the Reese General Trust, filed suit
against the Company, and certain former officers and directors and other
parties, in the 333rd Judicial District Court of Harris County, Texas, alleging,
among other claims, that (a) undisclosed facts regarding the background of Keith
Greenberg who had provided consulting services to the Company, were material to
the Trust's decision to sell the stock of U.S. Imaging, Inc. ("USI") to the
Company in June 1996 and to receive 1,671,000 shares of Company Common Stock as
partial consideration for the sale; and (b)the Trust was harmed by the Company's
failure to register the shares under the Securities Act and by the Company's
subsequent restatement of its quarterly report for the quarter ended March 31,
1996. Lisa Brockett is the daughter of Dr. L.E. Richey, a former director and
Chairman of the Board of the Company. The Plaintiff has not specified the amount
of actual damages sought and the suit is in a very early stage. The Company
intends to vigorously defend the suit, and believes it has substantive defenses
and counterclaims but there can be no assurances that the Company will prevail.
In April 1999, the Company sued United Radiology Associates, Inc. ("URA") for
breach of contract and related claims relating to the sale of the stock of USI
to URA by the Company in February 1999, and the Company simultaneously filed a
claim against Dr. Richey for breach of a personal guaranty in connection
therewith. Dr. Richey is the chief executive officer and a director of URA.

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

At the Company's 1999 Annual Meeting of Stockholders held on June 10, 1999, the
stockholders of the Company voted upon and elected the following directors:

       DIRECTOR NOMINEE                VOTES CAST FOR          VOTES WITHHELD
       ----------------                --------------          --------------
       C. Keith Hartley                  19,973,743                459,898
       Kenneth R. Jennings               20,064,113                369,528
       David McIntosh                    19,974,113                459,528
       Michael A. O'Hanlon               19,974,113                459,528
       Joseph A. Paul                    20,062,243                311,398

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

         EXHIBIT                    DESCRIPTION
         -------                    -----------
          27                        Financial Data Schedule.

(b) A report on Form 8-K dated April 7, 1999 was filed during the quarter ended
    June 30, 1999 disclosing an Item 5 event.





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<PAGE>   22

                                   SIGNATURES

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


                                      US DIAGNOSTIC INC.

Dated:  August 12, 1999               By: /s/ JOSEPH A. PAUL
                                          -------------------------------------
                                          Joseph A. Paul
                                          President and Chief Executive Officer



                                      By: /s/ J. WAYNE MOOR
                                          -------------------------------------
                                          J. Wayne Moor
                                          Executive Vice President and
                                          Chief Financial Officer






                                       22
<PAGE>   23

                                  EXHIBIT INDEX


       27           Financial Data Schedule






                                       23