<PAGE>
                       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 September 30, 2001

         [ ]      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)

<TABLE>
<S>                                                                <C>
                        Delaware                                             11-3164389
--------------------------------------------------------------     --------------------------------
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
</TABLE>

                            250 S. Australian Avenue
                                    Suite 900
                         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 stock, as of the latest practicable date.

<TABLE>
<CAPTION>
            Class                            Outstanding at November 8, 2001:
            -----                            -------------------------------
<S>                                          <C>
Common stock, $ .01 par value                           22,317,205 shares
</TABLE>




<PAGE>
                               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, the ability to sell assets at favorable prices and in a
timely manner, economic, competitive, regulatory and legal factors, collections
of accounts receivable, the ability of the Company to achieve a restructuring of
its debt on acceptable terms in a timely manner, available financing or
available refinancing for or restructuring of existing debt, cash flow and
working capital availability, the ability of the Company to reduce its overhead,
the impact of any actions taken by debt holders as a result of defaults by the
Company under its debt instruments, as well as the Company's inability to
successfully execute the Plan of Restructuring 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>
PART I  -  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
   In thousands, except share data                                                   September 30,       December 31,
                                                                                         2001                2000
                                                                                     -------------       -----------
<S>                                                                                  <C>                 <C>
ASSETS
CURRENT ASSETS
    Cash and cash equivalents                                                          $   2,363           $   4,458
    Accounts receivable, net of allowance for bad debts of $13,632 and
      $14,288 in 2001 and 2000, respectively                                              13,794              21,853
    Other receivables                                                                      1,952               3,246
    Prepaid expenses and other current assets
                                                                                             856               2,499
                                                                                       ---------           ---------
     TOTAL CURRENT ASSETS                                                                 18,965              32,056
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
   of $8,616 and $28,231 in 2001 and 2000, respectively                                   18,040              41,281

INTANGIBLE ASSETS, net of accumulated amortization of $5,794 and $11,855 in
   2001 and 2000, respectively                                                            18,018              38,438

OTHER ASSETS                                                                                 883                 948

INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES                                  3,178               3,125
                                                                                       ---------           ---------
    TOTAL ASSETS                                                                       $  59,084           $ 115,848
                                                                                       =========           =========

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
     Accounts payable                                                                  $   4,816           $   8,521
     Accrued expenses                                                                      9,016              13,906
     Subordinated convertible debentures                                                  21,912                  --
     Current portion of long-term debt                                                    32,411              27,697
     Obligations under capital leases - current portion                                    1,158               3,017
                                                                                           1,913               4,791
                                                                                       ---------           ---------

         TOTAL CURRENT LIABILITIES                                                        71,226              57,932

Subordinated convertible debentures                                                           --              21,843
Long-term debt, net of current portion                                                     6,494              34,814
Obligations under capital leases, net of current portion                                   4,219               5,573
Other liabilities                                                                            934                 879
                                                                                       ---------           ---------
         TOTAL LIABILITIES                                                                82,873             121,041
                                                                                       ---------           ---------
MINORITY INTEREST                                                                            602               3,502
                                                                                       ---------           ---------
COMMITMENTS AND CONTINGENCIES (Note 10)                                                       --                  --

STOCKHOLDERS' DEFICIENCY
   Preferred stock, $1.00 par value; 5,000,000 shares authorized; none issued                 --                  --
   Common stock, $.01 par value; 50,000,000 shares authorized; 22,317,205 and
       22,412,405 shares issued and outstanding as of September 30, 2001 and
       December 31, 2000, respectively                                                       223                 224
   Additional paid-in capital                                                            147,656             147,696
   Deferred stock-based compensation                                                         (28)               (105)
   Accumulated deficit                                                                  (172,242)           (156,510)
                                                                                       ---------           ---------
        TOTAL STOCKHOLDERS' DEFICIENCY                                                   (24,391)             (8,695)
                                                                                       ---------           ---------
    TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                     $  59,084           $ 115,848
                                                                                       =========           =========
</TABLE>
 See Notes to Condensed Consolidated Financial Statements.


                                       3
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------------

In thousands, except per share data

<TABLE>
<CAPTION>

                                                         THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                            SEPTEMBER 30,                       SEPTEMBER 30,
                                                    ---------------------------           ----------------------------
                                                      2001                2000              2001                2000
                                                    --------           --------           --------           ---------
NET REVENUE                                         $ 12,282           $ 30,123           $ 44,704           $ 107,785
                                                    --------           --------           --------           ---------
<S>                                                 <C>                <C>                <C>                <C>
OPERATING EXPENSES
     General and administrative                       10,923             26,971             36,905              88,133
     Asset impairment losses                             820                 --             16,339                  --
     Bad debt expense                                    863              1,150              2,200               5,071
     Depreciation                                      1,380              3,592              5,502              12,496
     Amortization                                        425              1,138              1,731               3,795
                                                    --------           --------           --------           ---------
       TOTAL OPERATING EXPENSES                       14,411             32,851             62,677             109,495
                                                    --------           --------           --------           ---------

NET GAIN (LOSS) ON SALE OF SUBSIDIARIES                1,463             (3,830)            10,425               6,355
                                                    --------           --------           --------           ---------
INCOME (LOSS) FROM OPERATIONS
                                                        (666)            (6,558)            (7,548)              4,645
                                                    --------           --------           --------           ---------

OTHER INCOME (EXPENSE)
     Interest expense                                 (1,666)            (2,858)            (5,830)            (10,699)
     Amortization of lender equity
         participation fees                               --                 --                 --                (926)
     Interest and other income                           331                491                903                 648
                                                    --------           --------           --------           ---------
       TOTAL OTHER INCOME (EXPENSE)                   (1,335)            (2,367)            (4,927)            (10,977)
                                                    --------           --------           --------           ---------

Loss before minority interest, provision
   for income taxes and extraordinary gain            (2,001)            (8,925)           (12,475)             (6,332)
                                                    --------           --------           --------           ---------

Minority interest:
    Minority interest gain in sale of
      subsidiaries                                        --                 --              3,258               5,183
    Minority interest in income of
     subsidiaries                                        136                329                 88               1,355
                                                    --------           --------           --------           ---------
        Total minority interest                          136                329              3,346               6,538
                                                    --------           --------           --------           ---------

Loss before provision for income taxes
   and extraordinary gain                             (2,137)            (9,254)           (15,821)            (12,870)
Provision for income taxes                               148                327                375               1,183
                                                    --------           --------           --------           ---------
Loss before extraordinary gain                        (2,285)            (9,581)           (16,196)            (14,053)

EXTRAORDINARY GAIN, NET OF TAXES                          --                 --                464                  --
                                                    --------           --------           --------           ---------

NET LOSS                                            $ (2,285)          $ (9,581)          $(15,732)          $ (14,053)
                                                    ========           ========           ========           =========
</TABLE>


                                       4




<PAGE>


US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED) (CONCLUDED)
-------------------------------------------------------------------------------


In thousands, except per share data

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED SEPTEMBER 30,         NINE MONTHS ENDED SEPTEMBER 30,
                                            --------------------------------         -------------------------------
                                                2001              2000                   2001               2000
                                                ----              ----                   ----               ----
<S>                                        <C>                  <C>                  <C>                  <C>
BASIC AND DILUTED LOSS PER COMMON
    SHARE
Loss before extraordinary gain             $     (.10)          $     (.43)          $     (.72)          $     (.62)
Extraordinary gain                                 --                   --                  .02                   --
                                           ----------           ----------           ----------           ----------
Net loss                                   $     (.10)          $     (.43)          $     (.70)          $     (.62)
                                           ==========           ==========           ==========           ==========

Average common shares outstanding              22,324               22,548               22,353               22,625
                                           ==========           ==========           ==========           ==========
</TABLE>



See Notes to Condensed Consolidated Financial Statements.


                                       5
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
-------------------------------------------------------------------------------


In thousands

<TABLE>
<CAPTION>
                                                                  ADDITIONAL
                                         COMMON     COMMON          PAID-IN         DEFERRED      ACCUMULATED  TOTAL STOCKHOLDERS'
                                         SHARES     STOCK           CAPITAL       COMPENSATION      DEFICIT        DEFICIENCY
                                         ------     -----         ---------       ------------   ------------  -------------------
<S>                                     <C>         <C>           <C>             <C>            <C>             <C>
BALANCE - JANUARY 1, 2001               22,412      $ 224         $ 147,696         $(105)       $(156,510)      $ (8,695)

Restricted stock issued                      5         --                --            --               --             --

Common stock redeemed and
   retired upon sale of imaging
   centers                                (100)        (1)              (40)           --               --            (41)

Amortization of deferred
   compensation                             --         --                --            77               --             77

Net loss                                    --         --                --            --          (15,732)       (15,732)
                                        ------      -----         ---------         -----        ---------       --------

BALANCE - SEPTEMBER 30, 2001            22,317      $ 223         $ 147,656         $ (28)       $(172,242)      $(24,391)
                                       =======      =====         =========         =====        =========       ========
</TABLE>


See Notes to Condensed Consolidated Financial Statements.


                                       6
<PAGE>

US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------------

In thousands, except supplemental schedule of non-cash activities

<TABLE>
<CAPTION>
                                                                    NINE MONTHS ENDED SEPTEMBER 30,
                                                                    -------------------------------
                                                                        2001             2000
                                                                      --------         --------
<S>                                                                 <C>                <C>
OPERATING ACTIVITIES
      NET CASH USED IN OPERATING ACTIVITIES                           $ (5,017)        $ (5,671)
                                                                      --------         --------

INVESTING ACTIVITIES
      Purchase of equipment                                               (191)          (6,094)
      Payment of purchase price due on companies acquired                   --              (22)
      Buy-out of partnership interest                                       --             (391)
      Proceeds from the sale of imaging centers, net of
          cash retained by purchasers                                   14,659           29,449
      Proceeds from disposition of property and equipment                  314               51
      Contribution of capital by minority partners                          --              225
                                                                      --------         --------

      NET CASH - PROVIDED BY INVESTING ACTIVITIES                       14,782           23,218
                                                                      --------         --------

FINANCING ACTIVITIES
      Proceeds from borrowings                                              --           17,423
      Repayment of notes payable and obligations under capital
          leases                                                       (11,860)         (33,129)
      Redemption of common stock                                            --             (251)
                                                                      --------         --------

      NET CASH - USED IN FINANCING ACTIVITIES                          (11,860)         (15,957)
                                                                      --------         --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    (2,095)           1,590

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                          4,458            5,811
                                                                      --------         --------

CASH AND CASH EQUIVALENTS - END OF PERIOD                             $  2,363         $  7,401
                                                                      ========         ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid during the period for:

      Interest                                                        $  3,097         $ 12,541
                                                                      ========         ========
      Income taxes                                                    $    413         $    280
                                                                      ========         ========
</TABLE>


                                       7

<PAGE>
US DIAGNOSTIC INC. AND SUBSIDIARIES
-------------------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED) (CONCLUDED)
-------------------------------------------------------------------------------

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Borrowings under capitalized leases were $0 and $3.7 million during the nine
months ended September 30, 2001 and 2000, respectively.

During the nine months ended 2001 and 2000, debt and capital lease obligations
decreased by $12.3 million and $37.5 million, respectively, and property and
equipment decreased by $9.0 million and $32.9 million, respectively, as a result
of the sale of imaging centers. The Company also wrote-off net intangibles of
$7.9 million and $14.9 million as a result of the sale of imaging centers during
the nine months ended 2001 and 2000, respectively, and retired 100,000 shares as
part of the sale of a subsidiary during the nine months ended September 30,
2001. The Company used $4.8 million and $17.7 million of sales proceeds to repay
debt not specifically related to the sold centers during the nine months ended
2001 and 2000, respectively.

During the nine months ended 2001, the Company wrote-off net intangibles of $0.3
million and net property and equipment of $0.7 million as a result of the
closing of non-performing imaging centers. During the nine months ended 2000,
the Company wrote-off net intangibles of $10.0 million and net property and
equipment of $0.9 million and reversed accrued expenses of $114,000 relating to
the closing of non-performing imaging centers.

During the nine months ended 2001, the Company wrote-off net property and
equipment of $5.5 million and net intangibles of $10.8 million as a result of
asset impairment. There were no asset impairment losses during 2000.

During the nine months ended 2001, the Company wrote-off net property and
equipment of $1.7 million and debt and capital lease obligations of $2.4 million
as a result of early debt extinguishment. There was no early debt extinguishment
during 2000.

The Company issued 4,800 and 69,000 shares of restricted stock during the nine
months ended September 30, 2001 and 2000, respectively.


See Notes to Condensed Consolidated Financial Statements.



                                       8
<PAGE>
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 September 30,
2001, 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 accounting
principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States of America 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, 2000.

In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified from the previously issued financial
statements in order to conform with the financial statement presentation of the
current period. See Note 2 for further details.

GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has experienced significant net losses since
1995 and as of September 30, 2001 had an accumulated deficit of approximately
$172.2 million. The Company has prepared a business plan and cash flow
projections for the year ending December 31, 2001 which indicates that the
Company's cash flow is insufficient to meet its operating expenses and service
its debt which includes relatively short term maturities. Based on current
estimates, unless the Company can successfully sell imaging centers at favorable
prices and terms, obtain additional significant financial resources (which is
unlikely), or restructure its debt, the Company's current cash and cash from
operations will be insufficient to meet its anticipated cash needs. Furthermore,
the Company has defaulted on the March 31, 2001 and September 30, 2001 interest
payments on its 9% Subordinated Convertible Debentures due 2003 (the
"Debentures"). Also, the Company has defaulted on its obligation to repurchase
Debentures which is required as a result of failing to maintain consolidated net
worth of at least $18.0 million (a "Deficiency Offer"). On


                                       9
<PAGE>
May 1, 2001, the Company received a default notice from the Trustee under the
Debenture Indenture ("Indenture"). These defaults could give rise to an
acceleration of the maturities of the Debentures. In addition, the Company is
prohibited from borrowing additional amounts without causing additional
non-compliance with certain Indenture covenants and an additional default under
the Indenture. Furthermore, the Company failed to pay the $10.0 million
principal amount (and accrued interest) of its 6 1/2% Convertible Notes that
matured on June 30, 2001 (the "Notes"). This failure constitutes a default under
the Notes and may also constitute a cross default under other of the Company's
debt instruments which could entitle the holders of such instruments to
accelerate their maturity.


In light of the Company's financial conditions and prospects, as well as these
defaults and other defaults as described in Note 7 or other potential defaults
which may also constitute cross defaults under other debt instruments permitting
the acceleration of such debt, the Company will require a restructuring of its
debt and is currently engaged in negotiations with its secured and unsecured
lenders. These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans concerning
these matters are described below. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


Unless the Company can successfully restructure its indebtedness, sell
additional imaging centers or otherwise obtain liquidity in the short term, the
failure to make the payments described above and other payments that are due,
the related defaults and potential cross defaults, the lack of working capital
and the inability to incur additional debt will have a material adverse effect
on the Company's ability to maintain its operations, as well as its financial
condition. Moreover, if these matters cannot be resolved successfully, the
Company would be required to pursue other options, which could include seeking a
reorganization, or its creditors could file an involuntary bankruptcy petition
against the Company under the federal bankruptcy laws.



MANAGEMENT'S PLANS

Despite efforts to reduce expenses and improve the Company's capital structure
and partial completion of the Plan of Restructuring (see below), the Company
remains highly leveraged, most of which debt is either currently due or due
within 12 months. The Company also has significant ongoing capital expenditure
requirements in order to maintain and modernize its imaging equipment. In
addition, the medical diagnostic imaging industry has been confronted since the
mid-1990s with the efforts of private and governmental third-party payors to
reduce, or limit increases in reimbursement rates. The Company's cash flow from
operating activities has been insufficient to meet the Company's operating
needs, scheduled debt repayment obligations and capital expenditure plans.

On May 9, 2000, the Board of Directors approved a restructuring plan which
allows for the sale of all or substantially all of its imaging centers (the
"Plan of Restructuring"). The stockholders approved the sale of the imaging
centers and the Plan of Restructuring at the annual stockholders' meeting held
on July 21, 2000.

Although the Company has sold 36 medical diagnostic imaging centers since May
2000 pursuant to the Plan of Restructuring, the pace of such sales at favorable
prices and terms did not meet with expectations. Because the Company has been
required to maintain a corporate infrastructure to operate remaining centers
pending sale and to collect accounts receivable of sold centers, it has been
unable to reduce its overhead to a level appropriate to its reduced size. This
has prevented the Company from directing all its available cash resources to
debt reduction. Based on its current estimates, the Company anticipates that,
absent completion


                                       10
<PAGE>
of additional center sales or the availability of additional short term
liquidity, its current cash and cash generated from operations will be
insufficient to meet its anticipated cash needs; however, if its principal
repayments can be appropriately restructured, the Company believes that its cash
flow could be sufficient to permit it to continue to operate its remaining
imaging centers, service its restructured debt obligations and, as market
conditions allow, sell the Company as a whole or complete the sale of the
remaining centers over time, although there can be no assurance in this regard.

Accordingly, the Company has suspended its imaging center sales except in
special circumstances while pursuing a proposed debt restructuring with the
assistance of its financial advisor, Imperial Capital LLC, and its counsel,
Greenberg Traurig, P.A. The Company continues to be in discussions with its
primary lender as well as an ad hoc committee of unsecured debt holders
that has retained legal counsel and a financial advisor. See Note 7 for more
details.

RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company has adopted the
statement effective July 1, 2001. The adoption of SFAS 141 did not have a
significant impact on the financial statements.

In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test within six months from the date of
adoption. The Company has not yet completed its evaluation of the effect of
adopting this statement. The Company will adopt the pronouncement effective
January 1, 2002.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations," which addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002,
with early adoption encouraged. The Company does not expect the adoption of SFAS
143 to have a material effect on its financial statements or disclosures.

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early adoption encouraged. The provisions of SFAS 144 generally are
to be applied prospectively. The Company does not expect the adoption of SFAS
144 to have a material effect on its financial statements or disclosures.

[2] DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED

The Company's sales of its imaging centers pursuant to the Plan of
Restructuring, described in Management's Plans above, were not completed within
the one year time period following the approval of the Plan of Restructuring at
the annual stockholders' meeting on July 21, 2000. As a result, effective June
30, 2001, the


                                       11
<PAGE>
Company is treating as continuing operations its remaining operations that had
previously been presented as discontinued operations. The accompanying condensed
consolidated financial statements have been reclassified to reflect this
presentation.

[3] PROPERTY AND EQUIPMENT

A summary of the property and equipment is as follows:

<TABLE>
<CAPTION>
                                                         September 30,     December 31,
In thousands                                                 2001               2000
                                                         -------------     -------------
<S>                                                      <C>               <C>
  Land                                                    $  1,125         $  1,844
  Buildings                                                  1,007            3,014
  Medical equipment                                         12,184           46,128
  Furniture and fixtures                                     1,225            2,272
  Office, data processing equipment and software             7,358            9,364
  Vehicles                                                      --              137
  Leasehold improvements                                     3,757            6,753
                                                          --------         --------
    Total                                                   26,656           69,512

  Less:  Accumulated depreciation and amortization          (8,616)         (28,231)
                                                          --------         --------

      Property and equipment, net                         $ 18,040         $ 41,281
                                                          ========         ========
</TABLE>

Included in property and equipment is equipment under capital leases amounting
to $8.4 million and $15.1 million at September 30, 2001 and December 31, 2000,
respectively. Accumulated depreciation for equipment under capital leases was
$2.7 million and $6.1 million as of September 30, 2001 and December 31, 2000,
respectively.

Depreciation expense amounted to $1.4 million and $5.5 million during the three
and nine months ended September 30, 2001, respectively, of which $0.4 million
and $1.5 million, respectively, was attributed to equipment under capital
leases. Depreciation expense amounted to $3.6 million and $12.5 million during
the three and nine months ended September 30, 2000, respectively, of which $0.8
million and $2.7 million, respectively, was attributed to equipment under
capital leases.

During the quarter ended September 30, 2001, property and equipment (net of
accumulated depreciation) decreased by $11,800 in connection with the
disposition of an imaging center and $0.7 million in connection with asset
impairment losses.



                                       12
<PAGE>
[4] INTANGIBLE ASSETS

A summary of intangible assets is as follows:

In thousands

<TABLE>
<CAPTION>
                                     September 30,     December 31,
                                          2001             2000
                                     -------------     ------------
<S>                                  <C>               <C>
Goodwill                               $ 21,709         $ 45,078
Covenants not to compete                    775            2,551
Customer lists                            1,321            2,540
Other intangibles                             7              124
                                       --------         --------
Total                                    23,812           50,293
Less: Accumulated amortization           (5,794)         (11,855)
                                       --------         --------
         Intangible assets, net        $ 18,018         $ 38,438
                                       ========         ========
</TABLE>

Goodwill consists of the cost of purchased businesses in excess of the fair
value of net tangible assets acquired.

During the quarter ended September 30, 2001, intangible assets (net of
accumulated amortization) decreased by $0.1 million in connection with asset
impairment losses.

[5] ASSET IMPAIRMENT LOSSES

Effective June 30, 2001, the Company is treating as continuing operations its
remaining operations that had previously been presented as discontinued
operations. Therefore, all long-lived assets were analyzed on an individual
center basis to determine if expected future cash flows would be sufficient to
cover annual amortization of intangible and long-lived assets. The Company has
recorded impairment losses for those centers for which the sum of the expected
future cash flows does not cover the carrying value of the assets acquired. An
impairment of $0.8 million was recorded in the quarter ended September 30, 2001
which results from the write-off of intangible assets of $0.1 million and
property and equipment of $0.7 million. No impairment losses were recorded in
2000.

[6] INCOME TAXES

Income taxes have been provided based upon the Company's anticipated annual
effective income tax rate at both the Federal and State levels. Tax benefits
relating to the Company's loss is recognized only to the extent that, in the
opinion of management, it is more likely than not, that the tax benefit is
realizable.

[7] DEBT

The Company has a financing agreement with DVI Financial Services, Inc.
("DVIFS") subject to certain conditions including maintenance of at least $5.0
million of cash during all reporting periods. The Company was not in compliance
with this covenant as of March 31, 2001. On May 21, 2001, DVIFS waived this
requirement and amended the cash maintenance level to a lower amount, equal to
the outstanding borrowings directly related to this financing agreement. The
Company is in compliance with such amendment as of September 30, 2001.


                                       13
<PAGE>
The Company did not make the interest payments on the Debentures that were due
March 31, 2001 and September 30, 2001, failure of which constitutes an event of
default under the Indenture and could give rise to an acceleration of the
maturity of the Debentures. A default on the Debentures could also allow other
debt holders to accelerate the maturity of their debt instruments. The amount of
past due interest on the Debentures as of November 14, 2001 is approximately
$2.0 million. Since the September 30, 2000 quarter and all the subsequent
quarters, the Company has not been in compliance with the consolidated net worth
covenant under the Indenture; as a result, the Company was obligated to conduct
a Deficiency Offer (see GOING CONCERN under Note 1). Given the Company's cash
resources and pending the Company's efforts to restructure its debt, the Company
did not conduct the Deficiency Offer in a timely fashion. On May 1, 2001, the
Company received a default notice from the Trustee for the Indenture regarding
certain technical defaults and the failure to make a Deficiency Offer. In
addition, since March 31, 2001, the Company's debt to operating cash flow ratio
was insufficient under the debt incurrence test thereby limiting its ability to
incur additional debt.

Due to the defaults and cross defaults, the Debentures have been classified as a
current liability since June 30, 2001 for financial statement purposes.
Furthermore, the Company has failed to pay the $10.0 million principal amount
(and accrued interest) of its 6 1/2% Convertible Notes that matured on June 30,
2001. The amount of past due interest on the Notes as of November 14, 2001 is
approximately $0.3 million. This failure constitutes a default under the Notes
and may also constitute a cross default under other of the Company's debt
instruments which could entitle the holders of such instruments to accelerate
the maturity. See MANAGEMENT'S PLANS under Note 1 for further details.

In addition, under its credit facilities with DVIFS and DVI Business Credit
Corporation ("DVIBC") (collectively, "DVI"), DVI has the right to sweep
specified amounts of the Company's cash deposits and apply such amounts to the
payment of interest and principal outstanding under those facilities. On August
30, 2001, the Company and DVI entered into a Forbearance Agreement (the
"Forbearance Agreement") pursuant to which DVI agreed to extend certain
financial accommodations to the Company and forbear from exercising its rights
and remedies against the Company with respect to the existing defaults for a
period ended on September 30, 2001 (the "Forbearance Period"). Under the
Forbearance Agreement, the Company granted DVI additional collateral in all
accounts receivable and a pledge of the Company's equity interests in certain
subsidiaries in addition to the collateral already granted for various DVI
loans. Unless a further restructuring is completed, the Company will be required
to pay DVIFS an amount equal to the difference between the payments actually
made and the regular monthly payments that should have been made had the
Forbearance Agreement not been entered into (the "Forbearance Amount") no later
than 90 days from the expiration of the Forbearance Period. Although the
Forbearance Period has expired, DVI has to date agreed to accept, and has
indicated it will continue until December 1, 2001 to accept, reduced payments at
a level comparable to that set in the expired Forbearance Agreement in order to
permit the Company to meet its current cash demands. Unless and until the
Company can negotiate a comprehensive restructuring of its indebtedness, it will
continue to be substantially dependent on DVI's willingness to provide
additional financial accommodations, as to which there can be no assurance.

One secured creditor has agreed to modify the Company's payment obligations
to extend the terms of $3.7 million principal amount of debt and capital lease
obligations with remaining terms to maturity of 15 to 50 months as of July 2001,
to 84 months. Also, the creditor agreed to waive any late charges or possible
defaults. For financial statement purposes, the Company has adjusted the current
and long-term portions of debt and capital lease obligations to reflect this
modification as of September 30, 2001.

In consideration of DVIFS' release of liens on the assets of an imaging center
and its consent to the sale of those assets in May 2001 (See Note 9 to the Form
10-Q filed June 30, 2001), the Company agreed to secure


                                       14
<PAGE>
its obligations to DVIFS under the previously unsecured Debenture repurchase
facility (the "Repurchase Facility"). The collateral consists of the deferred
portion of the purchase price for such assets and certain assets owned by a
subsidiary, the stock of which was previously pledged to DVIFS.

During the quarter ended September 30, 2001, debt decreased by $1.1 million in
connection with the disposition of an imaging center.

[8] EARNINGS PER SHARE

The Company had a loss before extraordinary gain for the three and nine months
ended September 30, 2001 and September 30, 2000, and all potentially dilutive
securities were excluded from the computations of basic and diluted earnings per
share during such periods since the effect would be anti-dilutive. Such
potentially dilutive securities consist of the following: (i) unexercised stock
options and warrants to purchase 1.8 million and 2.9 million shares of the
Company's common stock as of September 30, 2001 and 2000, respectively; (ii) 3.6
million shares of the Company's common stock issuable upon conversion of
convertible debt as of both September 30, 2001 and 2000; and (iii) unissued
restricted stock amounting to 91,800 and 96,600 shares of the Company's common
stock as of September 30, 2001 and 2000, respectively.

[9] SOLD/CLOSED IMAGING CENTERS

On September 17, 2001, the Company sold its interest in an underperforming
imaging center (excluding accounts receivable and accounts payable) to Lutz
Radiology Corp. ("Lutz Corp"). Lutz Corp is a corporation controlled by Thomas
G. Winter, a former vice president of the Company who resigned as part of this
transaction. The sales price consisted of assumption of debt by the purchaser
amounting to $1.1 million.

On July 11, 2000, the Company sold the assets of two imaging centers. The sales
price was $3.0 million, consisting of cash of $900,000 and the assumption by the
purchaser of debt and capital leases amounting to $2.1 million.

On August 14, 2000 the Company sold the assets of four imaging centers to
Metropolitan Diagnostic Management LLC and Queens Diagnostic Management LLC
(collectively referred to as "MDM"). MDM is controlled by Alan A.Winakor, a
former executive vice president of the Company who resigned as part of this
transaction. The sales price was $6.9 million, consisting of $2.4 million cash
and the assumption by the purchaser of debt and other obligations amounting to
$4.3 million and the surrender of $251,000 of Mr. Winakor's common stock of the
Company.

On July 25, 2000, the Company entered into an Asset Purchase Agreement with
Comprehensive Diagnostic Imaging, Inc. and Comprehensive Medical Imaging, Inc.
(collectively referred to as "CMI") for the sale of the assets of 14 of its
centers. On August 31, 2000, the Company sold the assets of seven centers in
Florida. On September 20, 2000, the Company completed the transaction for the
remaining six centers in California, other than with respect to one center, for
which the consent to transfer was not obtained. The aggregate sales price for
the assets was $32.0 million, consisting of cash received of $30.7 million, and
debt assumed by CMI of $1.3 million. Immediately upon the closing, $3.0 million
of the cash proceeds were used to repay a portion of the Company's revolving
credit loan with DVIBC, $5.7 million was used to repay a portion of the DVIFS
unsecured loan, and $12.6 million was paid as full payment on various equipment
and cash flow notes.

Also, in July and August 2000, the Company closed two imaging centers that were
underperforming.



                                       15
<PAGE>
The following is a summary of the gains/losses recognized on the above described
sales for the three and nine months ended September 30, 2001 and 2000,
respectively, as well as the gains/losses on the closing of non-performing
imaging centers.

<TABLE>
<CAPTION>
In thousands                                                    Three Months Ended             Nine Months Ended
                                                                    September 30                  September  30
                                                               --------------------            --------------------
                                                               2001            2000            2001            2000
                                                               ----            ----            ----            ----
<S>                                                           <C>           <C>             <C>              <C>
  Net gains on sold imaging centers                           $1,463        $ 2,889         $ 11,134         $ 17,374
  Net losses on closed imaging centers                            --         (6,719)            (709)         (11,019)
                                                              ------        -------         --------         --------
     Net gain (loss) on disposition of imaging centers        $1,463        $(3,830)        $ 10,425         $  6,355
                                                              ======        =======         ========         ========
</TABLE>

[10]  LITIGATION

SHELBY RADIOLOGY, P.C. V. US DIAGNOSTIC INC. ET AL. - In June 1997, the
plaintiff, Shelby Radiology, P.C. ("Shelby Radiology"), filed suit against the
Company alleging breach of a contract to provide radiology services and
specifically improper termination of the contract. In January 1998, Shelby
Radiology amended its complaint to include allegations of promissory fraud,
misrepresentation and suppression. Under both its fraud and breach of contract
claims, Shelby Radiology was seeking compensatory damages in the amount of $1.2
million as amounts it would have been paid under the "oral agreement." In
addition, Shelby Radiology sought punitive damages pursuant to its fraud claims.
On May 3, 1999, this matter was tried before a jury in Montgomery County,
Alabama. The trial concluded on May 7, 1999 and the jury returned a verdict
against the Company in the amount of $1,134,000 as compensatory damages on
plaintiff's fraud claim. The jury did not award any punitive damages. The
Company paid $0.6 million to a bonding company which posted a bond to secure
payment of the judgment and appealed the verdict to the Alabama Supreme Court
which ruled against the Company in a split decision. The Company's request for a
rehearing of that decision was rejected. The plaintiff collected the $1.4
million judgment, inclusive of interest, from the bonding company under the
bond. The Company owes approximately $0.8 million to the bonding company. The
Company recognized the settlement expense as of December 31, 2000 as a result of
this lawsuit.

OTHER MATTERS - 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 the outcome of these matters, and although there can be no
assurances, 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


                                       16
<PAGE>
on the Company's expectations and are subject to a number of risks and
uncertainties, including but not limited to, the ability to sell assets at
favorable prices and in a timely manner, economic, competitive, regulatory and
legal factors, collections of accounts receivable, the ability of the Company to
achieve a restructuring of its debt on acceptable terms in a timely manner,
available financing or available refinancing for or restructuring of existing
debt, cash flow and working capital availability, the ability of the Company to
reduce its overhead, the impact of any actions taken by debt holders as a result
of defaults by the Company under its debt instruments, as well as the Company's
inability to successfully execute the Plan of Restructuring and other factors
discussed elsewhere in this report and in other 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 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.

OVERVIEW AND RECENT DEVELOPMENTS

The Company's current cash resources are limited because its cash flow is
insufficient to meet its operating expenses and service its debt which includes
relatively short term maturities (both scheduled and potentially accelerated
upon default). Based on current estimates, unless the Company can successfully
sell imaging centers at favorable prices and terms, obtain additional
significant financial resources (which is unlikely), or restructure its debt,
the Company's current cash and cash from operations will be insufficient to meet
its anticipated cash needs. Furthermore, the Company has defaulted on the March
31, 2001 and September 30, 2001 interest payments on the Debentures as well as
the compliance with a number of other covenants under the Indenture including
the obligations to make a Deficiency Offer; these defaults could result in the
acceleration of maturities of the Debentures. In addition, the Company has
failed to pay the $10.0 million principal amount (and accrued interest) of the
Notes that matured on June 30, 2001. This failure may also constitute a cross
default under other of the Company's debt instruments which could entitle the
holders of such instruments to accelerate their maturity. In light of these
defaults or potential defaults, which may also constitute cross defaults under
other debt instruments permitting the acceleration of such debt, the Company
will require a restructuring of its debt and has retained Imperial Capital and
Greenberg Traurig to advise in this regard and assist the Company in reviewing
its strategic plans. If these uncertainties cannot be resolved successfully and
in a timely manner, the Company may be required to seek a reorganization, or its
creditors could file an involuntary bankruptcy petition against the Company
under the federal bankruptcy laws.

Pursuant to the Plan of Restructuring, the Company has sold a total of 36
imaging centers since May 2000. Although the Company has been successful in the
past in selling centers at advantageous prices and in a timely fashion, there
can be no assurance that the Company will be able to sell the remaining imaging
centers at favorable or acceptable prices or at all and there is currently
substantial uncertainty that the Plan of Restructuring can be completed as
originally intended. The Company has largely suspended its imaging center sales
while it attempts to complete the debt restructuring. See Note 1 GOING CONCERN
and MANAGEMENT'S PLANS which are incorporated herein by reference.

DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED

The Company's sales of its imaging centers pursuant to the Plan of
Restructuring, were not completed within the one year time period following the
approval of the Plan of Restructuring at the annual stockholders' meeting on
July 21, 2000. As a result, effective June 30, 2001, the Company is treating as
continuing operations its remaining operations that had previously been
presented as discontinued operations. The accompanying condensed consolidated
financial statements have been reclassified to reflect this presentation.


                                       17
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000.


Net revenue for the three months ended September 30, 2001 (the "2001 three month
period") decreased to $12.3 million, from $30.1 million for the three months
ended September 30, 2000 (the "2000 three month period"). The decrease resulted
primarily from the sale of the sold facilities. Net revenue relating to those
centers that are still in operation as of September 30, 2001 (the "open
centers") was $12.2 million for the 2001 three month period compared to $11.5
million for 2000 three month period. The increase in net revenue of the open
centers is related to a 0.3% increase in scan volume.

General and Administrative ("G&A") expense decreased to $10.9 million during the
2001 three month period, compared to G&A expense of $27.0 million during the
2000 three month period. The decrease from 2000 to 2001 resulted primarily from
the sale of the sold facilities. G&A expense relating to the open centers was
$11.0 million for the 2001 three month period compared to $12.4 million for 2000
three month period.

Asset impairment losses were $0.8 million during the 2001 three month period,
compared to none during the 2000 three month period. As discussed in Note 5 to
the condensed consolidated financial statements, the Company has recorded
impairment losses for those centers for which the fair value does not cover the
carrying value of the long-lived assets.

Bad debt expense was $0.9 million during the 2001 period compared to $1.2
million during the 2000 period. Bad debt expense decreased from 2000 to 2001
resulting primarily from the sale of the sold facilities. Bad debt expense
relating to the open centers was $0.6 million for the 2001 three month period
compared to $0.4 million for 2000 three month period. The 2001 three month
period included an additional $0.5 million bad debt allowance.

Depreciation expense was $1.4 million during the 2001 three month period,
compared to $3.6 million during the 2000 three month period. Depreciation
expense decreased from 2000 to 2001 resulting primarily from the sale of the
sold facilities. Depreciation expense relating to the open centers was $1.4
million for 2001 three month period and $1.8 million for 2000 three month
period. The decrease in depreciation expense of the open centers is related to
the write off of property and equipment as part of the asset impairment analysis
effective June 30, 2001.

Amortization expense was $0.4 million during the 2001 three month period,
compared to $1.1 million during the 2000 three month period. Amortization
expense decreased from 2000 to 2001 resulting primarily from the sale of the
sold facilities. Amortization expense relating to the open centers was $0.4
million for the 2001 three month period compared to $0.6 million for 2000 three
month period. The decrease in amortization expense of the open centers is
related to the write off of intangibles as part of the asset impairment analysis
effective June 30, 2001.

Interest expense decreased to $1.7 million, during the 2001 three month period,
compared to $2.9 million during the 2000 three month period, resulting primarily
from reduced debt in connection with the sale of the sold facilities. Interest
expense relating to the open centers was $1.6 million for the 2001 three month
period compared to $2.4 million for 2000 three month period. The decrease in
interest expense of the open centers is primarily due to reduced debt in
connection with the sale of the sold facilities.

During the three months ended September 30, 2001, the Company recognized a net
gain of $1.5 million on the sale of one imaging center. During the three months
ended September 30, 2000, the Company recognized a net loss of $6.7 million
relating to the closing of three imaging centers that were non-performing and
recognized a net gain of $2.9 million on the sale of 19 imaging centers.


                                       18
<PAGE>

The Company had a basic and diluted loss per share of $0.10 during the 2001
three month period compared to basic and diluted loss per share of $0.43 during
the 2000 three month period.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 2000.

Net revenue for the nine months ended September 30, 2001 (the "2001 nine month
period") decreased to $44.7 million, from $107.8 million for the nine months
ended September 30, 2000 (the "2000 nine month period"). The decrease resulted
primarily from the sale of the sold facilities. Net revenue relating to open
centers was $38.0 million for the 2001 nine month period compared to $35.8
million for 2000 nine month period. The increase in net revenue of the open
centers is related to a 2.3% increase in scan volume.

G&A expense decreased to $36.9 million during the 2001 nine month period,
compared to G&A expense of $88.1 million during the 2000 nine month period. The
decrease from 2000 to 2001 resulted primarily from the sale of the sold
facilities. G&A expense relating to the open centers was $32.8 million for the
2001 nine month period compared to $35.4 million for 2000 nine month period. In
addition, the Company recorded a gain resulting from a legal settlement for $2.4
million in March 2001 which was offset by a loss from another unrelated legal
settlement for $2.1 million.

Asset impairment losses were $16.3 million during the 2001 nine month period,
compared to none during the 2000 nine month period. As discussed in Note 5 to
the condensed consolidated financial statements, the Company has recorded
impairment losses for those centers for which the fair value does not cover the
carrying value of the long-lived assets.

Bad debt expense was $2.2 million during the 2001 period compared to $5.1
million during the 2000 period.

Bad debt expense decreased from 2000 to 2001 resulting primarily from the sale
of the sold facilities. Bad debt expense relating to the open centers was $1.6
million for the 2001 nine month period compared to $2.2 million for 2000 nine
month period. The 2001 nine month period included an additional $0.5 million bad
debt allowance compared to the 2000 nine month period which included a $0.9
million additional bad debt allowance.

Depreciation expense was $5.5 million during the 2001 nine month period,
compared to $12.5 million during the 2000 nine month period. Depreciation
expense decreased from 2000 to 2001 resulting primarily from the sale of the
sold facilities. Depreciation expense relating to the open centers was $4.9
million for the 2001 nine month period compared to $5.0 million for 2000 nine
month period. The decrease in depreciation expense of the open centers is
related to the write off of property and equipment as part of the asset
impairment analysis effective June 30, 2001.

Amortization expense was $1.7 million during the 2001 nine month period,
compared to $3.8 million during the 2000 nine month period. Amortization expense
decreased from 2000 to 2001 resulting primarily from the sale of the sold
facilities. Amortization expense relating to the open centers was $1.7 million
for the 2001 nine month period compared to $3.1 million for 2000 nine month
period. The decrease in amortization expense of the open centers is related to
the write off of intangibles as part of the asset impairment analysis effective
June 30, 2001.

Interest expense decreased to $5.8 million, during the 2001 nine month period,
compared to $10.7 million during the 2000 nine month period, resulting primarily
from reduced debt in connection with the sale of the sold facilities. Interest
expense relating to the open centers was $5.7 million for the 2001 nine month
period compared to $8.2 million for 2000 nine month period. The decrease in
interest expense of the open centers is primarily due to reduced debt in
connection with the sale of the sold facilities.

Amortization of lender equity participation fees was $0 and $0.9 million during
the 2001 and 2000 nine month periods, respectively. Such amounts represent the
amortization of an aggregate of $2.8 million of capitalized fees


                                       19
<PAGE>
paid to an affiliate of DVIFS during the fourth quarter of 1998 and the first
quarter of 1999 in connection with certain financing. All such fees were fully
amortized by June 2000.

The Company recorded a $0.5 million gain on early extinguishment of debt, net of
$0.2 million of income taxes, during the nine months ended September 30, 2001.

During the nine months ended September 30, 2001, the Company recognized a net
loss of $0.7 million relating to the closing of two imaging centers that were
non-performing and recognized a net gain of $11.1 million on the sale of 11
imaging centers. During the nine months ended September 30, 2000, the Company
recognized a net loss of $11.0 million relating to the closing of nine imaging
centers that were non-performing and recognized a net gain of $17.4 million on
the sale of 22 imaging centers.

The Company had a basic and diluted loss per share of $0.70 during the 2001 nine
month period compared to basic and diluted loss per share of $0.62 during the
2000 nine month period.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001, the Company had a working capital deficiency of $52.3
million, compared to a working capital deficiency of $25.9 million at December
31, 2000. The increase in the working capital deficiency from 2000 to 2001 is
primarily due to an increase in current portion of long-term debt comprising
$21.9 million of Debentures that are in default and thus subject to acceleration
of maturity, as well as $10.0 million of its 6 1/2% Convertible Notes that the
Company failed to pay upon maturity on June 30, 2001. Furthermore, the past due
interest on the above two debt issues of $2.3 million is shown as a current
liability. The decrease in current assets from December 31, 2000 to September
30, 2001 is comparable to the decrease in current liabilities (other than for
current portions of long-term debt and capital lease obligations) for the same
periods as a result of the sale of imaging centers during 2001. The Company's
primary short-term liquidity requirements as of September 30, 2001 include
obligations under debt and capital leases (including the amounts of principal
and interest in default), accounts payable, other current liabilities and
capital expenditures related to the replacement and enhancement of existing
imaging equipment and imaging centers.

Net cash used in operating activities during the 2001 nine month period was $5.0
million, compared to $5.7 million used in operating activities during the 2000
nine month period. The negative cash flow from operations in the 2001 nine month
period is mainly due to a decrease in revenues and operating cash flows related
to the sale of 11 imaging centers and closing of two imaging centers in the nine
months ended September 30, 2001 (in addition to the sale of 25 imaging centers
and closing of 10 imaging centers in 2000). In addition, the Company has not
been able to reduce its overhead as quickly as necessary due to the need to
retain corporate infrastructure to collect accounts receivable, maintain the
operations of remaining centers and conduct other corporate functions. This
drain on cash flow has also impaired the Company's ability to pay down its debt.
Furthermore, a $2.4 million gain resulting from a legal settlement was recorded
during the first quarter of 2001 which was offset by a $2.1 million loss from
another legal settlement recorded during the same period.

Net cash provided by investing activities was $14.8 million during the 2001 nine
month period, compared to net cash provided by investing activities of $23.2
million during the 2000 nine month period. During the 2001 nine month period,
the Company received $14.7 million in net cash proceeds from the sale of imaging
centers, compared to $29.4 million during the 2000 nine month period. Equipment
purchases were $0.2 million during the 2001 nine month period, compared to $6.1
million during the 2000 nine month period.

Net cash used in financing activities was $11.9 million during the 2001 nine
month period, compared to $16.0 million used in financing activities during the
2000 nine month period. Proceeds from new borrowings were $0 during the 2001
nine month period, compared to $17.4 million during the 2000 nine month period.
Repayments of notes and capital leases totaled $11.9 million during the 2001
nine month period, compared to $33.1 million


                                       20
<PAGE>
during the 2000 nine month period. The Company repaid an aggregate of $3.3
million and $4.0 under its revolving credit loan with DVIBC and $1.5 million and
$13.7 million under the DVIFS Repurchase Facility from proceeds received upon
the sale of imaging centers for debt not specifically related to the sold
centers during the 2001 and 2000 nine month periods, respectively.

As of September 30, 2001, the Company has approximately $1.5 million of purchase
commitments for capital expenditures for which it either already has, or expects
to have financing available.

Based on current estimates, unless the Company can successfully sell imaging
centers at favorable prices and terms, or obtain additional significant
financial resources (which is unlikely), the Company's current cash and cash
from operations will continue to be insufficient to meet its anticipated cash
needs. In light of this, as well as the Company's actual and potential defaults
on its indebtedness and its inability to borrow additional amounts without
triggering additional defaults, the Company is seeking to restructure its debt.
If these uncertainties cannot be resolved successfully and in a timely manner,
the Company could be required to seek a reorganization, or its creditors could
file an involuntary bankruptcy petition against the Company under the federal
bankruptcy laws. These conditions, among others, raise substantial doubt about
the Company's ability to continue as a going concern. See GOING CONCERN and
MANAGEMENT'S PLANS under Note 1 of Notes to Condensed Consolidated Financial
Statements which are incorporated herein by reference.

In addition, under its credit facilities with DVI, DVI has the right to sweep
specified amounts of the Company's cash deposits and apply such amounts to the
payment of interest and principal outstanding under those facilities. On August
30, 2001, the Company and DVI entered into a Forbearance Agreement (the
"Forbearance Agreement") pursuant to which DVI agreed to extend certain
financial accommodations to the Company and forbear from exercising its rights
and remedies against the Company with respect to the existing defaults for a
period ending on September 30, 2001 (the "Forbearance Period"). Under the
Forbearance Agreement, the Company granted DVI additional collateral in all
accounts receivable and a pledge of the Company's equity interests in certain
subsidiaries in addition to the collateral already granted for various DVI
loans. Unless a further restructuring is completed, the Company will be required
to pay DVIFS an amount equal to the difference between the payments actually
made and the regular monthly payments that should have been made had the
Forbearance Agreement not been entered into (the "Forbearance Amount") no later
than 90 days from the expiration of the Forbearance Period. Although the
Forbearance Period has expired, DVI has to date agreed to accept, and has
indicated it will continue until December 1, 2001 to accept, reduced payments at
a level comparable to that set in the expired Forbearance Agreement in order to
permit the Company to meet its current cash demands. Unless and until the
Company can negotiate a comprehensive restructuring of its indebtedness, it will
continue to be substantially dependent on DVI's willingness to provide
additional financial accommodations, as to which there can be no assurance.

For additional information regarding contingencies and uncertainties related to
litigation and regulatory matters, see Note 10 of Notes to Condensed
Consolidated Financial Statements which is incorporated herein by reference.


                                       21
<PAGE>
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below represents in tabular form contractual balances of the Company's
capitalized lease and long-term debt financial instruments at September 30,
2001. The expected maturity categories take into consideration amortization of
principal as currently classified in the condensed consolidated financial
statements and do not take prepayments into consideration. The weighted-average
interest rates for the various liabilities presented are as of September 30,
2001.


In thousands

<TABLE>
<CAPTION>
                                                        Principal Amount Maturing in:
                           --------------------------------------------------------------------------
                                                                                                       Fair Value
                             2002       2003       2004       2005      2006    Thereafter    Total    at 9/30/01
                           -------     ------     ------    -------    ------   ----------   --------  ---------
<S>                        <C>         <C>        <C>       <C>        <C>      <C>          <C>       <C>
   Interest rate
   sensitive
   liabilities:

   Long-term debt
   adjustable-rate
   borrowings                8,261         65         71         78        86         644      9,205        9,205
   Average interest rate      8.50%      9.07%      9.07%      9.07%     9.07%       9.07%      8.56%

   Long-term debt
   fixed-rate               46,062      1,972      2,000        942       258         378     51,612       51,612
   borrowings
   Average interest rate      8.92%     10.62%      8.78%     10.73%    10.48%      10.32%      9.03%

   Capitalized lease
   obligations
   fixed-rate                1,158        866        891      1,112       410         940      5,377         5,377
   borrowings
   Average interest rate      9.00%     10.73%     10.65%     10.52%    10.14%      10.17%     10.15%
                           -------     ------     ------    -------    ------     -------   --------      ---------

   Total                   $ 55,481    $ 2,903    $ 2,962   $  2,132    $  754    $  1,962  $ 66,194      $  66,194
                           ========    =======    =======   ========    ======    ========  ========      =========

   Weighted-Average
   Interest Rates             8.86%     10.62%      9.35%     10.56%    10.13%       9.84%      9.01%
                              =====     ======      =====     ======    ======       =====      =====

</Table>
                                       22
<PAGE>
PART II   -   OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

See Note 10 of Notes to Condensed Consolidated Financial Statements which is
incorporated herein by reference.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

The Company did not pay the $10.0 million principal amount (and accrued
interest) of its 6 1/2% Convertible Notes that matured on June 30, 2001. The
amount of past due interest on the Notes as of November 14, 2001 is
approximately $0.3 million. This failure constitutes a default under the Notes
and may also constitute a cross default under other of the Company's debt
instruments which could entitle the holders of such instruments to accelerate
their maturity.

Also, the Company has not made the interest payments on the Debentures that were
due March 31, 2001 and September 30, 2001. Because these defaults have remained
uncured for 30 days, they could give rise to an acceleration of the maturity of
the Debentures. A default on the Debentures would also allow other debt holders
to accelerate their debt instruments. The amount of past due interest on the
Debentures as of November 14, 2001 is approximately $2.0 million. The Company is
seeking to restructure its indebtedness, including the 6 1/2% Notes and is
currently engaged in negotiations with its secured and unsecured lenders. See
GOING CONCERN and MANAGEMENT'S PLANS under Note 1 and Note 7 of Notes to
Condensed Consolidated Financial Statements which are incorporated herein by
reference.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
   Exhibit Number    Description
   --------------    -----------
       <S>           <C>
         10.1        Forbearance Agreement dated August 30, 2001 by and between
                     US Diagnostic Inc. and its subsidiaries and DVI Financial
                     Services Inc. and DVI Business Credit Corporation.
</Table>
(b) Reports on Form 8-K

A report on Form 8-K dated June 30, 2001 was filed during the quarter ended
September 30, 2001 disclosing an Item 5 event.

Items 2, 4 and 5 are not applicable and have been omitted.


                                       23
<PAGE>
                                   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:  November 14, 2001           By:  /s/ Leon F. Maraist
                                         -------------------------------------
                                         Leon F. Maraist
                                         President and Chief Executive Officer


                                    By:  /s/ P. Andrew Shaw
                                         -------------------------------------
                                         P. Andrew Shaw
                                         Executive Vice President and Chief
                                         Financial Officer


                                       24