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

                                   ----------

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998          COMMISSION FILE NO. 0-23311


                        AMERICAN PHYSICIAN PARTNERS, INC.
             (Exact name of registrant as specified in its charter)


           DELAWARE                                     75-2648089
       (State or other                               (I.R.S. Employer
       jurisdiction of                                Identification)
      incorporation or
        organization)

                                3600 CHASE TOWER
                                2200 ROSS AVENUE
                               DALLAS, TEXAS 75201
          (Address of principal executive offices, including zip code)

                                 (214) 303-2776
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                      Name of each exchange 
   Title of each class                                 on which registered
   -------------------                                ---------------------
<S>                                                   <C>
          None                                                None
</TABLE>


Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.0001 PAR VALUE

         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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was $135,080,491, based on the closing sales
price of $7.00 of the registrant's Common Stock on the Nasdaq National Market on
February 18, 1999.

         As of February 18, 1999, 19,297,213 shares of the registrant's Common
Stock were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the proxy statement for the Annual Meeting of Stockholders
of the registrant to be held during 1999 are incorporated by reference in Part
III.

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                        AMERICAN PHYSICIAN PARTNERS, INC.

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
FORM 10-K ITEM                                                                   PAGE
--------------                                                                   ----
<S>                                                                              <C> 
PART I
         Item 1.  Business .....................................................   1
         Item 2.  Properties ...................................................  21
         Item 3.  Legal Proceedings ............................................  21
         Item 4.  Submission of Matters to a Vote of Security Holders ..........  21

PART II
         Item 5.  Market for Registrant's Common Equity and Related
                     Stockholder Matters .......................................  22
         Item 6.  Selected Consolidated Financial Data .........................  23
         Item 7.  Management's Discussion and Analysis of Financial
                     Condition and Results of Operations........................  25
         Item 7A. Quantitative and Qualitative Disclosures About Market Risk....  39
         Item 8.  Financial Statements and Supplementary Data .................. F-1
         Item 9.  Changes in and Disagreements with Accountants on Accounting
                     and Financial Disclosure ..................................  40

PART III 
         Item 10. Directors and Executive Officers of the Registrant ...........  40
         Item 11. Executive Compensation .......................................  40
         Item 12. Security Ownership of Certain Beneficial
                     Owners and Management .....................................  40
         Item 13. Certain Relationships and Related Transactions ...............  40

PART IV
         Item 14. Exhibits, Financial Statement Schedules and Reports
                     on Form 8-K ...............................................  41
</TABLE>



<PAGE>   3
                                     PART I


ITEM 1.  BUSINESS.

GENERAL

     American Physician Partners, Inc. develops, consolidates and manages
radiology service networks. These networks consist primarily of free-standing
diagnostic imaging centers and locations at which the Company provides radiology
services that have been outsourced by hospitals. At December 31, 1998, the
Company owned, operated or maintained an ownership interest in imaging equipment
at 87 locations. The Company also provides management services to ten radiology
practices whose physicians provide professional radiology services at the
Company's imaging centers and at 50 hospitals. During 1998, the Company's
networks performed services for approximately 3.1 million imaging procedures.

     The Company's radiology networks are concentrated in geographic markets
located in California, Florida, Kansas, Maryland, New York, Texas, Virginia and
Washington, D.C. The Company focuses on markets in which the Company can provide
both extensive geographic coverage and a full spectrum of technical and
professional radiology services. These services can include general radiology,
magnetic resonance imaging ("MRI"), computed tomography ("CT"), mammography,
ultrasound, nuclear medicine, interventional radiology, positron emission
tomography ("PET") and radiation oncology.

     The Company derives the majority of its service fee revenue from providing
the technical component of radiology services performed at the Company's
free-standing imaging facilities and pursuant to the Company's outsourced
hospital relationships. The technical component of such services primarily
consists of producing images through the use of imaging equipment and services
performed by personnel other than radiologists. In conjunction with its
operation of imaging centers, the Company purchases imaging equipment, hires and
trains employees, schedules patient appointments, processes data relating to
fees for producing images and for other technical radiology services, and
obtains and maintains permits, licenses and insurance.

     The Company also derives service fee revenue from providing management
services to ten radiology practices pursuant to long-term service agreements.
The Company furnishes to these practices information management, billing and
collection services, purchasing services and other non-medical services. These
practices provide professional radiology services, including interpreting images
produced at the Company's imaging facilities. The radiology practices earn fees
from patients or third-party payors for the professional radiology services they
provide at the Company's facilities and other locations.

BUSINESS STRATEGY

     The Company's objective is to develop and operate networks of radiology
facilities to provide a full spectrum of radiology services and extensive
geographic coverage in existing market areas and in selected new markets. The
Company believes that it can leverage its substantial base of fixed assets to
earn greater technical revenues by increasing the number of procedures performed
at its imaging facilities. The Company's strategy for increasing the number of
procedures and the amount of its service fee revenue includes the following:

     o    increasing referrals to the Company's imaging center networks by
          strengthening existing and establishing new relationships with
          referring physicians, health systems and insurers;


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<PAGE>   4

     o    optimizing the locations of imaging centers within a market area and
          the mix of services offered at each imaging facility;

     o    utilizing the Company's relationships with radiologists to emphasize
          quality service and to seek operating efficiencies at the Company's
          imaging facilities;

     o    making selected acquisitions of imaging centers and entering into
          joint venture and outsourcing relationships with hospitals or health
          systems within existing markets; and

     o    expanding into selected new markets in which the Company believes that
          it can develop extensive radiology services networks.

Increasing Referrals by Strengthening Existing and Establishing New
Relationships with Referring Physicians, Health Systems and Insurers

     Referrals for diagnostic radiology services are not controlled by
diagnostic radiologists. These referrals, instead, are controlled by individual
referring physicians such as internists and surgeons, and increasingly are
influenced by health systems, managed care organizations, insurers and other
entities representing large groups of patients. The Company intends to increase
physician referrals to the Company's networks which, in the Company's
experience, are based on several factors:

     o    whether referring physicians are satisfied with the quality and
          timeliness of the technical and professional services provided by the
          imaging center or hospital and by the radiologists who perform
          professional services for the technical services provider;

     o    whether the radiology services provider offers a full spectrum of
          technical radiology services (such as MRI and CT) and professional
          services, including subspecialty expertise (such as neuroradiology),
          so that referring physicians do not need to determine for each patient
          referral whether the required technical imaging services and
          professional services are offered by the chosen radiology services
          provider;

     o    whether the radiology services provider is a participant in the health
          system, managed care organization or insurer that insures the patient;
          and

     o    whether referring physicians' patients are satisfied with the services
          provided by the radiology services provider. The Company's experience
          is that patient satisfaction depends primarily on customer service
          issues such as convenience of imaging center location, availability of
          appointment times, responsiveness of staff members to questions and
          the special needs of the patient and efficiency of the imaging
          center's operations (for example, whether the patient received
          services at the scheduled time).

     The Company organizes its radiology services networks to facilitate
physician referrals for radiology services by:

     o    maintaining and improving pre-existing relationships between referring
          physicians and the radiologists who perform professional services for
          the Company;


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     o    offering a full spectrum of technical services and affiliating with
          radiologists who offer comprehensive professional services of
          recognized quality, including subspecialty expertise;

     o    participating as an eligible radiology services provider for managed
          care organizations, insurers and similar entities in the Company's
          market areas; and

     o    offering convenient appointment times at locations that are convenient
          to referring physicians' patients.

     Managed care organizations, insurers and other entities often represent
large groups of patients who are dispersed throughout a wide geographic area.
These entities influence referring physicians' decisions by entering into
provider agreements with, or otherwise selecting or approving, health care
services providers, including radiology services providers. The Company's
experience is that entities representing widely-dispersed patients often prefer
to enter into referral relationships with radiology providers who can provide
radiology services in a corresponding geographical area. The Company has
developed its radiology services networks, in part, to provide an opportunity
for Aone-stop shopping@ for these entities so that they will select or approve
the Company more frequently and thus will influence referring physicians to
refer patients to the Company's networks.

     To increase the convenience of the Company's imaging centers to patients,
the Company implements network-wide scheduling systems where practical. Under
these systems, each imaging center in a network can access the patient
appointment calendar of other centers in the network. Each center also can
schedule patient appointments at each other facility within the network. This
system permits the Company's networks to better utilize time available at its
network centers and to meet patients' appointment time, date or location
preferences.

Optimizing the Location and Mix of Imaging Center Services

     Prior to their acquisition by the Company, the radiology facilities that
comprise the Company's network in each market were operated as parts of smaller
networks or as stand-alone facilities. Accordingly, decisions as to the services
to be offered at a facility often were based on different decision-making
criteria than those now utilized by the Company. For example, two imaging
centers within close proximity to each other that were owned by separate owners
previously may have offered similar services because they competed for
referrals. Similarly, an operator of an imaging center may not have offered
certain imaging services at a facility due to a lack of available capital
resources for equipment purchases or a lack of expertise by the imaging center's
personnel or radiologists.

     As the Company consolidates radiology facilities in an area into a network,
the Company and its affiliated physicians often can take actions to make the
combined network more efficient. In 1998, the Company closed or consolidated
certain acquired imaging centers that were unprofitable or overlapped other
imaging centers in the Company's networks. The remaining facilities now offer a
wider variety of services and operate at higher utilization levels than those
experienced prior to the closings. In 1998, the Company increased the number of
modalities offered at certain of its imaging centers. For example, by adding MRI
services to an imaging center that previously offered CT, the Company can
receive referrals from referring physicians who wish to use only one radiology
services provider for their patients and who refer patients for both CT and MRI.
The Company also can capitalize on the staff expertise of an imaging center to
assist another imaging center in adding new services.


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<PAGE>   6

     The Company also can increase the efficiency of its networks by installing
diagnostic-quality teleradiology systems in selected markets. Teleradiology
permits a physician at one facility to interpret images from imaging equipment
located at other facilities. These systems also permit the Company to leverage
the services of radiology specialists and subspecialists located at one location
who can provide professional services to multiple locations within the network.
In 1998, the Company installed two diagnostic-quality teleradiology systems, one
in its Finger Lakes (Rochester, New York) market area and one in its Northeast
Kansas market area, bringing the number of the Company's markets with
diagnostic-quality teleradiology systems to three. In these markets, the
Company's radiology practices are able to offer 24-hour professional radiology
services to hospitals and other locations equipped with the Company's
teleradiology equipment. Prior to the installation of the teleradiology network,
continuous on-site staffing may not have been appropriate. These systems are
attractive to referring physicians and hospitals since they receive timely
radiology interpretations from a radiologist outside of normal business hours or
on weekends or holidays. These systems are attractive to radiologists since they
utilize one radiologist to cover multiple sites and avoid on-site staffing or
call coverage at each site during these periods.

Emphasize Quality Service

     The Company focuses on providing quality patient service to ensure patient
and referring physician satisfaction. The Company's development of radiology
networks permits the Company to invest in advanced radiology equipment,
including MRI, open MRI, spiral CT and PET, as well as equipment to offer
diagnostic-quality teleradiology services in certain markets. When appropriate,
the Company provides capital to upgrade existing imaging equipment. The
Company's consolidation of imaging centers into coordinated networks improves
response time, increases overall patient accessibility, permits the Company to
standardize certain customer relations procedures and permits the Company to
develop Abest practices@ for its imaging centers. The Company seeks the input
and participation of the Company's radiology practices to develop best practices
and to improve productivity and quality of services. By focusing on further
improving and, where appropriate, standardizing the operations of its imaging
centers, the Company believes that it can increase patient and referring
physician satisfaction, which should lead to increased referrals and increased
utilization of the Company's imaging centers.

Expansion in Existing Markets

     The Company intends to expand through acquisitions within its existing
markets, as well as through joint venture and outsourcing relationships. The
Company may enter into an acquisition, joint venture or outsourcing relationship
to complete or expand the geographic coverage of, or to increase the services
offered by, one of its radiology services networks. The Company may undertake
such a transaction to increase the Company's share of radiology services within
a market.

     Outsourcing radiology services to the Company permits hospitals and other
health services providers (including physician groups such as obstetricians and
orthopedic specialists) to focus on their core business without losing the
ability to offer imaging services to their patients. The outsourcing sponsor
benefits by utilizing the Company's capital, favorable purchasing arrangements,
operating expertise and radiologist affiliations. Outsourcing relationships
permit the Company to receive additional technical revenues, to benefit from
economies of scale within a network, to fill in gaps in coverage within a
network, to operate an imaging service without incurring certain costs related
to the operation of a free-standing imaging center (such as the cost of
renovating a location for use as an imaging center) and to secure a long-term
relationship between the Company and the outsourcing sponsor.


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<PAGE>   7

     In addition, the Company may enter into service agreements with additional
radiology practices. These arrangements most often will include imaging centers
that will be added to the Company's existing radiology networks. The Company
believes that, through additional radiology practice relationships, the Company
can increase referrals to the Company's networks by accessing new referral
sources and new referring physician relationships, by enlarging or completing
the geographic coverage of the Company's networks, by expanding the scope of
professional services offered through the Company's networks and by increasing
the Company's market share within a market area.

     The Company has acquired imaging operations and has affiliated with
radiology practices that have had successful and profitable operating histories.
The Company expects that most of its future acquisitions and affiliations will
involve imaging centers and radiology practices with successful operating
histories. In selected instances, the Company may acquire low-performing imaging
centers that the Company believes can be operated more efficiently and
profitably as part of the existing network.

Selective Expansion into New Markets

     The Company also may expand into new geographic markets by acquiring
imaging centers, entering into joint venture or outsourcing relationships and
affiliating with high-quality, profitable radiology practices that have strong
reputations and competitive positions in their local markets. The Company
identifies potential acquisition candidates through a variety of means,
including targeted contacts of imaging center owners and radiologists by the
Company, participation in professional conferences, referrals from radiology
practices and direct inquiries from radiologists. Prior to entering a new
market, the Company will consider various factors including the following:

     o    likelihood the Company will achieve a return on capital that exceeds
          the Company's weighted-average cost of capital;

     o    potential for extensive geographic coverage of the target market by
          the Company;

     o    supply of existing radiology services within the target market;

     o    target market population and demographics; and

     o    competitive environment within the target market.

RADIOLOGY MARKET OVERVIEW

     The Health Care Financing Administration estimates that national health
care spending in 1997 was approximately $1.1 trillion. According to the American
College of Radiology, an estimated 350 million radiological procedures were
performed in the United States during 1995. Total spending on radiology services
including diagnostic imaging, interventional radiology and radiation oncology
was estimated at $56 to $70 billion according to a 1995 report prepared by SMG
Marketing Group. Diagnostic imaging, including interventional radiology
procedures, accounted for approximately 82% of the aggregate amount spent on
radiological services performed in the United States, with radiation oncology
services accounting for approximately 18%.

         Technical facilities are located within hospitals and in approximately
2,600 outpatient centers throughout the United States. Professional radiology
services are provided by radiologists, general practitioners and other
specialists. There are approximately 3,200 radiology groups in the United States


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comprised of approximately 27,000 practicing radiologists. These groups have a
typical size of six members, but vary in size up to approximately 100 physicians
serving a specific market.

OPERATIONS AND DEVELOPMENT

Imaging Centers

         The Company owns 61 imaging centers and operates and manages 16
additional imaging centers through joint venture relationships. The number and
type of modalities offered at the Company's owned, operated or managed imaging
centers are determined by the demand for such services within their respective
market areas. Presently, the majority of these imaging centers offer multiple
modalities including various combinations of MRI, CT, mammography, ultrasound,
nuclear medicine, fluoroscopy and traditional radiography. By offering a wide
spectrum of imaging modalities, the Company markets itself as a full-service
provider of diagnostic imaging services.

         Set forth below are the locations and certain other information with
respect to the Company's operations as of December 31, 1998:

<TABLE>
<CAPTION>
                                                 IMAGING FACILITIES                             HOSPITAL RELATIONSHIPS
                              -------------------------------------------------------     -----------------------------------
                                                       JOINT                                                    OUTSOURCED
                                   OWNED              VENTURE              OTHER                                 TECHNICAL
       MARKET AREAS               CENTERS            CENTERS(1)           SITES(2)        AFFILIATIONS(3)       SERVICES(4)
                              ---------------     ---------------     ---------------     ---------------     ---------------
<S>                           <C>                 <C>                  <C>                <C>                 <C>
Mid-Atlantic(5) .........                  25                  10                   1                  14                   4

Finger Lakes(6) .........                   6                  --                   4                   5                   5

Bay Area(7) .............                  17                  --                  --                   9                   1

South Texas(8) ..........                   3                   5                  --                   5                   4

Northeast Kansas(9) .....                   2                   1                  --                  11                   2

Hudson Valley (10) ......                   7                  --                   5                   3                   1

Treasure Coast(11) ......                   1                  --                  --                   3                  --
                              ---------------     ---------------     ---------------     ---------------     ---------------
         Totals .........                  61                  16                  10                  50                  17
</TABLE>

(1)  Represents partnerships with hospitals or health systems and were formed
     for the purpose of owning and operating imaging centers. Professional
     services at the joint venture imaging centers are performed by the
     radiology practices in such market area.

(2)  Includes locations where the Company owns diagnostic imaging equipment and
     provides professional services to other non-radiology health care
     providers.

(3)  Represents contractual or other relationships with hospitals where the
     radiology practices provide diagnostic and interventional radiology or
     radiation oncology services. The radiology practices provide substantially
     all of the diagnostic and interventional radiology services provided by
     radiologists at substantially all of such hospitals.

(4)  Represents hospital relationships in which the Company receives technical
     service fee revenue derived from in-patient procedures performed with
     diagnostic imaging equipment owned by the Company.

(5)  Encompasses the greater Baltimore/Washington, D.C. metropolitan area.

(6)  Encompasses the greater Rochester, New York metropolitan area. The figures
     do not include the affiliation with a radiology group in the Rochester, New
     York, market area, effective February 6, 1999.

(7)  Encompasses the greater San Francisco/Oakland/San Jose, California
     metropolitan area.

(8)  Encompasses the greater San Antonio, Texas metropolitan area.

(9)  Encompasses the Topeka, Kansas and Northeast Kansas area. The figures do
     not include the affiliation with a radiology group in the Northeast Kansas
     market area, effective January 1, 1999.

(10) Encompasses Rockland County, New York, and surrounding counties.



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(11) Encompasses Fort Pierce, Florida, and surrounding communities.

     The Company utilizes capital for its radiology and imaging center networks,
as appropriate, for the following purposes:

     o    technological advances, including teleradiology and upgraded
          diagnostic imaging equipment;

     o    imaging equipment for new modalities (such as open MRI, spiral CT and
          PET);

     o    information systems, including the Company's financial accounting
          system, which the Company implements at each new imaging center as
          soon as reasonably possible after the center is added to the Company's
          networks; and

     o    implementation of technologies to link voice, data and image
          transmission capabilities.

Radiology Practices

     The radiology practices whose radiologists perform professional services
for the Company consist of ten radiology practices, comprised of 254
radiologists, located in seven states and the District of Columbia. All of the
practices provide professional services, which consist of the supervision,
performance and interpretation of radiological procedures in hospitals, imaging
centers or other settings. The practices currently provide professional
radiology services to 50 hospitals. In the aggregate, the practices provide all
subspecialty diagnostic and interventional radiology and radiation oncology
services. Substantially all of the radiologists are board certified. In addition
to providing professional services at the Company's imaging facilities and the
hospitals, the radiology practices provide professional services to hospital
outpatient facilities, physicians' offices, mobile imaging units and nursing
homes.

     The radiology practices were selected based on a variety of factors,
including: physician and practice credentials and reputation; competitive market
position; subspecialty mix of physicians; historical financial performance and
growth potential; and willingness to embrace the Company's strategy for the
market for radiology services.

Affiliation Structure for the Company's Radiology Practices

     The Company's business model is based on a "partnership" with its radiology
practices in which the Company manages the non-medical functions of the
radiology practices in a manner that promotes physician participation and input
in areas such as practice enhancement and operating efficiencies, marketing and
long-term strategy development. The Company believes that its partnering
approach (i.e., shared ownership, economic interest and governance) enables
physicians to provide input in the management and affairs of their practice and
aligns the interests of physicians in the radiology practices with those of the
Company in promoting practice growth and operating efficiencies. The Company
believes its model is, and will continue to be, attractive to potential practice
acquisition candidates.

     In connection with the acquisition of imaging centers and affiliations with
radiology practices, the Company acquires certain tangible and intangible assets
and assumes certain liabilities of the radiology practices. The Company pays the
purchase price for such transactions in cash and shares of its Common Stock, or
cash and subordinated promissory notes convertible into shares of Common 


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<PAGE>   10

Stock. Simultaneously with the acquisitions, the Company enters into a 40-year
service agreement with each radiology practice pursuant to which the Company
will provide a wide range of management, administrative, technical and
non-medical services. For providing services under the service agreement, the
Company receives a fee which is structured to align the interests of the Company
and the radiology practices. Additionally, the service agreements restrict the
radiology practices from competing with the Company and other of the Company's
radiology practices within a specified geographic area during the term of the
service agreements and also require each radiology practice to obtain and
enforce similar restrictive covenants with the full-time physicians affiliated
with their practices. The Company anticipates that future acquisitions of
imaging centers and affiliated radiology practices will be based on the
partnership model the Company has established or a variation of such model.

     The Company believes a shared governance approach is critical to the
long-term success of a healthcare enterprise that is dependent on physician
services and referrals. The Company operates within a governance structure which
promotes physician involvement in the direction and management of the radiology
practices and the Company. As required by the service agreements, this is
accomplished by the Company and each radiology practice establishing Joint
Planning Boards consisting of three to six members. The Joint Planning Boards
have responsibility for establishing payor contracting guidelines, making
recommendations with respect to operating budgets and capital expenditures and
developing marketing strategies and long-term objectives for their respective
practices. The Company believes the Joint Planning Boards promote participation
by physicians in both the overall management of their practices and the
continued growth of the Company's imaging center operations in that region and
serve as a means for the Company and its radiology practices to communicate
effectively and exchange information. In addition, the Company has a Physician
Advisory Board, the primary focus of which is to enhance the quality of services
provided by the Company, its imaging centers and its radiology practices. The
Physician Advisory Board consists of 11 practicing physicians from the radiology
practices. This board serves as a forum in which members discuss and make
recommendations regarding clinical applications, practice protocols,
appropriateness criteria, utilization guidelines, best practices and managed
care issues. Recommendations are communicated to all radiology practice
physicians, however, the adoption of such recommendations will be at the
discretion of the radiology practices.

Information Management

     The Company believes that integrated practice management information and
financial information systems are essential to the development of integrated
health care delivery capabilities and fundamentals to improving the quality of
care, reducing the cost of care and enhancing the Company's attractiveness to
payors. The Company has implemented a Financial Accounting System ("FAS"). The
FAS is designed to facilitate consistent, efficient reporting of financial
information throughout the Company using one standard chart of accounts with a
single set of accounting practices and financial controls. The Company has
deployed general ledger, accounts payable, asset management and payroll systems
at each of the radiology practices. The Company is in the process of developing
other standard information systems for clinical and practice data.

     The Company has initiated communications with primary payors from which it
receives reimbursement. There is no assurance that the systems of such payors or
of other companies with which the Company has significant relationships will be
made year 2000 compliant in a timely manner or that a failure by any such payor
or other company to make its systems year 2000 compliant will not have a
material adverse on the Company. See "Risk Factors -- Year 2000 Compliance" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Issue."


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<PAGE>   11

Service Agreements

     The Company is a party to a service agreement with each related radiology
practice under which the Company is the exclusive manager and administrator of
non-medical services relating to the operation of the practice. The following
summary of the service agreement is intended to be a brief description of the
standard form of the Company's service agreements with the respective radiology
practices. The service agreements may vary from the description below depending
on the requirements of local regulations and negotiations with the individual
practices. The Company expects to enter into agreements with similar provisions
with additional radiology practices in the future.

     The service fees payable to the Company by the radiology practices under
the service agreements vary based on fair market value, as determined in arms'
length negotiations, and the nature and extent of services provided. Where state
law allows, service fees due under the service agreements are derived from two
distinct revenue streams:

          o    the radiology practice pays a service fee to the Company based on
               a negotiated percentage (Radiology practice service fees range
               from 20% to 30%) of the adjusted professional revenues as defined
               in the service agreement; and

          o    the radiology practice pays a service fee based on 100% of the
               adjusted technical revenues as defined in the service agreement,
               which equals the fair value of the services provided.

In states where the law requires a flat fee structure, the Company has
negotiated a base service fee, which is equal to the fair market value of the
services provided under the service agreement and which is renegotiated each
year to equal the fair market value of the services provided under the service
agreement. Adjusted professional revenues and adjusted technical revenues are
determined by deducting certain contractually agreed-upon expenses
(non-physician salaries and benefits, rent, depreciation, insurance, interest
and other non-physician costs) from physician groups revenue of the radiology
practice. In addition, the Company receives income from joint ventures in which
the Company holds ownership interests. Revenues are billed by the Company on
behalf of the radiology practices. Payments are received by the radiology
practice and transferred to the Company on a daily basis. On a monthly basis the
Company calculates the amount of service fees due and remits to the radiology
practices an amount equal to the difference between the net revenues of the
radiology practice and the service fees calculated by the Company.

     Pursuant to the service agreements, the Company, among other things: (i)
acts as the exclusive manager and administrator of non-physician services
relating to the operation of the radiology practice, subject to matters reserved
to the radiology practice or referred to the Joint Planning Board; (ii) aids in
the billing of hospitals, insurance companies and other third-party payors and
collects on behalf of the radiology practice the fees for professional medical
and other services rendered by the radiology practice; (iii) provides, as
necessary, clerical, accounting, purchasing, payroll, legal, bookkeeping and
computer services and personnel, information management, preparation of certain
tax returns and medical transcribing services; (iv) supervises and maintains
custody of substantially all files and records; (v) provides facilities for the
radiology practice; (vi) prepares, in consultation with the Joint Planning Board
and the radiology practice, all annual operating and capital budgets; (vii)
orders and purchases inventory and supplies as necessary; (viii) implements, in
consultation with the Joint Planning Board and the radiology practice, national
and local public relations or advertising programs; (ix) provides financial and
business assistance in the negotiation, establishment, supervision and


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<PAGE>   12

maintenance of contracts and relationships with managed care and other similar
providers and payors; and (x) assists the radiology practice with obtaining
medical malpractice insurance for its physicians and other medical
professionals.

     Under the service agreements, each radiology practice remains responsible
for (i) hiring and compensating its physicians and certain other medical
professionals, (ii) the licensing, credentialing and certification necessary to
conduct its practice, (iii) obtaining and maintaining medical malpractice
insurance for the professional entity and its physician employees, (iv)
providing professional radiological services and (v) complying with federal and
state laws, regulations and other ethical standards applicable to the practice
of radiology. Pursuant to the service agreements, the radiology practices
maintain full control over the provision of professional radiological services.
The Company does not engage in the practice of medicine or provide professional
radiological services. In addition, the service agreements with the radiology
practices also contain provisions whereby both the Company and each radiology
practice have agreed to certain restrictions on accepting or pursuing radiology
opportunities within a 10-mile radius of any of the Company's owned, operated or
managed imaging centers at which the radiology practice provides professional
radiology services or any hospital at which a radiology practice provides
on-site professional radiology services. Each service agreement also restricts
the applicable radiology practice from competing with the Company and other
radiology practices within a specified geographic area during the term of such
service agreement. In addition, the service agreements require the radiology
practices to enter into and enforce agreements with the stockholders and
full-time radiologists at each radiology practice (subject to certain
exceptions) that include covenants not to compete with the Company for a period
of two years after termination of employment.

     The service agreements are for an initial term of 40 years, with automatic
extensions of five years unless notice of termination is given. The service
agreements may be terminated by either party if (i) the other party (a) files a
petition in bankruptcy or other similar events occur or (b) defaults in the
performance of a material duty or obligation, which default continues for a
specified period after notice or (ii) an opinion is rendered by a law firm of
nationally-recognized expertise in health care law that a material term of the
service agreement is in violation of applicable law (or a court or regulatory
agency finds as such) and such violation cannot be cured.

     Each service agreement may also be terminated by the Company if the
radiology practice or a physician employee engages in conduct, or is formally
accused of conduct, for which the physician employee's license to practice
medicine reasonably would be expected to be subject to revocation or suspension
or is otherwise disciplined by any licensing, regulatory or professional entity
or institution, the result of any of which (in the absence of termination of
such physician or other action to monitor or cure such act or conduct) does or
reasonably would be expected to materially adversely affect the radiology
practice. In addition, the Company may terminate each service agreement with any
radiology practice if, during the first five years of the service agreement,
more than 33-1/3% of the total number of physicians employed or retained by such
practice are no longer employed or retained by such practice other than because
of certain events, including death, permanent disability, pre-qualified
retirement or involuntary loss of hospital contracts or privileges.

     Upon termination of a service agreement with an radiology practice,
depending upon the termination event, the Company may have the right to require
such radiology practice to purchase and assume, or the radiology practice may
have the right to require the Company to sell, assign and transfer to it, the
assets and related liabilities and obligations associated with the professional
and technical radiology services provided by the radiology practice immediately
prior to such termination. The purchase price for such assets, liabilities and
obligations will be the lesser of fair market value 


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<PAGE>   13

thereof or the return of the consideration received in the acquisition;
provided, however, that the purchase price shall not be less than the net book
value of the assets being purchased.

RADIOLOGY INDUSTRY

     In general, radiology includes diagnostic imaging, interventional radiology
and radiation oncology. Imaging procedures use energy waves to penetrate human
tissue and generate images of the body, which can be recorded on film or
digitized for display on a video monitor. Diagnostic imaging procedures are used
to diagnose diseases and physical injuries and are performed in hospitals,
physicians' offices, outpatient centers and imaging centers. Interventional
radiology procedures include the use of radiological methods to monitor and
guide catheters, stents, drains and needles to open clogged vessels, relieve
obstructed kidneys, perform biopsies of mass lesions, drain abscess collections
and lower pressure in certain vessels. Generally, these interventional
procedures are more time efficient, more cost-effective and less invasive than
surgical alternatives and have historically been performed in a hospital setting
to enable utilization of hospital support services.

     The principal diagnostic imaging modalities include the following, all of
which are non-invasive:

          General Radiology: X-Ray and Fluoroscopy. X-rays utilize roentgen rays
     to penetrate the body and record images of organs and structures on film.
     Fluoroscopy utilizes ionizing radiation combined with a video viewing
     system for real time monitoring of organs. X-ray and fluoroscopy are the
     most frequently used imaging modalities.

          Computed Tomography. CT utilizes a computer to direct the movement of
     an x-ray tube to produce multiple cross sectional images of a particular
     organ or area of the body. CT is used to detect tumors and other conditions
     affecting bones and internal organs. It is also used to detect the
     occurrence of strokes, hemorrhages and infections. CT provides higher
     resolution images than conventional x-rays, but generally not as well
     defined as those produced by magnetic resonance.

          Magnetic Resonance Imaging. MRI utilizes a strong magnetic field in
     conjunction with low energy electromagnetic waves which are processed by a
     computer to produce high-resolution images of body tissue including the
     brain, spine, abdomen, heart and extremities. Unlike CT and conventional
     x-rays, MRI does not utilize ionizing radiation, which can cause tissue
     damage in high doses.

          Mammography. Mammography is a specialized form of radiology utilizing
     low dosage x-rays to visualize breast tissue and is the primary screening
     tool for breast cancer. Mammography procedures also include the biopsy of
     cells to assist in the diagnosis of breast cancer.

          Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to
     develop images of internal organs, unborn fetuses and the vascular system.
     Ultrasound has widespread applications, particularly for procedures in
     obstetrics, gynecology and cardiology.

          Nuclear Medicine. Nuclear medicine utilizes short-lived radioactive
     isotopes which release small amounts of radiation that can be recorded by a
     gamma camera and processed by a computer to produce an image of various
     anatomical structures or to assess the function of 


                                       11
<PAGE>   14

     various organs such as the heart, kidneys, thyroid and bones. Nuclear
     medicine is used primarily to study anatomic and metabolic functions.

          Positron Emission Tomography. PET utilizes a scanner to record signals
     emitted by compounds with signal-emitting tracers after such compounds are
     injected into a patient's body. A scanner records the signals as they
     travel through the body and collect in the various organs targeted for
     examination. A computer assembles the signals into actual images. PET has
     proven effective in the detection and tracking of cancer (including lung,
     colorectal, breast and prostate), heart disease and brain disorders,
     including Alzheimer's disease, Parkinson's disease and seizure disorders.
     PET can provide accurate information currently unobtainable through any
     other imaging means and can eliminate the need for multiple tests and
     diagnostic surgical procedures.

     In addition to diagnostic imaging procedures, certain of the radiologist
practices that perform services for the Company also provide radiation oncology
services to hospitals. Radiation oncology procedures use a variety of radiation
sources to treat cancer and/or relieve pain caused by certain tumors and are
performed in hospitals and free-standing outpatient centers.

Trends In Radiology

     Technological Advancements. The Company believes that advances in
technology, including the development and continued enhancements of CT, MRI,
ultrasound, nuclear medicine, PET and interventional radiology have contributed
to the growth of the diagnostic imaging industry. These technological advances
have resulted in increased professional and technical utilization and have
produced diagnostic procedures that are safer, more accurate and less invasive
than techniques previously utilized. While traditional x-rays continue to be the
primary imaging modality based on the number of procedures performed, the use of
advanced diagnostic imaging modalities such as MRI and CT has increased rapidly
in recent years because these modalities allow physicians to diagnose a wide
variety of diseases and injuries quickly and accurately without exploratory
surgery or other surgical or invasive procedures, which are usually more
expensive, involve greater risk to the patient and result in longer
rehabilitation time. As a result, hospital days are shortened or eliminated and
time lost from work is significantly reduced. In addition, diagnostic imaging is
increasingly used as a screening tool for preventive care. The Company believes
that future technological advances will enhance the ability of radiologists to
diagnose and influence treatment, thereby lowering overall health care costs.

     Recent technological advancements include: magnetic resonance spectroscopy,
which can differentiate malignant from benign lesions; magnetic resonance
angiography, which can produce three-dimensional images of body parts and assess
the status of blood vessels; spiral computed tomography, which permits
three-dimensional images of body parts; monoclonal antibody studies utilizing
nuclear medicine to localize certain cancers that would otherwise be difficult
to detect or treat; and the development of teleradiology, which digitally
transmits radiological images from one location to another for interpretation.
The Company believes that the utilization of both the diagnostic and therapeutic
capabilities of radiology will continue to increase because of its
cost-effective, time-efficient and risk/benefit advantages over alternative
procedures (including surgery) and that newer technologies and future
technological advancements will result in further sub-specialization and
increased utilization of professional and technical radiological services.

     Reimbursement Patterns. Payment for radiology services comes primarily from
third-party payors such as private insurers (including traditional indemnity
insurance plans), managed care plans (including HMOs and PPOs) and governmental
payors (including Medicare and Medicaid). 


                                       12
<PAGE>   15

Historically, radiologists and other physicians generally provided medical
services on a fee-for-service basis. As managed care entities and other payors
have focused on providing care in a more cost-effective manner, they have
demanded and received significant discounts from fee-for-service rates charged
for radiological procedures. As a result, physicians have seen a decrease in per
procedure reimbursements from managed care and governmental entities for such
procedures. Certain third-party payors have focused on shifting more of the
financial risk for the provision of cost-effective services to providers through
capitation and other risk-sharing arrangements. Significant changes of this type
will require the Company to become more actively involved in assisting its
radiology practices in developing practice guidelines and appropriateness
criteria and managing the utilization of radiological procedures.

     The Company believes that the shift in financial risk from payors to
providers decreases the attractiveness of under-utilized imaging equipment
within a general practitioner's office and will accelerate the centralization of
resources to high-volume centers. According to an article published in the
American Journal of Radiology in 1993, approximately 64% of all radiological
procedures (primarily x-rays and ultrasound) performed in freestanding imaging
centers and physicians' offices were performed by non-radiologist physicians
including internists, family and general practitioners and orthopedists. The
Company believes that the general diagnostic imaging services performed by
non-radiologists may be directed to radiologists by managed care entities
seeking to have services performed at the lowest overall cost. As a result, the
Company believes that managed care entities, provided with utilization reports,
will focus on reducing costs by shifting radiological procedures performed by
non-radiologists to radiologists.

     Consolidation of Imaging Centers. Concurrent with the growth of managed
care and strict controls on Medicare reimbursement for inpatient costs,
diagnostic imaging services began to shift from hospital settings to imaging
centers in the early 1980s. While many of these imaging centers were developed
by physicians and hospitals, a subsequent change in federal law restricted the
referral of patients by a physician to a facility in which the physician
maintained an ownership interest. As a result, many physicians sold their
interests in imaging centers to hospitals, radiologists and companies engaged
exclusively in the ownership, operation and management of imaging centers. The
Company believes that many of these entities have and will continue to
consolidate the ownership of imaging centers.

     Referral Sources. Non-radiologists, including specialists and primary care
physicians, direct the utilization of radiology services. Most industry
marketing has been focused on developing relationships with these referring
physicians. As more patients move to managed care plans, the Company believes
physicians will have fewer referral options for diagnostic imaging procedures.
In addition, the Company believes that certain managed care entities will
increasingly demand that providers of radiology services share in the financial
risks associated with providing services for the lives covered by the managed
care entities. As the choices for radiology referrals decrease, the Company
believes that quality of care, subspecialty expertise and patient and referring
physician satisfaction will be important factors in determining referral
patterns.

     Trends in Radiology Organizations. The trends toward managed care, cost
containment and health care consolidation have combined to limit the number of
positions available and the salaries paid to radiologists. In addition, small
independent physician groups and individual practices are typically at a
competitive disadvantage to larger associations or networks of physicians
because they lack the capital necessary to (i) expand the geographic coverage of
the practice and the imaging modalities offered, (ii) develop state-of-the-art
information systems and (iii) purchase costly new imaging technologies, each of
which can improve quality of care and reduce costs. Generally, they also lack
the 


                                       13
<PAGE>   16

cost accounting and quality management systems necessary to allow physicians to
price and monitor complex risk-sharing arrangements with third-party payors.
Additionally, small to medium-sized groups and individual practices often do not
have contractual ties with other providers nor do they have the ability to offer
a broad range of subspecialty imaging services. Small practices often have
higher operating costs (since overhead must be spread over a relatively small
revenue base) and minimal vendor purchasing power. In order to remain
competitive in the changing medical service environment, radiologists are
beginning to affiliate with or create larger organizations by adding
radiologists to their groups, creating or joining a network or an independent
physician association or affiliating with a services provider such as the
Company.

GOVERNMENT REGULATION AND SUPERVISION

General

     The health care industry is highly regulated, and there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future. The ability of the Company to operate profitably
will depend in part upon the Company, the radiology practices and their
affiliated physicians obtaining and maintaining all necessary licenses,
certificates of need and other approvals and operating in compliance with
applicable health care regulations. The Company believes that health care
regulations will continue to change and, therefore, intends to monitor
developments in health care law and the Company expects to modify its operations
from time to time as the business and regulatory environment changes. There can
be no assurance that the Company will be able to modify its operations so as to
address changes in the regulatory environment.

Licensing and Certification Laws

     Every state imposes licensing requirements on individual physicians and on
facilities operated, or services performed, by physicians and others. In
addition, federal and state laws regulate HMOs and other managed care
organizations with which radiology practices or their affiliated physicians may
have contracts. Many states require regulatory approval, including certificates
of need and/or licensing, before establishing or expanding certain types of
health care facilities, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the entry
into new markets, the Company, the Radiology practices or their affiliated
physicians may become subject to additional regulation.

Fee-Splitting; Corporate Practice of Medicine

     The laws of many states (including each of the states in which the existing
radiology practices are located) prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company intends to
structure its proposed operating structures and methods as described herein so
as to comply with existing applicable laws, the Company's business operations
have not been the subject of judicial or regulatory interpretation. There can be
no assurance that a review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's planned operations and expansion. In
addition, the regulatory framework of certain jurisdictions may limit the
Company's expansion into such jurisdictions if the Company is unable to modify
its operating structure to conform with such regulatory framework.


                                       14
<PAGE>   17

Medicare Physician Payment System

     The Company believes that regulatory trends in cost containment will
continue to result in a reduction from historical levels in per-procedure
revenue for medical practices. The federal government has implemented, through
the Medicare program, a resource-based relative value scale ("RBRVS") payment
methodology for physician services. The RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year and is
subject to increases or decreases at the discretion of Congress. To date, the
implementation of the RBRVS has reduced payment rates for certain of the
procedures historically provided by the existing Radiology practices. The
Balanced Budget Act of 1997 ("BBA 97") provides for reductions in the rate of
growth of payments for physician services, including services historically
provided by the radiology practices, in the amount of $5.3 billion over a
five-year period ending in 2002. In addition, BBA 97 provides for the
implementation of a resource-based methodology for payment of physician practice
expenses under the physician fee schedule over a four-year period beginning in
1999. Adoption of this methodology is expected to reduce payments for services
historically provided by the radiology practices. There can be no assurance that
any reduced operating margins could be offset by the Company through increased
efficiencies, utilization of excess capacity, alteration of the mix of the
radiology practices' services or other means of increasing the Company's
revenues. Private third-party payors and Medicare and Medicaid have increased
their use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the radiology practices. BBA 97
also includes provisions designed to increase the enrollment of Medicare and
Medicaid participants in managed care programs. The inability of the Company to
negotiate satisfactory arrangements with managed care companies would have a
material adverse effect on the Company's business, financial condition and
results of operation.

     Rates paid by non-governmental insurers, including those that provide
Medicare supplemental insurance, are based on established physician and hospital
charges and are generally higher than Medicare payment rates. A change in the
composition of the patient mix of the medical practices that results in a
decrease in patients covered by private insurance plans could adversely affect
the Company's revenue and income.

         Medicare and Medicaid have increased their use of managed care as a
means of cost containment. As with private third-party payors, Medicare and
Medicaid managed care contractors negotiate discounts from established physician
and hospital charges or require capitation or other risk sharing arrangements as
a condition of patient referral to physician groups such as the radiology
practices. BBA 97 includes provisions designed to increase the enrollment of
Medicare and Medicaid participants in managed care programs. The inability of
the Company to negotiate satisfactory arrangements with Medicare and Medicaid
managed care contractors could have a material adverse effect on the Company's
business, financial condition and results of operation.

Medicare and Medicaid Fraud and Abuse

     Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person, (ii) the furnishing or arranging for the furnishing of items or services
reimbursable under the Medicare, Medicaid or other governmental programs or
(iii) the purchase, lease or order or arranging or recommending purchasing,
leasing or ordering of any item or service reimbursable under the Medicare,
Medicaid or other governmental programs. Pursuant to this anti-kickback law, the
federal government has recently announced a policy 


                                       15
<PAGE>   18

of increased scrutiny of joint ventures and other transactions among health care
providers in an effort to reduce potential fraud and abuse relating to Medicare
costs. The applicability of these provisions to many business transactions in
the health care industry has not yet been subject to judicial and regulatory
interpretation. Noncompliance with the federal anti-kickback legislation can
result in exclusion from the Medicare, Medicaid, or other governmental programs
and civil and criminal penalties.

     The Company believes that although it receives fees under the Service
agreements for management and administrative services, it is not in a position
to make or influence referrals of patients or services reimbursed under the
Medicare, Medicaid or other governmental programs to radiology practices or
their affiliated physicians, or to receive such referrals. Such service fees are
intended by the Company to be consistent with fair market value in arms' length
transactions for the nature and amount of management and administrative services
rendered. For these reasons, the Company does not believe that service fees
payable to it should be viewed as remuneration for referring or influencing
referrals of patients or services covered by such programs as prohibited by
statute.

     Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically enlarging
the field of physician-owned or physician-interested entities to which the
referral prohibitions apply. Stark II prohibits a physician from referring
Medicare or Medicaid patients to an entity providing "designated health
services," including, without limitation, radiology services, in which the
physician has an ownership or investment interest, or with which the physician
has entered into a compensation arrangement. The penalties for violating Stark
II include a prohibition on payment by these governmental programs and civil
penalties of as much as $15,000 for each violative referral and $100,000 for
participation in a "circumvention scheme." The Company believes that, although
it receives fees under the Service agreements for management and administrative
services, it is not in a position to make or influence referrals of patients.

     On January 9, 1998, the Health Care Financing Administration, Department of
Health and Human Services ("HCFA") published proposed rules (the "Proposed
Regulations") to implement Stark II. Under Stark II, radiology services and
radiation therapy services and supplies are services included in the designated
health services subject to the self-referral prohibition. Under the Proposed
Regulations, such services would include any diagnostic test or therapeutic
procedure using x-rays, ultrasound or other imaging services, computerized axial
tomography, magnetic resonance imaging, radiation, nuclear medicine and
diagnostic mammography services (but not screening mammography services). The
Proposed Regulations, however, would exclude from such definition of radiology
services and radiation therapy services and supplies "invasive" or
"interventional" radiology because the radiology services in these procedures
are merely incidental or secondary to another procedure that the physician has
ordered.

     Stark II provides that a request by a radiologist for diagnostic radiology
services or a request by a radiation oncologist for radiation therapy, if such
services are furnished by or under the supervision of such radiologist or
radiation oncologist pursuant to a consultation requested by another physician,
does not constitute a "referral" by a "referring physician." Therefore, if such
requirements were met, the Stark II self-referral prohibition would not apply to
such services. The effect of Stark II on the radiology practices, therefore,
will depend on the precise scope of services furnished by each such practice's
radiologists and whether such services derive from consultations or are
self-generated. Management of the Company believes that all of the services
provided by the radiology practices derive from requests for consultation. The
Proposed Regulations, however, significantly depart from the Medicare coverage
definition of radiology to include not only the technical component but also the
professional component of radiology services. HCFA has expressly requested
comments from the 


                                       16
<PAGE>   19

public regarding this aspect of the Proposed Regulations. In light of the
complexity of the issues relating to Stark II, and the uncertainty regarding the
Proposed Regulations, it is unclear whether the existing relationships between
the Company and the radiology practices and the relationships between the
radiology practices and physicians who refer patients to them would be deemed to
comply with Stark II after the final regulations are adopted.

     In addition, the Company believes that it has structured its acquisitions
of the assets of existing practices and intends to structure its future
acquisitions so as to not violate the anti-kickback and Stark II laws and
regulations. Specifically, the Company believes the consideration paid by the
Company to physicians to acquire the tangible and intangible assets associated
with their practices is consistent with fair market value in arms' length
transactions and not intended to induce the referral of patients. Should any
such practice be deemed to constitute an arrangement designed to induce the
referral of Medicare or Medicaid patients, then the Company's acquisitions could
be viewed as possibly violating anti-kickback and anti-referral laws and
regulations. A determination of liability under any such laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.

     Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's contemplated activities and the activities
of the radiology practices. There can be no assurance that the Company's or such
radiology practices' contemplated activities will not be investigated, that
claims will not be made against the Company or the radiology practices or that
these increased enforcement activities will not directly or indirectly have an
adverse effect on the Company's business, financial condition and results of
operations.

State Anti-kickback and Physician Self-referral Laws

     Many states have enacted similar laws and regulations prohibiting the
payment or solicitation of remuneration in exchange for or to induce the
referral of patients or the ordering of items or services, and regulating the
ability of physicians to refer patients to entities in which they have an
ownership interest or compensation arrangement. The Company believes that its
operations and those of the radiology practices comply with all such applicable
laws and regulations. There can be no assurance that the Company's or such
radiology practices' contemplated activities will not be investigated by the
relevant state authorities, that claims will not be made against the Company or
the radiology practices or that such enforcement activities will not directly or
indirectly have an adverse effect on the Company's business, financial condition
and results of operations.

Health Care Reform Initiatives

     In addition to existing government health care regulation, there have been
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue during the foreseeable future.
Certain aspects of these reforms, as proposed in the past, such as further
reductions in Medicare and Medicaid payments and additional prohibitions on
physician ownership, directly or indirectly, of facilities to which they refer
patients, if adopted, could adversely affect the Company.


                                       17
<PAGE>   20

Health Insurance Portability and Accountability Act of 1996

     In an effort to combat health care fraud, Congress enacted the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA, among
other things, amends existing crimes and criminal penalties for Medicare fraud
and enacts new federal health care fraud crimes, including actions affecting
non-governmental payors. Under HIPAA, a "health care benefit program" includes
any private plan or contract affecting interstate commerce under which any
medical benefit, item or services is provided. A person or entity that knowingly
and willfully obtains the money or property of any health care benefit program
by means of false or fraudulent representations in connection with the delivery
of health care services is subject to a fine and/or imprisonment. A finding of
liability under HIPAA could have a material adverse effect on the Company's
business, financial condition and results of operations.

Compliance Program

     With the assistance of the Company's special health care regulatory
counsel, the Company intends to implement a program to monitor compliance with
federal and state laws and regulations applicable to health care entities. The
Company has appointed a compliance officer who is charged with implementing and
supervising the Company's compliance program, which will involve the adoption of
(i) "Standards of Conduct" for its employees and affiliates and (ii) an "Ethics
Process" that will specify how employees, affiliates and others may report
regulatory or ethical concerns to the Company's compliance officer. The Company
intends for its compliance program to follow guidance provided by the Office of
Inspector General of the Department of Health and Human Services. An important
part of the Company's compliance program will be conducting periodic audits of
various aspects of its operations, including the radiology practices. The
Company also intends to initiate a training program designed to familiarize its
employees with the regulatory requirements and specific elements of the
Company's compliance program.

Insurance Laws and Regulation

     Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. The Company believes that it is, and
the radiology practices are, currently in compliance with such insurance laws
and regulations. However, implementation of additional regulations or compliance
requirements could result in substantial costs to the Company and the radiology
practices. The inability to enter into capitated or other risk-sharing
arrangements or the cost of complying with certain applicable laws that would
permit expansion of the Company's risk-based contracting activities could have a
material adverse effect on the Company's business, financial condition and
results of operations.

COMPETITION

     The Company's owned, operated or managed imaging centers and the radiology
practices compete with local radiologists and technical imaging service
providers, including for-profit and non-profit hospitals and health systems, in
each of the markets served by the Company. The Company believes that changes in
governmental and private reimbursement policies and other factors have resulted
in increased competition among providers for medical services to consumers and
that cost, accessibility, quality and scope of services provided are the
principal factors that affect competition. 


                                       18
<PAGE>   21

There can be no assurance that the Company's owned, operated or managed imaging
centers or the radiology practices will be able to compete effectively in the
markets that they serve, which inability to compete could adversely affect the
Company.

     The Company believes that the current trends in the hospital industry have
resulted in increased competition by radiology groups for hospital contracts.
Each of the radiology practices provides radiology services to hospitals. These
relationships can be affected through competition with other radiology groups,
the outsourcing of the radiology and imaging functions within the hospital or
closure of the hospital due to consolidation or financial instability. There can
be no assurance that each of the radiology practices will maintain its current
hospital relationships and be able to renew or extend its current arrangements
under favorable terms or effectively compete for new relationships.

     The Company's primary competition for the acquisition and retention of the
assets of, and the provision of management, technical and administrative
services to, additional radiology practices, MSOs and imaging centers within its
current market areas arises from local entrepreneurs. Nationally, the Company's
competition for the acquisition of and servicing of such operations is
fragmented with no dominant competitor. There are a number of publicly-traded
and privately held companies focused primarily on owning or managing imaging
centers. There are also publicly-traded and privately held companies that have
established operating histories and, in some instances, greater resources than
the Company that are pursuing the acquisition of general and specialty physician
practices and the management of such practices. Some hospitals, clinics, health
care companies, HMOs and insurance companies engage in activities similar to
those of the Company. There can be no assurance that the Company will be able to
compete effectively with such competitors for the acquisition of, or affiliation
with, radiology practices, that additional competitors will not enter the
market, that such competition will not make it more difficult or expensive to
acquire the assets of, and provide management, administrative, technical and
non-medical services to, radiology practices on terms beneficial to the Company
or that competitive pressures will not otherwise adversely affect the Company.

FACILITIES AND EMPLOYEES

     The Company's corporate headquarters are located at 3600 Chase Tower, 2200
Ross Avenue, Dallas, Texas 75201-2776, in approximately 26,000 square feet
occupied under a lease which expires on August, 31, 2011. As of December 31,
1998, the Company had approximately 1,600 employees, approximately 40 of whom
are employed at the Company's headquarters and regional offices and the
remainder of which are employed at the Company's imaging centers and at the
radiology practices. The Company believes that its relationship with its
employees is good.

CORPORATE LIABILITY AND INSURANCE

     The related radiology practices maintain professional liability insurance
coverage primarily on a claims made basis. Such insurance provides coverage for
claims asserted when the policy is in effect regardless of when the events that
caused the claim occurred. As a result of the acquisition of the related
radiology practices, the Company in some cases succeeded to certain liabilities
of the related radiology practices. Therefore, claims may be asserted against
the Company for events which occurred prior to such acquisitions. The Company
and the related radiology practices maintain insurance coverage similar to the
coverage previously maintained by the related radiology practices. On September
1, 1997, a new law became effective in the state of Texas that permits injured
patients to sue health insurance carriers, HMOs and other managed care entities
for medical malpractice. There can be no assurance that this law will not
increase the cost of liability insurance to the Company for services 


                                       19
<PAGE>   22

provided in Texas or any other states in which the Company does business if
similar legislation is adopted in those states.

     The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. The Company's intent is to not influence
or control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups. As a result of the relationship between the
Company and the related radiology practices, however, the Company may become
subject to medical malpractice actions under various theories, including
successor liability. There can be no assurance that claims, suits or complaints
relating to services provided by radiology practices will not be asserted
against the Company in the future. The Company maintains insurance coverage that
it believes will be adequate. The Company anticipates that such insurance will
extend to professional liability claims that may be asserted against employees
of the Company that work on site at radiology practice locations. In addition,
pursuant to the service agreements, the radiology practices are required (and
the Company intends to require any other future related radiology practices) to
maintain comprehensive professional liability insurance. The availability and
cost of such insurance is affected by various factors, many of which are beyond
the control of the Company and the practices. The cost of such insurance to the
Company and the radiology practices may have an adverse effect on the Company's
operations. In addition, successful malpractice or other claims asserted against
radiology practices or the Company that exceed applicable policy limits could
have a material adverse effect on the Company.

     The shareholders of the related radiology practices have agreed to
indemnify the Company for certain claims. There can be no assurance that the
Company will be able to receive payments under any such indemnity agreements or
that the failure to fully recover such amounts will not have a material adverse
effect on the Company's business, financial condition or results of operations.

     The related radiology practices are required by the terms of the service
agreements to maintain medical malpractice liability insurance consistent with
minimum limits mandated in their hospital contracts or by applicable state law.
The minimum amounts to be maintained are $1 million per occurrence and $3
million in the aggregate. The Company maintains general liability and umbrella
coverage of $5 million per occurrence and $5 million in the aggregate.
Additionally, the Company maintains workers' compensation insurance on all
employees. Coverage is placed on a statutory basis and responds to each state's
specific requirements.

LEGAL PROCEEDINGS

     The Company is not currently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the Company
other than routine litigation arising in the ordinary course of business, which
litigation is expected to be covered by liability insurance and all of which is
not expected to have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance that the
Company will not subsequently be named as a defendant in additional lawsuits.

     There can be no assurance that the Company will not be named as a defendant
in lawsuits for matters arising out of events that occurred prior to the
acquisition of the related radiology practices. Each practice has retained
responsibility for, and/or agreed to indemnify the Company in full against, the
liabilities associated with these lawsuits. In the event the Company is named as
a party in any of these lawsuits, or a monetary judgment is entered against the
Company and indemnification is unavailable for any reason, the Company's
business, financial condition and results of operations could be materially
adversely affected.


                                       20
<PAGE>   23

INCORPORATION

     The Company was incorporated in Delaware in 1996. Prior to the November
1997 initial public offering (the "IPO") of the Company's common stock, the
Company had not conducted any significant operations. The radiology practices,
the imaging centers the Company acquired from such practices and the imaging
centers acquired in post-IPO transactions, however, were in operation prior to
the IPO.

ITEM 2. PROPERTIES.

     The Company's corporate headquarters are located at 3600 Chase Tower, 2200
Ross Avenue, Dallas, Texas 75201, in approximately 26,000 square feet occupied
under a lease, which expires on August 31, 2011.

ITEM 3. LEGAL PROCEEDINGS.

     The Company is not currently subject to any material litigation or, to the
Company's knowledge, is any material litigation threatened against the Company
other than routine litigation arising in the ordinary course of business, which
litigation is expected to be covered by liability insurance and all of which is
not expected to have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance that the
Company will not subsequently be named as a defendant in additional lawsuits.

     There can be no assurance that the Company will not be named as a defendant
in lawsuits for matters arising out of events that occurred prior to the
acquisition of the related radiology practices. Each practice has retained
responsibility for, and /or agreed to indemnify the Company in full against, the
liabilities associated with these lawsuits. In the event the Company is named as
a party in any of these lawsuits, or a monetary judgment is entered against the
Company and indemnification is unavailable for any reason, the Company's
business, financial condition and results of operations could be materially
adversely affected.

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

     The Company did not submit any matters to a vote of security holders during
the fourth quarter of 1998.


                                       21
<PAGE>   24

                                     PART II


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

Market Information and Stock Price

     The Company's Common Stock has been traded on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) National Market, under
the symbol "APPM", since November 20, 1997. The following table sets forth, for
the period indicated below, the high and low bid prices per share of the Common
Stock as reported by NASDAQ:

<TABLE>
<CAPTION>
                                                            High        Low
                                                            ----        ---
<S>                                                        <C>         <C>
       1997
           Fiscal Quarter Ended December 31, (from
           November 20, 1997)                              12 1/4      8 3/4
       1998
           Fiscal Quarter Ended March 31,                  11 7/8      9 1/2
           Fiscal Quarter Ended June 30,                   11 1/2      7
           Fiscal Quarter Ended September 30,               9 1/8      6
           Fiscal Quarter Ended December 31,                7 1/8      4 1/2
</TABLE>

     As of the close of business on February 18, 1999, the last reported sales
price per share of the Company's Common Stock was $7.00. There were 272 holders
of record of the Company's Common Stock at the close of business on February 18,
1998. Such number does not include persons, whose shares are held by a bank,
brokerage house or clearing company, but does include such banks, brokerage
houses and clearing companies.

     No cash dividends have been paid on the Company's Common Stock since the
organization of the Company and the Company does not anticipate paying dividends
in the foreseeable future. The Company currently intends to retain earnings for
future growth and expansion opportunities.


                                       22
<PAGE>   25

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following selected consolidated historical financial data of the
Company is derived from the Company's consolidated financial statements for the
periods indicated and, as such, reflects the impact of acquired entities from
the effective dates of such transactions. The information in the table and the
notes thereto should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto.

<TABLE>
<CAPTION>
                                                 PERIOD FROM
                                                  INCEPTION
                                              (APRIL 30, 1996)
                                                      TO
                                                 DECEMBER 31,         YEAR ENDED DECEMBER 31,
                                                     1996              1997              1998     
                                              ----------------     ------------      ------------
<S>                                           <C>                  <C>               <C>         
SERVICE FEE REVENUE ........................     $         --      $      8,683      $    135,604

COSTS AND EXPENSES:
   Salaries and benefits ...................               --             2,922            42,227
   Practice supplies .......................               --             1,036             8,865
   Practice rent and lease expense .........               --               852            11,532
   Other practice expenses .................               --             1,557            25,311
   Corporate general and administrative ....            1,623             4,910             9,597
   Depreciation and amortization ...........                3               888            12,178
   Interest expense, net ...................               23               617             7,541
                                                 ------------      ------------      ------------
       Total costs and expenses ............            1,649            12,782           117,251
                                                 ------------      ------------      ------------
INCOME (LOSS) BEFORE TAXES, MINORITY
   INTERESTS IN CONSOLIDATED SUBSIDIARIES
   AND EQUITY IN EARNINGS OF INVESTMENTS ...           (1,649)           (4,099)           18,353
EQUITY IN EARNINGS OF INVESTMENTS ..........               --               220             4,339
MINORITY INTERESTS IN CONSOLIDATED
   SUBSIDIARIES ............................               --               (49)             (710)
                                                 ------------      ------------      ------------
INCOME (LOSS) BEFORE TAXES .................           (1,649)           (3,928)           21,982
INCOME TAX EXPENSE .........................               --                --             8,451
                                                 ------------      ------------      ------------
NET INCOME (LOSS) ..........................     $     (1,649)     $     (3,928)     $     13,531
                                                 ============      ============      ============

NET INCOME (LOSS) PER COMMON SHARE:
       Basic ...............................     $      (0.82)     $      (1.13)     $       0.72
       Diluted .............................     $      (0.82)     $      (1.13)     $       0.70
</TABLE>

<TABLE>
<CAPTION>
                                                                 As of December 31,                
                                                          1996          1997          1998     
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>     
Balance Sheet Data:
   Working Capital ................................     $  2,029      $  3,376      $ 19,378
   Total Assets ...................................        2,578        62,766       156,639
   Long-term Debt and Capital Lease Obligations ...           --        55,865       120,211
   Convertible Notes ..............................        3,500            --            --
   Stockholders' Equity ...........................       (1,399)      (24,035)        7,046
</TABLE>


                                       23
<PAGE>   26

Summary of Operations by Quarter

     The following table presents unaudited quarterly operating results for each
of the Company's last eight fiscal quarters. The Company believes that all of
the necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the
consolidated financial statements. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a full year
or predictive of future periods.

<TABLE>
<CAPTION>
                                                 1997 Quarter Ended                                 1998 Quarter Ended         
                                   ----------------------------------------------      -------------------------------------------
                                                             (Amounts in thousands, except per share data)

                                   Mar. 31      June 30     Sept. 30      Dec. 31      Mar. 31     June 30    Sept. 30     Dec. 31
                                   -------      -------     --------      -------      -------     -------    --------     -------
<S>                                <C>          <C>         <C>           <C>          <C>         <C>        <C>          <C>    
Statement of Income Data:
  Service fee revenue              $    --      $    --      $    --      $ 8,683      $29,716     $33,556     $35,055     $37,277
  Income (loss) before
     income taxes                     (880)        (820)      (1,443)        (785)       5,122       5,470       5,489       5,901
  Net income (loss)                $  (880)     $  (820)     $(1,443)     $  (785)     $ 3,073     $ 3,391     $ 3,408     $ 3,659

  Net Income (Loss) Per Share:
     Basic                         $ (0.44)     $ (0.41)     $ (0.72)     $ (0.10)     $  0.17     $  0.18     $  0.18     $  0.19
     Diluted                       $ (0.44)     $ (0.41)     $ (0.72)     $ (0.10)     $  0.16     $  0.17     $  0.18     $  0.19
  Weighted Average Shares:
     Basic                           2,000        2,000        2,000        7,804       18,054      18,744      18,908      19,235
     Diluted                         2,000        2,000        2,000        7,804       18,841      19,449      19,356      19,679
</TABLE>


                                       24
<PAGE>   27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

     The Company develops, consolidates and manages radiology service networks.
These networks consist primarily of free-standing diagnostic imaging centers and
locations at which the Company provides radiology services that have been
outsourced by hospitals. The Company derives the majority of its service fee
revenue from providing the technical component of radiology services performed
at the Company's free-standing imaging facilities and pursuant to the Company's
outsourced hospital relationships. In addition, the Company also derives service
fee revenue from providing management services to radiology practices pursuant
to long-term service agreements. For the year ended December 31, 1998, the
Company derived 74% of its service fee revenue from the ownership, management
and operation of its radiology and imaging center network and 26% of its service
fee revenue from the management services provided to radiology practices. As of
December 31, 1998, APPM (i) owned operated and managed 61 imaging centers; (ii)
operated, managed or owned an interest in 16 additional imaging centers; and
(iii) provided management services to ten radiology practices consisting of 254
physicians. The Company's radiology and imaging center networks are concentrated
in California, Florida, Kansas, Maryland, New York, Texas, Virginia and
Washington, D.C.

     In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," published by the Securities
and Exchange Commission, the acquisition of the assets and assumption of certain
liabilities for all of the initial radiology practices pursuant to the
Reorganizations (as defined) was accounted for by the Company at the
transferors' historical cost basis with shares of the registrant's Common Stock
issued in those transactions valued at the historical cost of the nonmonetary
assets acquired, net of liabilities assumed.

RESULTS OF OPERATIONS

     APPM was incorporated on April 30, 1996, but conducted no significant
operations until the initial public offering (the "IPO") and closing of the
acquisitions of the initial radiology practices (the "Reorganizations") in
November 1997. 

Service Fee Revenue

     Service fee revenue increased to $135,604,000 in 1998 from $8,683,000 in
1997. Prior to November 26, 1997, the Company had no significant operations and,
therefore, no service fee revenue was generated during the period ended December
31, 1996.

Salaries and Benefits

     Salaries and benefits increased to $42,227,000 in 1998 from $2,922,000 in
1997. As a percentage of service fee revenue, these costs were 31.1% and 33.7%
in 1998 and 1997, respectively. The Company did not incur any salary and benefit
costs for practice-based employees in 1996. The amounts paid to corporate
employees during 1996 were recorded as corporate general and administrative
expenses.

Practice Supplies

     Practice supplies increased to $8,865,000 in 1998 from $1,036,000 in 1997.
As a percentage of service fee revenue, these costs were 6.5% and 11.9% in 1998
and 1997, respectively. The decrease as a percentage of service fee revenue is
largely due to the Company's ability to negotiate and obtain favorably priced
radiology supplies.

Practice Rent and Lease Expense

     Practice rent and lease expense increased to $11,532,000 in 1998 from
$852,000 in 1997. As a percentage of service fee revenue, these costs were 8.5%
and 9.8% in 1998 and 1997, respectively.


                                       25
<PAGE>   28

Other Practice Expenses

     Other practice expenses increased to $25,311,000 in 1998 from $1,557,000 in
1997. As a percentage of service fee revenue, these costs were 18.7% and 17.9%
in 1998 and 1997, respectively. Other practice expenses in 1998 include repairs
and maintenance, service contracts, utilities and communication costs.

Corporate General and Administrative

     Corporate general and administrative increased 95.5% to $9,597,000 in 1998
from $4,910,000 in 1997. Corporate general and administrative in 1997 increased
202.5% from $1,623,000 in 1996. As a percentage of service fee revenue, these
costs were 7.1% and 56.5% in 1998 and 1997, respectively. The decrease as a
percentage of service fee revenue is a result of the Company building
infrastructure throughout 1996 and 1997.

Depreciation and Amortization

     Depreciation and amortization expense increased to $12,178,000 in 1998 from
$888,000 in 1997. Depreciation and amortization increased $885,000 from $3,000
in 1996. As a percentage of service fee revenue, these costs were 9.0% and 10.2%
in 1998 and 1997, respectively. Prior to the IPO, the Company did not have any
material depreciable assets.

Interest Expense, net

     Interest expense, net increased to $7,541,000 in 1998 from $617,000 in
1997. As a percentage of service fee revenue, these costs were 5.6% and 7.1% in
1998 and 1997, respectively.

Income Taxes

     The Company's effective tax rate for 1998 was 38.4%. The Company did not
recognize any income tax benefit for the operating losses incurred during 1997
and 1996. The Company plans to reflect the income tax benefit for those years as
a reduction in its effective tax rate in future years.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1998, the Company had $19,378,000 in working capital, an
increase of $16,002,000 from December 31, 1997. The Company's principal sources
of liquidity consist of (i) cash and cash equivalents aggregating $6,485,000,
(ii) net accounts receivable of $36,789,000, and (iii) approximately $14,800,000
in borrowing capacity under the Company's bank credit facility (the "Credit
Facility").

     For the year ended December 31, 1998, $9,950,000 was provided by
operations. Cash of $63,501,000 was used in investing activities in 1998,
$52,866,000 of which was related to certain acquisitions, $12,651,000 related to
the purchase of property and equipment and $2,016,000 net was received from
joint ventures. Cash of $55,464,000 was provided by financing activities in
1998, substantially all of which was provided under the Credit Facility. For the
year ended December 31, 1997, $5,333,000 was used in operations. Cash of
$420,000 was used in investing activities, primarily for the purchase of
property and equipment. Cash of $7,834,000 was provided by financing activities,
primarily through borrowings under the Company's Credit Facility. For the year
ended December 31, 1996, $1,199,000 was used in operations. Cash of $3,750,000
was provided by financing activities, primarily as a result of the issuance of
$3,500,000 of convertible notes payable.

     On November 26, 1997, the Company entered into the Credit Facility. The
Credit Facility was amended May 19, 1998. The loan agreement provides for
revolving loans of up to $160,000,000 to be used by the Company for acquisitions
and general working capital needs. The Company may borrow, repay and reborrow
amounts during the first three years of the Credit Facility. Amounts outstanding
under the Credit Facility at the end of three years are required to be repaid in
quarterly installments of varying amounts commencing September 30, 2000. The
Credit Facility expires and all loans thereunder mature on the sixth anniversary
of the closing date of the Credit Facility. Borrowings under the Credit Facility
at any time may not exceed the lesser of $160,000,000 or 3.0 times the
consolidated EBITDA of the Company, giving pro forma effect to acquisitions made
with such borrowings. At December 31, 1998, the Company's debt could not exceed
$135,000,000 under the Credit Facility. The Company had outstanding borrowings
of $112,500,000 under the Credit Facility and an additional $7,700,000
outstanding under other credit arrangements. At the Company's option, the
interest rate is (i) an adjusted LIBOR rate, plus an applicable margin which can
vary from 1.5% to 2.5% dependent on 


                                       26
<PAGE>   29

certain financial ratios or (ii) the prime rate, plus an applicable margin which
can vary from 0.5% to 1.5%. In each case, the applicable margin varies based on
financial ratios maintained by the Company. The Credit Facility includes certain
restrictive covenants including prohibitions on the payment of dividends and the
maintenance of certain financial ratios (including minimum debt-service coverage
and maximum debt-to-EBITDA coverage, as defined). Borrowings under the Credit
Facility are secured by all service agreements, which the Company is, or becomes
a party to, and a pledge of the stock of the Company's subsidiaries.

     The Company anticipates sourcing other debt or equity financing to
facilitate its growth strategy in 1999. In the event the Company is unsuccessful
in obtaining additional financing, the Company anticipates that funds generated
from operations, cash and cash equivalents, and funds available under the Credit
Facility will be sufficient to meet the Company's working capital requirements
and debt obligations and to finance any necessary capital expenditures through
the end of 1999.

YEAR 2000 ISSUE

Impact of Year 2000

     The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, computer programs, computers and embedded microprocessors controlling
equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may result in
computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related issues,
which could also lead to miscalculations or failures: (i) some older systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the Year 2000 is a leap year.

State of Readiness

     The Company started to formulate a plan to address the Year 2000 Issue in
the third quarter of 1998. To date, the Company's primary focus has been on its
own internal information technology systems, including all types of systems in
use by the Company in its operations, finance and human resources departments,
and to deal with the most critical systems first. The Company is in the process
of developing a Year 2000 Plan to address all of its Year 2000 Issues. The Year
2000 Plan being developed will involve generally the following phases:
awareness, assessment, renovation, testing and implementation. Although the
Company's assessment of the Year 2000 Issue is incomplete, the Company has
completed an assessment of approximately 75% of its internal information
technology systems. The Company estimates that it will complete the assessment
of its remaining internal information technology systems by April 30,1999 and
will establish a timetable for the renovation phase of the remaining technology
systems. The Company has already completed the renovation of approximately 60%
of its information technology systems, including modifying and upgrading
software and developing and purchasing new software, and continues to renovate
the portions of such systems for which assessment is complete. The Company has
not begun or established a timetable for the testing and implementation phases.
The Company's goal is to complete such phases by September 30, 1999, although
complications arising from unanticipated acquisitions might cause some delay.

     The Company has recently begun to assess the potential for Year 2000
problems with the information systems of its customers, payors and vendors. The
Company prepared and sent questionnaires to its customers, vendors and other
third parties with which the Company has a material relationship. The Company
expects to complete the assessment with respect to such parties by April 30,
1999. The Company does not have sufficient information to provide an estimated
timetable for completion of renovation and testing that such parties with which
the Company has a material relationship may undertake. The Company is unable to
estimate the costs that it may incur to remedy the Year 2000 issues relating to
such parties. The Company has received preliminary information concerning the
Year 2000 readiness of many of its customers, vendors and other third parties
with which the Company has a material relationship and expects to engage in
discussions with the remaining parties through April 30, 1999 in an attempt to
determine the extent to which the Company is vulnerable to those parties'
possible failure to become Year 2000 compliant. Most of the Company's diagnostic
imaging equipment used to provide imaging services have computer systems and
applications, and in some cases embedded microprocessors, that could be affected
by Year 2000 issues. The Company is assessing the impact on its diagnostic
imaging equipment by contacting the vendors of such equipment. The vendors with
respect to the majority of the MRI and CT equipment used by the Company have
informed the Company that (i) certain identified MRI and CT equipment is Year
2000 compliant, (ii) it has developed software for functional work arounds to
ensure Year 2000 compliance with respect to the balance of its noncompliant MRI
and CT equipment and (iii) remediation will be made 


                                       27
<PAGE>   30

during future regular maintenance visits. The Company has contacted all
ultrasound equipment vendors with a list of systems now in use and requested
their assessment of the impact on the equipment and that they provided to the
Company and the nature and timetable of the remediation that such vendors may
propose. The Company expects to complete its assessment by April 30, 1999 and
that renovation will be completed by September 30, 1999. The Company is in the
process of contacting the other vendors of its diagnostic imaging equipment. The
Company expects that its equipment vendors will propose timely remediation and
will bear the cost of modifying or otherwise renovating the Company's diagnostic
imaging equipment. The Company has recently begun an assessment of the potential
for Year 2000 problems with the embedded microprocessors in its other equipment,
facilities and corporate and regional offices, including telecommunications
systems, utilities, dictation systems, security systems and HVACS, and expects
to complete the assessment by April 30,1999.

Costs to Address Year 2000 Issue

     The Company estimates, on a preliminary basis, that the cost of assessment,
renovation, testing and implementation of its internal systems will range from
approximately $500,000 to $1,500,000. The major components of these costs are:
consultants, additional personnel costs, programming, new software and hardware,
software upgrades and travel expenses. The Company expects that such costs will
be funded through operating cash flows. This estimate, based on currently
available information, will be updated as the Company continues its assessment
and proceeds with renovation, testing and implementation, and may be adjusted
upon receipt of more information from the Company's vendors, customers and other
third parties and upon the design and implementation of the Company's
contingency plan. In addition, the availability and cost of consultants and
other personnel trained in this area and unanticipated acquisitions might
materially affect the estimated costs. The effects of the aforementioned costs
have had no material impact on the Company's progress as it relates to other
information system projects and implementation.

Risks to the Company

     The Company's Year 2000 Issue involves significant risks. There can be no
assurance that the Company will succeed in implementing the Year 2000 Plan it is
developing. The following describes the Company's most reasonably likely
worst-case scenario, given current uncertainties. If the Company's renovated or
replaced internal information technology systems fail the testing phase, or any
software application or embedded microprocessors central to the Company's
operations are overlooked in the assessment or implementation phases,
significant problems, including delays, may be incurred in billing the Company's
major customers (Medicare, HMOs or private insurance carriers) for services
performed. If its major customers' systems do not become Year 2000 compliant on
a timely basis, the Company will have problems and incur delays in receiving and
processing correct reimbursements. If the computer systems of third parties
(including hospitals) with which the Company's systems exchange data do not
become Year 2000 compliant both on a timely basis and in a manner compatible
with continued data exchange with the Company's information technology systems,
significant problems may be incurred in billing and reimbursement. If the
systems on the diagnostic imaging equipment utilized by the Company are not Year
2000 compliant, the Company may not be able to provide imaging services to
patients. If the Company's vendors or suppliers of the Company's necessary
power, telecommunications, transportation and financial services fail to provide
the Company with equipment and services, the Company will be unable to provide
services to its customers. If any of these uncertainties were to occur, the
Company's business, financial condition and results of operations would be
adversely affected. The Company is unable to assess the likelihood of such
events occurring or the extent of the effect on the Company.

Contingency Plan

     The Company has not yet established a contingency plan to address unavoided
or unavoidable Year 2000 risks with internal information technology systems and
with customers, vendors and other third parties, but expects to create such a
plan by June 30, 1999.

FORWARD-LOOKING STATEMENTS

     This report contains or may contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 including
statements of the Company's and management's expectations, intentions, plans and
beliefs, including those contained in or implied by "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements, as defined in Section 21E of the Securities Exchange
Act of 1934, are dependent on certain events, risks and uncertainties that may
be outside of the Company's control. These forward-looking statements may
include statements of management's plans and objectives for the Company's future
operations and statements of future economic performance; the Company's capital
budget and future capital requirements, 


                                       28
<PAGE>   31

and the Company meeting its future capital needs; and the assumptions described
in this report underlying such forward-looking statements. Actual results and
developments could differ materially from those expressed in or implied by such
statements due to a number of factors, including, without limitation, those
described in the context of such forward-looking statements.

RISK FACTORS

     In addition to the other information included and incorporated by reference
in this Form 10-K, stockholders and prospective investors should consider
carefully the factors listed below in evaluating an investment in the Company's
common stock. This Form 10-K contains certain forward-looking statements that
include risks and uncertainties, and address, among other things, acquisition
and expansion strategy, use of proceeds, projected capital expenditures,
liquidity, possible third-party payor arrangements, cost reduction strategies,
possible effects of changes in government regulation and managed care and
availability of insurance. Actual events or results may differ materially from
those discussed in forward-looking statements as a result of various factors,
including, without limitation, those discussed in the risk factors set forth
below and matters set forth elsewhere in this Form 10-K.

     For the ease and convenience of prospective investors, the Company has
organized this discussion of risks into two categories: first, risks that relate
particularly to the Company; and second, risks that relate particularly to the
radiology services industry.

RISKS RELATING TO THE COMPANY

Reliance on Referrals

     The Company's radiology services networks depend on referrals from third
parties. A substantial portion of these referrals are made by physicians who
have no contractual obligation to refer patients to the Company's networks. The
Company generates revenue from fees charged for technical services provided at
its owned, operated or managed imaging centers and from service fees that it
receives from the radiology practices. Neither the Company nor any of its
radiology practices is dependent on any single referral source for a material
portion of its revenue. However, if a sufficiently large number of physicians
elected at any time to discontinue referring patients to the Company's networks,
the Company's business, financial condition and results of operations would be
materially adversely affected.

     Further, in an effort to control costs, non-governmental health care payors
have implemented cost containment programs that could limit the ability of
physicians to refer patients to the Company's owned, operated or managed imaging
centers. For example, persons enrolled in prepaid health care plans, such as
health maintenance organizations ("HMOs"), often are not free to choose where
they obtain diagnostic imaging, interventional radiology or radiation oncology
services. Rather, the health plan provides these services directly or contracts
with providers and requires its enrollees to obtain such services only from such
providers. Some insurance companies and self-insured employers also limit such
services to contracted providers. Such "closed panel" systems are now common in
the managed care environment. Other systems create an economic disincentive for
referrals to providers outside of the plan's designated panel of providers.
Although the Company intends to seek managed care contracts for its radiology
services networks, there can be no assurance that the Company will be able to
compete successfully for managed care contracts against larger companies with
greater resources.


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<PAGE>   32

Limited Operating History; Reliance on Key Personnel

     Prior to November 26, 1997, the Company conducted no significant operations
and had no revenue while incurring corporate overhead expenses associated with
building its management infrastructure. The Company's financial statements for
the fiscal year ended December 31, 1997, cover a period of only 35 days of
operating the Company's radiology services business. Although the Company now
has audited financial statements for the full 12-month period ended December 31,
1998, the Company's limited operating history prior to 1998 may limit the
Company's ability to prepare accurate projections for future periods, including
projections of revenues and expenses. This brief operating history also may
limit the Company's ability to anticipate the effect that changing economic
conditions or other market conditions will have on the Company's operations and
finances. The Company's limited operating history also may increase the
Company's reliance on its senior executive management, some of whom have
extensive experience in managing health care services companies or in developing
the Company's current financial and operational strategies. Because of the
difficulty in finding adequate replacements for such personnel, the loss of the
services of any such personnel or the Company's inability in the future to
attract and retain management and other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not maintain key man insurance for any of its
executive officers. See "Management - Employment Agreements;
Covenants-Not-to-Compete" and "Certain Transactions."

Potential Need for Additional Capital

     The Company utilizes capital to purchase new imaging equipment and to
upgrade and replace existing equipment. During 1998, the Company expended
approximately $12.7 million to purchase, upgrade and replace imaging equipment.
The Company also utilizes capital to expand within its existing markets and to
enter new markets. During 1998, the Company expended approximately $52.9 million
to make acquisitions and to enter into outsourcing relationships. The Company's
capital sources have consisted primarily of income from operations and
borrowings under the Company's credit facility. The Company's ability to
accomplish its goals and to execute its business strategy depend on the
Company's continued ability to access capital on appropriate terms. The
Company's growth could be limited and its existing operations impaired unless it
is able to obtain additional capital through subsequent debt or equity
financings. There can be no assurance that borrowing capacity under the credit
facility will be available to the Company when needed or that the Company will
be able to obtain additional financing or that, if available, such financing
will be on terms acceptable to the Company. As a result, there can be no
assurance that the Company will be able to implement its business strategy
successfully. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."

Dependence on Radiologists; Risk of Termination of Service Agreements

     The Company's radiology services include a professional component that must
be provided by radiologists who are not directly employed or engaged by the
Company. The Company does not control the radiologists who perform professional
services for the Company. These radiologists, instead, are employed by related
radiology practices that have affiliated with the Company through service
agreements. The service agreements have terms of 40 years, but may be terminated
by either party under certain conditions. There can be no assurance that the
service agreements will not be terminated. Because the Company generates a
portion of its service fee revenue through the service fees it receives pursuant
to the service agreements, the termination of any of the radiology practices'
service agreements could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business - Service
Agreements."


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<PAGE>   33

     Each radiology practice entered into employment agreements with the key
radiologists associated with each such practice. The employment agreements
generally are for a term of five years. Although the Company, in conjunction
with the radiology practices, will endeavor to maintain and renew such
contracts, in the event a significant number of such radiologists terminate
their relationships with the Company, the Company's business could be adversely
affected. Further, if a significant number of radiologists or other medical
service providers become unable or unwilling to continue in their roles, the
Company's business could be adversely affected. Neither the Company nor the
radiology practices maintains insurance on the lives of any affiliated physician
for the benefit of the Company. See "Business - Affiliation Structure."

Uncertainty Regarding the Enforceability of Noncompetition Provisions

     Each of the radiology practices entered into agreements with the
stockholders and full-time radiologists at each radiology practice (subject to
certain exceptions) that include covenants not to compete with the Company for a
period of two years after termination of employment. See "Business - Service
Agreements." In most states, a covenant not to compete will be enforced only to
the extent it is necessary to protect a legitimate business interest of the
party seeking enforcement, does not unreasonably restrain the party against whom
enforcement is sought and is not contrary to public interest. This determination
is made based on all of the facts and circumstances of the specific case at the
time enforcement is sought. For this reason, it is not possible to predict with
certainty whether a court will enforce such a covenant in a given situation. The
Company also cannot predict with certainty whether the Company's interest under
the service agreements will be viewed as the type of protectable business
interest that would support enforcement of the covenants not to compete. The
inability of the Company to enforce radiologists' anti-competition covenants
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Risks Associated with Acquisitions and Expansion Strategy

     The Company intends to expand through acquisitions within its existing
markets, as well as through joint venture and outsourcing relationships. The
Company also may expand into new geographic markets by acquiring imaging
centers, entering into joint venture or outsourcing relationships and
affiliating with high-quality, profitable radiology practices. There can be no
assurance that the Company will be able to expand either within its existing
markets or in new markets. In addition, there can be no assurance that any such
expansion will be beneficial to the successful implementation of the Company's
overall strategy or that such expansion will ultimately produce returns that
justify the investment by the Company.

     The Company's ability to expand is dependent upon factors such as its
ability to (i) identify attractive and willing candidates for acquisition, (ii)
adapt or amend the Company's structure to comply with present or future federal
and state legal requirements affecting the Company's arrangements with physician
practice groups, including state prohibitions on fee-splitting, corporate
practice of medicine and referrals to facilities in which physicians have a
financial interest, (iii) obtain regulatory approvals and certificates of need,
where necessary, and comply with licensing and certification requirements
applicable to the Company, the radiology practices and the physicians associated
with the radiology practices, including their respective facilities, and (iv)
expand the Company's infrastructure and management to accommodate expansion.
Acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention
and resources, failure to retain key acquired personnel, amortization or
write-off of acquired intangible assets and risks associated with unanticipated
events or liabilities, some or all of which could have a material adverse effect
on the Company's business, financial condition and results of operations.


                                       31
<PAGE>   34

     The Company intends to expand both in areas where the radiology practices
currently operate as well as in new markets. Although the Company will continue
to structure its operations in an effort to comply with applicable antitrust
laws, there can be no assurance that federal or state governmental authorities
would not view the Company as being dominant in a particular market and,
therefore, cause the Company to divest itself of any particular relationship or
related asset. In addition, these laws could prevent acquisitions of practices
that would be integrated into existing radiology practices if such acquisitions
substantially lessen competition or tend to create a monopoly.

Year 2000 Compliance

     The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, computer programs, computers and embedded microprocessors controlling
equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may result in
computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related issues,
which could also lead to miscalculations or failures: (i) some older systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the Year 2000 is a leap year. The Company is at risk for both its own Year 2000
compliance and for the Year 2000 compliance of those with whom it does business,
particularly third-party payors. The Company has determined that a majority of
its own software and hardware information technology systems and those of its
radiology practices are Year 2000 compliant and that the remainder of such
software and equipment will be Year 2000 compliant before the end of 1999. The
Company is working with vendors and suppliers to assess the Company's exposure
with regard to embedded technology in non-information technology systems. The
Company anticipates that the total amount it will expend on Year 2000 issues is
between $500,000 and $1,500,000.

     Management believes that the most significant risk to the Company of Year
2000 issues is the effect such issues may have on third-party payors, such as
Medicare. With respect to Medicare payments, neither the Health Care Financing
Administration nor its fiscal intermediaries have any contingency plan in place.
However, the Health Care Financing Administration has mandated that its fiscal
intermediaries submit a draft of their contingency plans to it and that they be
prepared to ensure that no interruption of Medicare payments results from Year
2000 related failures of their systems. There can be no assurance that Year 2000
issues will not have a material adverse effect on the Company's business,
results of operations and financial condition.

Potential Liability and Insurance; Legal Proceedings

     The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Although the Company intends to structure
its relationships with the radiology practices under the service agreements in a
manner that will not constitute the practice of medicine, there can be no
assurance that claims, suits or complaints relating to services and products
provided by radiology practices will not be asserted against the Company in the
future. Additionally, the Company owns, operates and manages radiology
facilities, which exposes the Company to professional liability claims. The
Company maintains insurance policies with coverages that it believes are
appropriate in light of the risks attendant to its business. In addition,
pursuant to the service agreements, the radiology practices are required to
maintain professional liability insurance. Nevertheless, there can be no
assurance that successful malpractice or other claims will not be asserted
against the radiology practices or the 


                                       32
<PAGE>   35

Company that exceed the scope of coverage or applicable policy limits or that
could otherwise have a material adverse effect on the Company's business,
financial condition and results of operations.

     The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the Company
and the radiology practices. There can be no assurance that adequate liability
insurance will be available to the Company and the radiology practices in the
future at acceptable costs or that the future cost of such insurance to the
Company and the radiology practices will not have a material adverse effect on
the Company's business, financial condition and results of operations.

     In connection with the acquisitions of the certain radiology practices, the
Company assumed and succeeded to substantially all of the obligations of such
radiology practices. Further, in connection with the acquisition of the assets
of other radiology practices in the future, the Company may succeed to some or
all of the liabilities of such radiology practices. Therefore, claims may be
asserted against the Company for events that occurred prior to the acquisition
of the assets of radiology practices. In connection with the Company's
acquisitions, the shareholders of each such radiology practice have agreed to
indemnify the Company for certain claims. There can be no assurance that the
Company will be able to receive payment under any such indemnity agreements or
that the failure to fully recover such amounts will not have a material adverse
effect on the Company's business, financial condition and results of operations.

     The physicians employed by the radiology practices are from time to time
subject to malpractice claims. Such malpractice claims, if successful, could
result in damages which may exceed applicable insurance coverage for such
malpractice claims. While each related radiology practice and the Company
maintains insurance consistent with industry practice, there can be no assurance
that the amount of insurance currently maintained by them will satisfy all
claims made against them or that a radiology practice or the Company will be
able to obtain insurance in the future at satisfactory rates or in adequate
amounts. Further, there are certain claims against the related radiology
practices that are not covered by insurance. The Company cannot predict the
effect that any such claims, regardless of their outcome, might have on its
business or reputation.

     The Company is not currently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the Company
other than routine litigation arising in the ordinary course of business, which
litigation is expected to be covered by liability insurance and all of which is
not expected to have a material adverse effect on the Company's business,
financial condition or results of operations. There can be no assurance that the
Company will not subsequently be named as a defendant in additional lawsuits.

Competition

     The Company is under competitive pressure to acquire and retain the assets
of, and to provide management and administrative services to, additional
radiology services providers, radiology practices, MSOs and imaging centers.
There are a number of publicly-traded companies focused on owning or managing
imaging centers. The Company is aware of at least two privately-held physician
practice management companies focused on professional and technical radiology
services. Several companies, both publicly and privately held, that have
established operating histories and, in some instances, greater resources than
the Company are pursuing the acquisition of general and specialty physician
practices. Additionally, some hospitals, clinics, health care companies, HMOs
and insurance companies engage in activities similar to those of the Company.
There can be no assurance that the Company will be able to compete effectively
for the acquisition of, or affiliation with, radiology 


                                       33
<PAGE>   36

practices, that additional competitors will not enter the market, that such
competition will not make it more difficult or expensive to acquire the assets
of, and provide management and administrative services to, radiology practices
on terms beneficial to the Company, or that competitive pressures will not
otherwise adversely affect the Company. See "Business - Competition."

     The radiology practices and the Company's owned, operated or managed
imaging centers compete with numerous local radiology and imaging service
providers. The Company believes that changes in governmental and private
reimbursement policies and other factors have resulted in increased competition
among providers for the provision of medical services to consumers. There can be
no assurance that the radiology practices and the Company's owned, operated or
managed imaging centers will be able to compete effectively in the markets they
serve, which inability to compete could materially and adversely affect the
Company's business, financial condition and results of operations.

     Further, the radiology practices will compete with other providers for
managed care contracts. The Company believes that trends toward managed care
have resulted, and will continue to result, in increased competition for such
contracts. Other radiology practices and MSOs may have more experience than the
radiology practices and the Company in obtaining such contracts. There can be no
assurance that the radiology practices and the Company will be able to obtain
future business from managed care entities which will allow the Company to
compete effectively in the markets they serve, which inability to compete could
materially and adversely affect the Company's business, financial condition and
results of operations.

Anti-Takeover Considerations

     Certain provisions of the Company's Restated Certificate of Incorporation,
the Company's Amended and Restated Bylaws and Delaware law could discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and, consequently, limit the price that investors might be willing to
pay in the future for shares of the Common Stock. These provisions include the
inability to remove directors except for cause and the Company's ability to
issue, without further stockholder approval, shares of preferred stock with
rights and privileges senior to the Common Stock. The Company also is subject to
Section 203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with an "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Capital Stock."

     The Company has entered into employment agreements with four of its
executive officers which contain provisions that require the Company to pay
certain amounts to such employees upon their termination following certain
events, including a change of control of the Company. Such agreements may delay
or prevent a change of control of the Company.

Terminations of Lock-ups

     In connection with the transactions pursuant to which the Company acquired
the assets of the original related practices, the practices (or their
stockholders) received shares of Company Common Stock. Shares also were issued
to radiologist practices (or their stockholders) that consummated acquisition
transactions with the Company after the November 1997 initial public offering.
The holders of these shares were prohibited from transferring the shares until a
specified period of time elapsed after the transaction in which the shares were
issued. In November 1998, 3,161,612 shares were released from these transfer
restrictions and 254,754 shares were released in January 1999. Restrictions will
expire during the remainder of 1999 as follows: April, 108,416 shares; May,


                                       34
<PAGE>   37

3,161,612 shares; July, 254,754 shares; September, 89,844 shares; October,
108,416 shares; and November, 6,323,223 shares, for a total of 10,046,265 during
1999. During 2000, an additional 1,021,004 shares will be released from transfer
restrictions. There can be no assurance that holders of these shares will
continue to hold their shares. Moreover, the Company cannot predict the effect
that trades of substantial amounts of shares would have on the Company's stock
price from time to time or the effect that an increase in the number of shares
available to the public would have on the Company's stock price from time to
time.

RISKS RELATING TO THE COMPANY'S INDUSTRY

State and Federal Fraud and Abuse, Anti-Kickback and Anti-Referral Laws

     Various federal and state laws regulate the relationships between providers
of health care services, physicians and other clinicians. See "Business -
Government Regulation and Supervision." These laws include the fraud and abuse
provisions of the Social Security Act, which include the federal "anti-kickback"
and Stark or anti-referral laws. The "anti-kickback" laws prohibit the offering,
payment, solicitation or receipt of any direct or indirect remuneration for the
referral of Medicare, Medicaid or other governmental program patients or for the
recommendation, leasing, arranging, purchasing, ordering or providing of
Medicare or Medicaid covered services, items or equipment. Violations of the
"anti-kickback" laws may result in substantial civil or criminal penalties for
individuals or entities, including large civil monetary penalties and exclusion
from participation in Medicare, Medicaid and other governmental programs. The
Balanced Budget Act of 1997 ("BBA 97") contains certain reform provisions
relating to Medicare, Medicaid and other governmental programs, that are
intended to assist the government in its efforts to enforce the "anti-kickback"
laws, including additional resources for enforcement, adding a civil money
penalty and broadening the scope of circumstances under which mandatory or
permissive exclusion from the programs may apply. Such exclusion and penalties,
if applied to the Company's owned, operated or managed imaging centers, the
radiology practices or physicians affiliated with the radiology practices, could
result in significant loss of reimbursement to the affected individuals and
entities. A determination of liability under any such laws could have a material
adverse effect on the Company's business, financial condition and results of
operations.

     Certain provisions contained in the Omnibus Budget Reconciliation Act of
1989 ("Stark I") and the Omnibus Budget Reconciliation Act of 1993 ("Stark II"),
and subsequent amendments, prohibit physician referrals for certain "designated
health services," including radiology services to entities with which a
physician or an immediate family member has a financial relationship
(collectively, the "Stark Law"). The Stark Law also prohibits entities from
presenting or causing to be presented a claim or bill to any individual,
third-party payor, or other entity for designated health services furnished
under a prohibited referral. A violation of the Stark Law by the Company, a
radiology practice or physicians affiliated with the radiology practices, may
result in significant civil penalties, which may include exclusion or suspension
of the physician or entity from future participation in the Medicare and
Medicaid programs and substantial fines. A determination of violation under such
law by any of these persons or entities could have a material adverse effect on
the Company's business, financial condition and results of operations.

     Several states have adopted laws similar to the federal "anti-kickback" and
Stark Law that cover patients in private programs as well as government
programs. All of the states in which the radiology practices are located have
adopted a form of "anti-kickback" law and almost all of those states have also
adopted a form of anti-referral law. These laws and the interpretations thereof
vary from state to state and are enforced by the courts and regulatory
authorities, each with broad discretion. 


                                       35
<PAGE>   38

A determination of liability under any such laws could have a material adverse
effect on the Company's business, financial condition and results of operations.

Corporate Practice of Medicine; Fee Splitting

     The laws of many states, including each of the states in which the
radiology practices are located, also prohibit business corporations, such as
the Company, from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as
fee-splitting, with physicians. These laws and their interpretations vary from
state to state and are enforced by both the courts and regulatory authorities,
each with broad discretion. The Company's strategy is to acquire certain assets
and assume certain liabilities of, and to enter into service agreements with
radiology practices. Pursuant to the service agreements, the Company will
provide management, administrative, technical and other non-medical services to
the radiology practices in exchange for a service fee. The Company intends to
structure its relationships with the radiology practices (including the purchase
of assets and the provision of services under the service agreements) to keep
the Company from engaging in the practice of medicine or exercising control over
the medical judgments or decisions of the radiology practices or their
physicians. There can be no assurance that regulatory authorities or other
parties will not assert that the Company is engaged in the corporate practice of
medicine in such states or that the payment of service fees to the Company by
the radiology practices pursuant to the service agreements constitutes
fee-splitting or the corporate practice of medicine. If such a claim was
successfully asserted, the Company could be subject to civil and criminal
penalties and could be required to restructure or terminate its contractual
arrangements. Such results or the inability of the Company to successfully
restructure its relationships to comply with such statutes could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business - Service Agreements."

Licensing and Certification Laws

     The ownership, construction, operation, expansion and acquisition of
imaging centers are subject to various federal and state laws, regulations and
approvals concerning the licensing of facilities, personnel, certificates of
need and other required certificates for certain types of health care facilities
and major medical equipment. Although the laws of five of the states in which
the radiology practices are located do not subject imaging centers to
certificate of need or separate licensing requirements as stand-alone imaging
centers, the laws of other states in which the Company operates limit to some
extent the Company's ability to acquire new imaging equipment or expand or
replace its equipment at imaging centers in other states. No assurances can be
given that the required regulatory approvals for any future acquisitions,
expansions or replacements will be granted to the Company, and the failure to
obtain such approvals could materially and adversely affect the Company's
business, financial condition and results of operations. See "Business -
Government Regulation and Supervision."


                                       36
<PAGE>   39

Compliance

     Although the Company intends to structure and conduct its proposed
operation so as to comply with applicable federal and state laws, neither the
Company's current or anticipated business operations nor the operations of the
radiology practices have been the subject of judicial or regulatory
interpretation. There can be no assurance that a review of the Company's
business by courts or regulatory authorities will not result in determinations
that could adversely affect the operations of the Company or that the health
care regulatory environment will not change so as to restrict the Company's
operations. In addition, the regulatory framework of certain jurisdictions may
limit the Company's expansion into or ability to continue operations within such
jurisdictions, unless the Company is able to modify its operational structure to
conform with such regulatory framework. Any limitation on the Company's ability
to expand could have a material adverse effect on the Company's business,
financial condition and results of operations.

Reform Initiatives; Increased Enforcement

     In addition to existing government health care regulations, there have been
numerous initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The Company
believes that such initiatives will continue for the foreseeable future. Certain
aspects of these reforms as proposed in the past, such as further reductions in
Medicare and Medicaid payments, if adopted, could materially and adversely
affect the Company's business, financial condition and results of operations.

     Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern the Company's activities. There can be no assurance that
the Company's activities will not be investigated, that claims will not be made
against the Company or that increased enforcement activities will not directly
or indirectly have an adverse effect on the Company's business, financial
condition and results of operations or the market price of the Common Stock.

Insurance Laws and Regulations

     Certain states have enacted statutes or adopted regulations affecting risk
assumption in the health care industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based contracting to
applicable insurance laws and regulations, which may include, among other
things, laws and regulations providing for minimum capital requirements and
other safety and soundness requirements. Failure to comply with these statutes
and regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, implementation of
additional regulations or compliance requirements could result in substantial
costs to the Company and the radiology practices. The inability to enter into
capitated or other risk-sharing arrangements or the cost of complying with
certain applicable laws that would permit expansion of the Company's risk-based
contracting activities could have a material adverse effect on the Company's
business, financial condition and results of operations.

Reimbursement Trends and Cost Containment

     The Company's revenue will be derived from service fees paid to the Company
by the radiology practices pursuant to the service agreements and through its
ownership, operation and management of imaging centers. Substantially all of the
revenue of the radiology practices and such 


                                       37
<PAGE>   40

imaging centers is currently derived from government sponsored health care
programs (principally, Medicare and Medicaid) and private third-party payors.
During the year ended December 31, 1998, approximately 28% of the service fee
revenue was derived from government approved health care programs and
approximately 72% was derived from private third-party payors. The health care
industry is experiencing a trend toward cost containment as government and
private third-party payors seek to impose lower reimbursement and utilization
rates and negotiate reduced payment schedules with service providers. The
Company believes that these trends will continue to result in a reduction from
historical levels in per-patient revenue for its radiology practices and imaging
centers and that the results of operations of the radiology practices are likely
to continue to be affected by lower reimbursement levels. Further reductions in
payments or other changes in reimbursement for health care services could have a
material adverse effect on the Company's business, financial condition and
results of operations unless the Company is otherwise able to offset such
payment reductions.

     Rates paid by private third-party payors are based on established physician
and hospital charges and are generally higher than Medicare reimbursement rates.
Any decrease in the relative number of patients covered by private insurance
could have a material adverse effect on the Company's business, financial
condition and results of operations.

     The federal government has implemented, through the Medicare program, a
resource-based relative value scale ("RBRVS") payment methodology for physician
services. The RBRVS is a fee schedule that, except for certain geographical and
other adjustments, pays similarly-situated physicians the same amount for the
same services. The RBRVS is adjusted each year and is subject to increases or
decreases at the discretion of Congress. To date, the implementation of the
RBRVS has reduced payment rates for certain of the procedures historically
provided by the radiology practices. BBA 97 provides for reductions in the rate
of growth of payments for physician services, including services historically
provided by the radiology practices, in the amount of $5.3 billion over a
five-year period ending in 2002. In addition, BBA 97 provides for the
implementation of a resource-based methodology for payment of physician practice
expenses under the physician fee schedule over a four-year period beginning in
fiscal year 1999. Adoption of this methodology is expected to reduce payments
for services historically provided by the radiology practices.

     RBRVS-type payment systems also have been adopted by certain private
third-party payors and the Company believes that it is likely that other private
third-party payors will adopt this payment methodology in the future.
Wider-spread implementation of such programs could reduce payments by private
third-party payors and could indirectly reduce the Company's operating margins
to the extent that the costs of providing management, administrative, technical
and non-medical services related to such procedures could not be proportionately
reduced. There can be no assurance that such cost reduction efforts by
governmental or private third-party payors will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business C Government Regulation and Supervision."

     Private third-party payors and Medicare and Medicaid have increased their
use of managed care as a means of cost containment. Increasingly, private
third-party payors negotiate discounts from established physician and hospital
charges or require capitation or other risk sharing arrangements as a condition
of patient referral to physician groups such as the radiology practices. BBA 97
also includes provisions designed to increase the enrollment of Medicare and
Medicaid participants in managed care programs. The inability of the Company to
negotiate satisfactory arrangements with managed care companies could have a
material adverse effect on the Company's business, financial condition and
results of operations.



                                       38
<PAGE>   41

Risks Associated with Managed Care Contracts and Capitated Fee Arrangements

     During the fiscal year 1998, approximately 95% of the service fee revenue
was derived from payments made on a fee-for-service basis by patients and
third-party payors (including government programs) and approximately 5% was
derived from capitated arrangements. Under capitated or other risk-sharing
arrangements, the health care provider typically is paid a pre-determined amount
per-patient per-month from the payor in exchange for providing all necessary
covered services to patients covered under the arrangement. Such contracts pass
much of the financial risk of providing care, including the risk of
over-utilization, from the payor to the provider. The Company believes that its
success will, in part, depend on the Company's ability to negotiate, on behalf
of the radiology practices and the Company's owned, operated or managed imaging
centers, contracts with HMOs, employer groups and other third-party payors
pursuant to which services will be provided on a risk-sharing or capitated basis
by some or all of such radiology practices or imaging centers. Risk-sharing
arrangements result in greater predictability of revenue but greater
unpredictability of expenses and, consequently, profitability. There can be no
assurance that the Company will be able to negotiate, on behalf of its radiology
practices or the Company's owned, operated or managed imaging centers,
satisfactory arrangements on a capitated or other risk-sharing basis. In
addition, to the extent that patients or enrollees covered by such contracts
require more frequent or extensive care than is anticipated, the Company would
incur unanticipated costs not offset by additional revenue, which would reduce
operating margins. In the worst case, the revenue derived from such contracts
may be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on the
Company's business, financial condition and results of operations.

     Furthermore, various quality assurance programs and organizations have been
created to scrutinize managed care organizations and their providers. In
response to such programs, managed care organizations and providers have
developed their own quality assurance programs to address a variety of areas,
including patient access to services, patient satisfaction, outcomes and
performance measures and utilization of services. These quality assurance
measures involve various costs associated with their implementation and
operation and depend, in part, upon the sophistication and compatibility of
existing systems and operations of the radiology practices as well as the
Company's ability to integrate those systems and operations. The Company's
inability to develop strong quality assurance measures in conjunction with its
radiology practices could place the Company and its radiology practices at a
competitive disadvantage and have a material adverse effect on the Company's
business, financial condition and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents and its Credit Facility.

                                       39
<PAGE>   42
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                PAGE
<S>                                                                      <C>
Report of Independent Public Accountants................................  F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998............  F-3

Consolidated Statements of Income for the Period from Inception 
     (April 30, 1996) to December 31,1996 and for the Years
     Ended December 31, 1997 and 1998...................................  F-4

Consolidated Statements of Stockholders' Equity for the Period from 
     Inception (April 30, 1996) to December 31, 1996 and for the
     Years Ended December 31, 1997 and 1998.............................  F-5

Consolidated Statements of Cash Flows for the Period from Inception 
     (April 31, 996) to December 31, 1996 and for the Years
     Ended December 31, 1997 and 1998...................................  F-6

Notes to Consolidated Financial Statements..............................  F-7
</TABLE>



                                      F-1
<PAGE>   43

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholders of
American Physician Partners, Inc.:

      We have audited the accompanying consolidated balance sheets of American
Physician Partners, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for the period from inception (April 30,
1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

      In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Physician
Partners, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the period from inception
(April 30, 1996) to December 31, 1996, and for the years ended December 31,
1997 and 1998, in conformity with generally accepted accounting principles.




                                  ARTHUR ANDERSEN LLP


Dallas, Texas,
   January 27, 1999


                                      F-2
<PAGE>   44

               AMERICAN PHYSICIAN PARTNERS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                      ----------------------------
                                                                          1997           1998     
                                                                      ------------   -------------
<S>                                                                     <C>            <C>
CURRENT ASSETS:
   Cash and cash equivalents ......................................     $   4,572      $   6,485
   Accounts receivable, net of allowances of $55,200 and $86,900
     in 1997 and 1998, respectively ...............................        21,398         36,789
   Due from affiliated practices ..................................         3,651          1,412
   Other current assets ...........................................         2,351          2,835
                                                                        ---------      ---------
         Total current assets .....................................        31,972         47,521
PROPERTY AND EQUIPMENT, net of accumulated depreciation
   of $60,721 and $69,497 in 1997 and 1998, respectively ..........        22,837         37,002
INVESTMENTS IN JOINT VENTURES .....................................         3,725          5,424
INTANGIBLE ASSETS, net ............................................         1,790         61,119
DEFERRED FINANCING COSTS, net .....................................         2,395          3,408
OTHER ASSETS ......................................................            47          2,165
                                                                        ---------      ---------
         Total assets .............................................     $  62,766      $ 156,639
                                                                        =========      =========

                      LIABILITES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses ..........................     $  12,689      $  13,884
   Accrued physician retention ....................................         4,330          6,319
   Accrued salaries and benefits ..................................         1,514          3,893
   Current portion of long-term debt ..............................           858            840
   Current portion of capital lease obligations ...................         1,791          1,677
   Deferred income taxes ..........................................         6,124            636
   Other current liabilities ......................................         1,290            894
                                                                        ---------      ---------
         Total current liabilities ................................        28,596         28,143
DEFERRED INCOME TAXES .............................................         3,872          2,406
LONG-TERM DEBT, net of current portion ............................        51,734        113,807
CAPITAL LEASE OBLIGATIONS, net of current portion .................         1,482          3,887
OTHER LIABILITIES .................................................           297            243
                                                                        ---------      ---------
         Total liabilities ........................................        85,981        148,486

COMMITMENTS AND CONTINGENCIES

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ...................           820          1,107

STOCKHOLDERS' EQUITY:
   Preferred stock, $.0001 par value; 10,000,000 shares authorized;
     no shares issued and outstanding .............................            --             --
   Common stock, $.0001 par value; 50,000,000 shares authorized;
     17,234,852 and 19,243,949 shares issued and outstanding in
     1997 and 1998, respectively ..................................             2              2
Additional paid-in capital ........................................       (18,460)          (910)
Retained earnings .................................................        (5,577)         7,954
                                                                        ---------      ---------
         Total stockholders' equity ...............................       (24,035)         7,046
                                                                        ---------      ---------
         Total liabilities and stockholders' equity ...............     $  62,766      $ 156,639
                                                                        =========      =========
</TABLE>

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


                                      F-3
<PAGE>   45
               AMERICAN PHYSICIAN PARTNERS, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                             PERIOD FROM
                                              INCEPTION
                                          (APRIL 30, 1996)
                                                  TO             YEAR ENDED DECEMBER 31,
                                             DECEMBER 31,   ---------------------------------
                                                 1996             1997             1998
                                           ---------------  ----------------  ---------------
<S>                                         <C>              <C>              <C>
SERVICE FEE REVENUE ....................... $         --      $      8,683      $    135,604

COSTS AND EXPENSES:
   Salaries and benefits ..................           --             2,922            42,227
   Practice supplies ......................           --             1,036             8,865
   Practice rent and lease expense ........           --               852            11,532
   Other practice expenses ................           --             1,557            25,311
   Corporate general and administrative ...        1,623             4,910             9,597
   Depreciation and amortization ..........            3               888            12,178
   Interest expense, net ..................           23               617             7,541
                                            ------------      ------------        ----------
       Total costs and expenses ...........        1,649            12,782           117,251
                                            ------------      ------------        ----------

INCOME (LOSS) BEFORE TAXES, MINORITY
INTERESTS IN CONSOLIDATED SUBSIDIARIES
AND EQUITY IN EARNINGS OF INVESTMENTS .....       (1,649)           (4,099)           18,353

EQUITY IN EARNINGS OF INVESTMENTS .........           --               220             4,339

MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES ..............................           --               (49)             (710)
                                            ------------      ------------        ----------

INCOME (LOSS) BEFORE TAXES ................       (1,649)           (3,928)           21,982

INCOME TAX EXPENSE ........................           --                --             8,451
                                            ------------      ------------        ----------

NET INCOME (LOSS) ......................... $     (1,649)     $     (3,928)       $   13,531
                                            ============      ============        ==========


NET INCOME (LOSS) PER COMMON SHARE:
       Basic .............................. $      (0.82)     $      (1.13)       $     0.72
       Diluted ............................ $      (0.82)     $      (1.13)       $     0.70

WEIGHTED AVERAGE SHARES OUTSTANDING:
       Basic ..............................    2,000,000         3,450,948        18,739,106
       Diluted ............................    2,000,000         3,450,948        19,334,658
</TABLE>


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

                                      F-4
<PAGE>   46

               AMERICAN PHYSICIAN PARTNERS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                             COMMON STOCK              ADDITIONAL
                                       -------------------------        PAID-IN       RETAINED
                                          SHARES       AMOUNT           CAPITAL       EARNINGS           TOTAL
                                       -----------  ------------     ------------    ----------         -------
<S>                                    <C>            <C>             <C>         <C>               <C>
BALANCE, inception (April 30,
     1996)...........................            --    $        --    $        --  $           --   $         --
   Issuance of common stock..........     2,000,000             --            250              --            250
   Net loss..........................            --             --             --          (1,649)        (1,649)
                                       ------------    -----------    -----------  --------------   ------------
BALANCE, December 31, 1996...........     2,000,000             --            250          (1,649)        (1,399)
   Cancellation of common stock......    (1,000,000)            --             --              --             --
   Initial public offering, net......     3,000,000             --         29,081              --         29,081
   Common stock issued to
     initial radiology practices
     in conjunction with the
     Reorganizations.................    12,646,446              2           (713)             --           (711)
   Conversion of convertible notes
     payable into common stock.......       510,406             --          3,500              --          3,500
   Payment of cash dividends to
     Founding Affiliated Practices...            --             --        (50,588)             --        (50,588)
   Exercise of stock options.........        78,000             --             10              --             10
   Net loss..........................            --             --             --          (3,928)        (3,928)
                                       ------------    -----------    -----------  --------------   ------------
BALANCE, December 31, 1997...........    17,234,852              2        (18,460)         (5,577)       (24,035)
   Common stock issued in
     connection with acquisitions....     1,812,054             --         17,502              --         17,502
   Exercise of stock options.........       197,043             --             48              --             48
   Net income........................            --             --             --          13,531         13,531
                                       ------------    -----------    -----------  --------------   ------------
BALANCE, December 31, 1998...........    19,243,949    $         2    $      (910) $        7,954   $      7,046
                                       ============    ===========    ===========  ==============   ============
</TABLE>


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


                                      F-5
<PAGE>   47
               AMERICAN PHYSICIAN PARTNERS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                PERIOD FROM 
                                                                 INCEPTION
                                                              (APRIL 30, 1996)
                                                                      TO             YEAR ENDED DECEMBER 31,      
                                                                 DECEMBER 31,   --------------------------------- 
                                                                     1996             1997             1998       
                                                              ----------------  ----------------  --------------- 
<S>                                                               <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ........................................... $  (1,649)    $   (3,928)    $   13,531
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities --
     Minority interests in consolidated subsidiaries ...........        --             49            710
     Depreciation and amortization .............................         3            888         12,178
     Equity in earnings of investments .........................        --           (220)        (4,339)
     Gain on sale of assets ....................................        --             (6)            --
     Changes in assets and liabilities:
       Accounts receivable, net ................................        --         (1,787)       (10,379)
       Other receivables and other current assets ..............       (15)        (3,908)         2,872
       Other assets ............................................       (14)        (2,412)        (2,118)
       Accounts payable and accrued expenses ...................       476          6,828          1,953
       Accrued salaries and benefits ...........................        --           (433)         2,380
       Other current liabilities ...............................        --            (87)          (450)
       Other liabilities .......................................        --           (317)        (6,388)
                                                                 ---------      ---------      ---------
         Net cash provided by (used in) operating activities ...    (1,199)        (5,333)         9,950

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from the sale of property and equipment ............        --              6             --
   Purchases of property and equipment, net ....................       (60)          (481)       (12,651)
   Cash paid for acquisitions ..................................        --             --        (52,866)
   Contributions to joint ventures .............................        --           (100)          (571)
   Distributions from joint ventures ...........................        --            155          2,587
                                                                 ---------      ---------      ---------
         Net cash used in investing activities .................       (60)          (420)       (63,501)
                                                                 ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of notes payable .....................       400             --             --
   Payment on notes payable ....................................      (400)            --             --
   Proceeds from issuance of convertible notes payable .........     3,500             --             --
   Proceeds from issuance of long-term debt, net ...............        --         49,600         59,814
   Payment on debt of initial radiology practices ..............        --        (23,420)            --
   Payment on capital leases ...................................        --             --         (3,282)
   Cash dividends to initial radiology practices ...............        --        (50,588)            --
   Cash received in the Reorganizations ........................        --          3,188             --
   Proceeds from the issuance of common stock, net .............       250         29,081             --
   Proceeds from the exercise of stock options .................        --             10             48
   Advances to radiology practices and other ...................        --            (37)        (1,116)
                                                                 ---------      ---------      ---------
         Net cash provided by financing activities .............     3,750          7,834         55,464
                                                                 ---------      ---------      ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS ......................     2,491          2,081          1,913

CASH AND CASH EQUIVALENTS, beginning of period .................        --          2,491          4,572
                                                                 ---------      ---------      ---------

CASH AND CASH EQUIVALENTS, end of period ....................... $   2,491      $   4,572      $   6,485
                                                                 =========      =========      =========

NON-CASH TRANSACTIONS DURING THE PERIOD:
   Assets acquired from radiology practices .................... $      --      $  53,427      $  16,677
                                                                 ---------      ---------      ---------
   Liabilities and debt assumed from radiology practices ....... $      --      $  54,138      $   7,404
                                                                 ---------      ---------      ---------
   Common stock issued to radiology practices .................. $      --      $ 151,757      $  17,502
                                                                 ---------      ---------      ---------
   Conversion of convertible notes payable into common stock.... $      --      $   3,500      $      --
                                                                 ---------      ---------      ---------
</TABLE>


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


                                      F-6
<PAGE>   48

               AMERICAN PHYSICIAN PARNTERS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 and 1998

1. DESCRIPTION OF BUSINESS:

      American Physician Partners, Inc. (together with its subsidiaries, "APPM"
or the "Company"), a Delaware corporation, develops, consolidates and manages
radiology and imaging networks. The Company was incorporated in 1996, but
conducted no significant operations until a reorganization and initial public
offering in November 1997. On November 26, 1997, the Company consummated an
initial public offering ("IPO") and simultaneously exchanged cash and shares of
its common stock for certain assets of and liabilities associated with seven
radiology practices (the "Reorganizations"). These exchanges were accounted for
using the historical cost basis with the stock being valued at the historical
cost of the net assets received by the Company. Cash consideration given in
these exchanges was treated for accounting purposes as a dividend from the
Company.

      As of December 31, 1998, the Company owned 61 imaging centers. The
Company also operates, manages or owns an interest in 16 additional imaging
centers through joint venture and outsourcing relationships with hospitals or
health systems. The Company is the managing partner in 14 of such imaging
center joint ventures. The Company's radiology facilities are concentrated in
California, Florida, Kansas, Maryland, New York, Texas, Virginia and Washington
D.C. Physician services are provided at all of APPM's 77 imaging centers under
the terms of service agreements with ten radiology practices, seven of which
expire in November 2037, with the other three expiring in 2038. Under the terms
of the service agreements, the Company provides management, administrative,
technical and non-medical services to radiology practices in return for service
fees. The service agreements cannot be terminated by either party without
cause, consisting primarily of bankruptcy or material default. However, under
certain conditions, the Company can terminate the service agreement if the
number of physicians in a practice falls below a certain percentage.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

      The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of the Company and its
majority-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.

Use of Estimates

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

Reclassification

      Certain prior year amounts have been reclassified to conform to current
year presentation. These reclassifications have no effect on the previously
reported net loss, stockholders' equity, or cash flows.

Cash and Cash Equivalents

      The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.


                                      F-7
<PAGE>   49
Accounts Receivable

      Accounts receivable principally represent receivables from patients and
other third-party payors for medical services provided by the radiology
practices. Such amounts are recorded net of contractual allowances and
estimated bad debts.

Property and Equipment

      Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Property and equipment are depreciated using the
straight-line method.

Investments in Joint Ventures

      Investments in joint ventures consist primarily of interests in entities
which own and operate diagnostic imaging centers. Such investments are
accounted for under the equity method. The underlying joint ventures had total
assets of approximately $12,185,000 and $17,792,000 and total revenues of
approximately $1,752,000 and $32,933,000 in 1997 and 1998, respectively.

Intangible Assets

      The value of intangible assets (consisting primarily of service
agreements) is recorded at cost at the date of acquisition. Intangible assets
are being amortized on a straight-line basis over a 25-year period in accordance
with Accounting Principles Board ("APB") No. 17, Intangible Assets. The Company
believes that the life of the core businesses acquired and the delivery of
radiology management services will exceed 25 years. As of December 31, 1997 and
1998, accumulated amortization was approximately $562,000 and $2,462,000,
respectively.

      Subsequent to an acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate that the remaining
balance of the intangible assets may not be recoverable or that the remaining
useful life may warrant revision. When factors indicate that intangible assets
should be evaluated for possible impairment, the Company uses an estimate of
the related business segment's undiscounted cash flows over the remaining life
of the intangible asset and compares it to the business segment's intangible
asset balance to determine whether the intangible assets are recoverable or if
impairment exists, in which case an adjustment is made to the carrying value of
the asset. When an adjustment is required the Company evaluates the remaining
intangible asset amortization using the factors outlined in APB No. 17.

Accrued Physician Retention

      Accrued physician retention represents amounts payable to the radiology
practices under the service agreements. The service agreements require the
Company to remit physician retention to the radiology practices on or before
the fifteenth calendar day of the following month for which services were
rendered.

New Accounting Standard - Revenue Presentation

      The Financial Accounting Standards Board's Emerging Issues Task Force
issued its abstract, Issue 97-2, "Application of FASB Statement No. 94 and
Accounting Principles Board ("APB") Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Arrangements"
("EITF 97-2"). EITF 97-2 addresses issues relating to (1) whether a
"controlling financial interest" can be established through a contractual
management agreement under FASB Statement No. 94, (2) whether a transaction
between a physician practice management entity ("PPM") and a physician practice
in which the PPM enters into a management agreement with the physician practice
should be considered a business combination and thus accounted for under APB
No. 16, (3) whether the pooling-of interests method of accounting may be
followed in certain circumstances, (4) what are common types of intangibles
that should be considered in performing the purchase price allocation, and (5)
whether an employee of the physician practice should be 



                                      F-8
<PAGE>   50

considered an employee of the PPM for purposes of accounting for that 
stock-based compensation.

      In 1997, the Company displayed physician groups revenue in its
consolidated statements of income. Since the Company has not established a
"controlling financial interest" under EITF 97-2, the 1997 display has been
restated to reflect the service fees earned as revenues. This change had no
effect on the Company's financial position, results of operations, or
liquidity.

      The following table sets forth the amounts of physician groups revenue
that would have been presented in the consolidated statements of income had the
Company met the provisions of EITF 97-2 (in thousands):

<TABLE>
<CAPTION>
                                                                   1997             1998     
                                                              -------------     -------------
     <S>                                                      <C>               <C>
      Physician groups revenue, net....................       $      13,709     $     208,983
      Less: amounts retained by physician groups.......              (5,026)          (73,379)
                                                              -------------     -------------
      Service fee revenue, as reported                        $       8,683     $     135,604
                                                              =============     =============
</TABLE>

Service Fee Revenue

      Service fee revenue represents radiology practices revenue less amounts
retained by radiology practices. The amounts retained by radiology practices
represents amounts paid to the physicians pursuant to the service agreements
between the Company and the radiology practices. Under the service agreements,
the Company provides each physician group with the facilities and equipment
used in its medical practice, assumes responsibility for the management of the
operations of the practice, and employs substantially all of the non-physician
personnel utilized by the group. Although the Company assists in negotiating
managed care contracts for the radiology practices, it assumes no risk under
these arrangements.

      The Company's service fee revenue is dependent upon the operating results
of the radiology practices. Where state law allows, service fees due under the
service agreements are derived from two distinct revenue streams: (1) a
negotiated percentage (typically 20% to 30%) of the adjusted professional
revenues as defined in the service agreement; and (2) 100% of the adjusted
technical revenues as defined in the service agreements. In states where the
law requires a flat fee structure, the Company has negotiated a base service
fee, which is equal to the fair market value of the services provided under the
service agreement and which is renegotiated each year to equal the fair market
value of the services provided under the service agreement. The fixed fee
structure results in the Company receiving substantially the same amount of
service fee as it would have received under its negotiated percentage fee
structure. Adjusted professional revenues and adjusted technical revenues are
determined by deducting certain contractually agreed-upon expenses
(non-physician salaries and benefits, rent, depreciation, insurance, interest
and other physician costs) from the radiology practices' revenue.

      Service fee revenue consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   1997             1998     
                                                              -------------     -------------
     <S>                                                      <C>               <C>
      Professional component...........................       $       2,632     $      34,694
      Technical component..............................               6,051           100,910
                                                              -------------     -------------
                                                              $       8,683     $     135,604
                                                              =============     =============
</TABLE>

      For the year ended December 31, 1998, four of the Company's radiology
practices each contributed 10% or more of the Company's service fee revenue.
Advanced Radiology, LLC contributed approximately 32%.

      The Company also periodically advances funds to the radiology practices
at current interest rates. Such advances are due on demand and are repaid
through reductions in future physician retention payments.



                                      F-9
<PAGE>   51
Income Taxes

      The Company accounts for income taxes under the liability method which
states that deferred taxes are to be determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of enacted tax laws. Deferred
income tax provisions and benefits are based on the changes to the asset or
liability from period to period. The Company and its subsidiaries file a
consolidated tax return.

Net Income Per Share

      The Company adopted the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" ("EPS") effective December 31, 1997.
SFAS No. 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. Basic EPS is calculated by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Options, warrants, and other
potentially dilutive securities are excluded from the calculation of basic EPS.
Diluted EPS includes the options, warrants, and other potentially dilutive
securities that are excluded from basic EPS using the treasury stock method to
the extent that these securities are not anti-dilutive. For the year ended
December 31, 1998, 595,552 shares related to stock options were included in
diluted EPS.

      There is no difference between basic and diluted EPS for the years ended
December 31, 1996 and 1997 because options and convertible notes payable have
an anti-dilutive effect. For the year ended December 31, 1997, 938,569 shares
related to stock options and convertible notes payable were not included in the
computation of diluted EPS because to do so would be anti-dilutive for the
period.

Fair Value of Financial Instruments

      SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of certain financial instruments. The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value due to the short maturity
of these instruments. The carrying amounts of the Company's long-term debt and
capital lease obligations also approximate fair value.

Concentration of Credit Risk

      The Company's accounts receivable consist primarily of service fee
revenues due from radiology practices and medical service revenues due from
patients funded through Medicare, Medicaid, commercial insurance and private
payment. The Company and its practices perform ongoing credit evaluations of
their patients and generally does not require collateral. The Company and its
practices maintain allowances for potential credit losses. Such losses have
been within management's expectation.

Cash Paid During Year

      The Company paid the following amounts for interest and income taxes (in
thousands):

<TABLE>
<CAPTION>
                                      1996           1997           1998     
                                 -------------   -------------  -------------
<S>                              <C>            <C>            <C>
Interest................         $           7   $         254  $       8,653
Income taxes............                    --              --         15,423
</TABLE>

3. ACQUISITIONS AND PRACTICE AFFILIATIONS:

      During 1998, the Company completed the following acquisitions and
practice affiliations. All of the acquisitions were accounted for under the
purchase method.


                                      F-10
<PAGE>   52
      In January 1998, the Company completed its affiliation with Community
Radiology Associates, a ten-physician radiology practice based in Rockville,
Maryland. The Company also completed the acquisition of Community Radiology
Associates' seven imaging centers and the acquisition of four independent
imaging centers in the Greater Bay Area of Northern California. Total
consideration for these transactions was approximately $41,433,000 consisting of
the issuance of 1,019,018 shares of the Company's common stock (509,510 shares
will be issued in January 1999), cash and assumed debt.

      In April 1998, the Company completed its affiliation with Radiology
Imaging Associates, a ten-physician radiology practice based in Fort Pierce,
Florida. The Company also completed the acquisition of Radiology Imaging
Associates' imaging center and the acquisition of an independent imaging center
in the Hudson Valley Area of Southern New York. In June 1998, the Company
completed the acquisition of an independent imaging center in the Greater Bay
Area of Northern California. The total consideration for these transactions was
approximately $15,100,000, consisting of the issuance of 433,662 shares of the
Company's common stock, cash and assumed debt.

      In July 1998, the Company completed its acquisition of two imaging
centers in the Greater Bay Area of Northern California. The total consideration
for these transactions was approximately $6,975,000 cash.

      In August 1998, the Company completed its acquisition of an imaging
center in San Antonio, Texas. The total consideration for this transaction was
approximately $2,800,000 cash.

      In September 1998, the Company completed its affiliation with WB&A
Imaging, P.C. (formerly known as Drs. Wener, Boyle & Associates, P.A.), a
15-physician radiology practice based in the Washington, D.C. Metropolitan
Area. The Company also completed the acquisition of WB&A Imaging, P.C.'s four
imaging centers. The total consideration for the transaction was approximately
$9,067,000, consisting of the issuance of 359,374 shares of the Company's common
stock, cash and assumed debt.

 4. PROPERTY AND EQUIPMENT:

      Property and equipment consists of the following at December 31, 1997 and
1998 (in thousands):

<TABLE>
<CAPTION>
                                                           Useful Life          1997             1998   
                                                          -------------      ----------        ----------
        <S>                                          <C>                    <C>               <C>
        Equipment (primarily medical equipment)             5-7 Years        $   71,180        $   92,067
        Leasehold improvements                       Remaining life of lease      9,744            12,567
        Building                                            15 Years              2,634             1,865
                                                                             ----------        ----------
                                                                                 83,558           106,499
        Less - Accumulated depreciation
          and amortization                                                      (60,721)          (69,497)
                                                                             ----------        ----------
        Property and equipment, net                                          $   22,837        $   37,002
                                                                             ==========        ==========
</TABLE>


                                      F-11
<PAGE>   53
5. LONG-TERM DEBT:

      Long-term debt consists of the following at December 31, 1997 and 1998
(in thousands):

<TABLE>
<CAPTION>
                                                                                1997             1998   
                                                                             ----------        ----------
        <S>                                                                <C>                <C>
        Note payable to a bank, interest at the Company's option at 
          LIBOR plus 2.0% (7.25% at December 31, 1998) or the 
          prime rate of a bank plus 1.0% (8.75% at December 31,
          1998), maturing in November 2003                                   $   49,600        $  112,500
        Note payable to a bank, interest at 7.92%, maturing
          March 2001, unsecured                                                   2,992             2,147
                                                                             ----------        ----------
                                                                                 52,592           114,647

        Less - Current portion of long-term debt                                   (858)             (840)
                                                                             ----------        ----------
        Long-term debt, net of current portion                               $   51,734        $  113,807
                                                                             ==========        ==========
</TABLE>

      On November 26, 1997, the Company entered into a bank credit facility
(the "Credit Facility"). The Credit Facility was amended on May 19, 1998. The
loan agreement provides for revolving loans of up to $160,000,000 to be used
for acquisitions and general working capital needs. The Company may borrow,
repay and reborrow amounts during the first three years of the Credit Facility.
Amounts outstanding under the Credit Facility at the end of three years are
required to be repaid in quarterly installments of varying amounts commencing
September 30, 2000. The Credit Facility expires and all loans thereunder mature
on the sixth anniversary of the closing date of the Credit Facility. Borrowings
under the Credit Facility at any time may not exceed the lesser of $160,000,000
or 3.00 times the consolidated EBITDA of the Company, giving pro forma effect
to acquisitions made with such borrowings. At December 31, 1998, the Company's
debt could not exceed $135,000,000 under the Credit Facility. The Company had
outstanding borrowings of $112,500,000 under the Credit Facility and an
additional $7,700,000 outstanding under other credit arrangements. At the
Company's option, the interest rate is (i) an adjusted LIBOR rate plus an
applicable margin which can vary from 1.5% to 2.5% dependent on certain
financial ratios or (ii) the prime rate plus an applicable margin which can
vary from 0.5% to 1.5%. In each case the applicable margin varies based on
financial ratios maintained by the Company. The Credit Facility includes
certain restrictive covenants including prohibitions on the payment of
dividends and the maintenance of certain financial ratios (including minimum
debt-service coverage and maximum debt-to-EBITDA coverage, as defined).
Borrowings under the Credit Facility are secured by all service agreements of
which the Company is or becomes a party and a pledge of the stock of the
Company's subsidiaries.

      The maturities of long-term debt at December 31, 1998 are as follows (in
thousands):

<TABLE>
                    <S>                             <C>
                     1999                                   $      840
                     2000                                       19,796
                     2001                                       37,761
                     2002                                       37,500
                     2003                                       18,750
                                                            ----------
                                                            $  114,647
                                                            ==========
</TABLE>

         As of December 31, 1997 and 1998, accumulated amortization of deferred
financing costs was approximately $33,000 and $661,000, respectively.


                                      F-12
<PAGE>   54
6. STOCKHOLDERS' EQUITY:

Common Stock

      In 1998, the Company issued 1,812,054 shares of its common stock in
connection with acquisitions (See Note 3).

      In November 1997, the Company issued 3,000,000 shares of its common stock
at $12.00 per share in an IPO. Proceeds from the offering, net of commissions
and other related expenses of $4,749,000, were $29,081,000. In connection with
the offering, the Company's convertible notes payable of $3,500,000 were
converted into 510,406 shares of common stock.

      Simultaneously with the closing of the IPO and Reorganizations,
stockholders of the initial radiology practices received, in the aggregate,
12,646,446 shares of common stock in exchange for certain assets and
liabilities of the initial radiology practices. These shares have been
registered under the Securities Act of 1933. In addition, the Company
distributed cash dividends of $50,588,000 to the initial radiology practices.

      During 1996, the Company issued 2,000,000 shares of common stock. At the
consummation of the IPO, 1,000,000 shares were cancelled for no consideration.

Stock Option Plan

      During 1996, the Company's Board of Directors approved the 1996 Stock
Option Plan (the "Plan") under which 3,000,000 options to purchase shares of
the Company's common stock may be granted to key directors, employees and other
health care professionals associated with the Company, as defined by the Plan.
Options granted under the Plan may be either incentive stock options ("ISO") or
nonqualified stock options ("NQSO"). The option price per share under the Plan
may not be less than 100% of the fair market value at the grant date for ISO
and may not be less than 85% of the fair market value at the grant date for
NQSO. Generally, options vest over a 5-year period and are exercisable over a
ten-year life. As of December 31, 1996, 1997 and 1998, 1,300,000, 1,591,000 and
2,117,000 shares, respectively, were outstanding under the Plan. Since the
Plan's inception, the Board of Directors granted options to purchase 30,000
shares of common stock outside the Plan. The following table summarizes the
combined activity under the Plan and the options granted outside the Plan at
December 31, 1996, 1997 and 1998:

<TABLE>
<CAPTION>
                                          1996                     1997                     1998
                                  ---------------------    ---------------------    ---------------------
                                              Wtd. Avg.                Wtd. Avg.                Wtd. Avg.
                                   Shares     Exercise     Shares     Exercise      Shares      Exercise
                                   (000's)     Price       (000's)     Price        (000's)      Price
                                  --------   ----------    --------   ----------    --------   ----------
<S>                               <C>      <C>            <C>        <C>           <C>       <C>
Outstanding, beginning of year          --  $      0.00      1,300   $     0.70      1,591   $     5.19
Granted                              1,300  $      0.70        663   $    11.15      1,427   $     9.24
Exercised                               --  $      0.00        (78)  $     0.13       (197)  $     0.24
Cancelled                               --  $      0.00       (294)  $     0.13       (704)  $     8.99
                                 ---------  -----------   --------   ----------   --------   ----------
Outstanding, end of year             1,300  $      0.70      1,591   $     5.19      2,117   $     7.14
                                 =========  ===========   ========   ==========   ========   ==========
Exercisable, end of year                96  $      0.20        656   $     4.10        718   $     5.79
Price Range                           $0.13 to $8.00           $0.13 to $12.00        $0.13 to $12.00
</TABLE>


                                      F-13
<PAGE>   55
      The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
2,116,998 options outstanding as of December 31, 1998.

<TABLE>
<CAPTION>
                                                    Wtd. Avg.                Wtd. Avg.
     Exercise Price Range        Shares          Exercise Price       Contractual Life (yrs)
     --------------------        ------          --------------       ----------------------
     <S>                        <C>                  <C>                      <C>
      $0.13 -  $7.49               536,765            $0.85                    7.76
      $7.50  - $9.00             1,230,233            $8.52                    9.19
      $9.50  - $12.00              350,000           $11.98                    8.38
</TABLE>

      The Company accounts for its stock-based compensation arrangements under
the provisions of APB No. 25, "Accounting for Stock Issued to Employees". In
1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was issued,
whereby companies may elect to account for stock-based compensation using a
fair value based method or continue measuring compensation expense using the
intrinsic value method prescribed in APB No. 25. SFAS No. 123 requires that
companies electing to continue to use the intrinsic value method make pro forma
disclosure of net income and net income per share as if the fair value based
method of accounting had been applied.

      The Company used the Black-Scholes option pricing model to estimate the
fair value of options. The pro forma effects of adopting SFAS No. 123's fair
value based method for the period ended December 31, 1996 were not materially
different from the corresponding APB No. 25 intrinsic value methodology because
the weighted average grant-date fair value of options granted during the period
was immaterial. The effects of applying SFAS No. 123 during 1997 and 1998 are
as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                          1997                      1998     
                                                     -------------              -------------
          <S>                                       <C>                        <C>
           Net income (loss):
                As reported                          $      (3,928)             $      13,531
                Pro forma                                   (5,599)                    12,117
           Net income (loss) per share (diluted):
                As reported                          $       (1.13)             $        0.70
                Pro forma                                    (2.80)                      0.63
</TABLE>

      The fair value of each option grant is estimated using the following
weighted-average assumptions for grants in 1997 and 1998, respectively:
risk-free interest rate of 5.1 and 5.6 percent; expected life of 2.58 and 2.81
years; expected volatility of 125.0 and 67.0 percent.

7. INCOME TAXES:

      Income tax expense in 1996, 1997 and 1998 is composed of the following
amounts (in thousands):

<TABLE>
<CAPTION>
                                             1996              1997             1998
                                         -------------    --------------    -------------
      <S>                               <C>             <C>                <C>
      Current income tax expense
         Federal                         $          --    $           --    $       8,418
         State                                      --                --            2,915
                                         -------------    --------------    -------------
                                                    --                --           11,333
      Deferred income tax benefit
         Federal                                    --                --           (2,507)
         State                                      --                --             (375)
                                         -------------    --------------    -------------
                                                    --                --           (2,882)
      Income tax expense                 $          --    $           --    $       8,451
                                         =============    ==============    =============
</TABLE>


                                      F-14
<PAGE>   56

      A reconciliation between reported income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% for 1996,
1997 and 1998 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     1996              1997             1998     
                                                 -------------    --------------    -------------
     <S>                                        <C>              <C>               <C>
      Computed at statutory rate                 $        (577)   $       (1,375)   $       7,694
      State income taxes, net of
        federal tax benefit                                 --                --            1,519
      Change in valuation allowance                        577             1,375               --
      Prior year tax return/accrual difference              --                --             (798)
      Nondeductible amortization                            --                --               36
                                                 -------------    --------------    -------------
      Income tax expense                         $          --    $           --    $       8,451
                                                 =============    ==============    =============
</TABLE>

      The components of deferred income tax expense (benefit) in 1996, 1997 and
1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     1996              1997             1998     
                                                 -------------    --------------    -------------
     <S>                                        <C>               <C>              <C>
      Amortization                               $          --    $           --    $         542
      Depreciation                                          --                --             (789)
      Net operating loss carryforward                     (577)           (1,375)              --
      Change in valuation allowance                        577             1,375               --
      Various accrued liabilities and other                 --                --              669
      Bad debts                                             --                --           (1,044)
      Start-up costs                                        --                --           (1,535)
      Cash to accrual adjustments                           --                --             (725)
                                                 -------------    --------------    --------------
      Deferred income tax benefit                $          --    $           --    $      (2,882)
                                                 =============    ==============    =============
</TABLE>

      The tax effects of temporary differences that give rise to the deferred
income taxes at December 31, 1997 and 1998, are presented below (in thousands):

<TABLE>
<CAPTION>
                                                        1997             1998     
                                                   --------------    -------------
     <S>                                          <C>                <C>
      Deferred tax assets
         Start-up costs                            $           --    $       1,535
         Various accrued liabilities and other                 --            3,403
         Bad debts                                             --            1,044
         Net operating loss carryforward                    1,952            1,952
                                                   --------------    -------------
                                                            1,952            7,934
      Valuation allowance                                  (1,952)          (1,952)
                                                               --            5,982
      Deferred tax liabilities
         Cash to accrual adjustments                       (8,662)          (7,937)
         Amortization                                          --             (542)
         Depreciation                                      (1,334)            (545)
                                                   --------------    -------------
                                                           (9,996)          (9,024)
                                                   --------------    -------------
                                                   $       (9,996)   $      (3,042)
                                                   ==============    =============
</TABLE>


                                      F-15
<PAGE>   57
8. COMMITMENTS AND CONTINGENCIES:

Leases

      The Company leases office space as well as certain equipment under
capital leases and noncancelable operating lease agreements, which expire at
various dates through 2011. At December 31, 1998, minimum annual rental
commitments under capital leases and noncancelable operating leases with terms
in excess of one year are as follows:

<TABLE>
<CAPTION>
   Years Ending                                                    Capital            Operating
   December 31,                                                     Leases             Leases  
   -------------                                                   -------            ---------
    <S>                                                           <C>                <C>
    1999                                                          $   2,244           $   5,271
    2000                                                              1,977               4,011
    2001                                                              1,413               2,738
    2002                                                                876               2,315
    2003                                                                144               2,025
    Thereafter                                                           --              11,439
                                                                  ---------           ---------
    Total minimum lease payments                                  $   6,654           $  27,799
                                                                                      =========
    Less - Amount representing interest                              (1,090)
                                                                  ---------
    Present value of minimum capital lease payments                   5,564
    Less - Current portion of capital lease obligations              (1,677)
                                                                  ---------
    Capital lease obligations, net of current portion             $   3,887
                                                                  =========
</TABLE>

      Lease expense was approximately $57,000, $585,000 and $5,619,000 in 1996,
1997 and 1998, respectively.

Litigation

      The Company is not currently subject to any material litigation nor, to
the Company's knowledge, is any material litigation threatened against the
Company other than routine litigation arising in the ordinary course of
business, which litigation is expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the Company's business, financial condition or results of operations. There can
be no assurance that the Company will not subsequently be named as a defendant
in additional lawsuits.

      There can be no assurance that the Company will not be named as a
defendant in lawsuits for matters arising out of events that occurred prior to
the acquisition of the related radiology practices. Each practice has retained
responsibility for, and /or agreed to indemnify the Company in full against,
the liabilities associated with these lawsuits. In the event the Company is
named as a party in any of these lawsuits, or a monetary judgment is entered
against the Company and indemnification is unavailable for any reason, the
Company's business, financial condition and results of operations could be
materially adversely affected.

9. SEGMENT REPORTING

         The Company has four reportable segments: Mid-Atlantic Region,
Northeastern Region, Central Region, and Western Region. The Company's
reportable segments are strategic business units defined by geography. Each
owns and operates imaging centers and provides management services to the
radiology practices within their respective regions.


                                      F-16
<PAGE>   58

         The accounting policies of the segments are the same as those
described in the summary of significant accounting policies except that the
Company does not allocate taxes associated with income to any of the regions.
They are managed separately because each region operates under different
contractual arrangements, providing service to a diverse mix of patients and
payors.

<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31, 1998

                              Mid-Atlantic Northeastern   Central       Western
                               Region (1)   Region (2)   Region (3)    Region (4)     Total  
                              ------------ ------------ ------------  -----------  ----------
<S>                          <C>           <C>          <C>          <C>           <C>
Service fee revenue           $    60,317  $    39,091  $    16,688   $    19,508  $   135,604
Total operating expenses           39,288       26,587        9,065        12,995       87,935
                              -----------  -----------  -----------   -----------  -----------
Segment contribution               21,029       12,504        7,623         6,513       47,669
Contribution margin                    35%          32%          46%           33%          35%
Depreciation and
  amortization expense              5,068        2,015          666         2,012        9,761
Interest Expense                      793          748          168           687        2,396
Segment Profit                     16,945        9,741        8,641         3,814       39,141

Segment assets                     44,101       22,470       11,756        12,029       90,356
Expenditures for
 segment assets                     3,457        4,991          284         1,125        9,857
</TABLE>

(1)  Includes the Mid-Atlantic Market.
(2)  Includes the Finger Lakes and Hudson Valley Markets.
(3)  Includes the South Texas, Treasure Coast and Northeast Kansas Markets.
(4)  Includes the Bay Area Market.

<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31, 1997

                              Mid-Atlantic Northeastern   Central       Western
                                 Region       Region       Region       Region        Total   
                              ------------ ------------ ------------  -----------  ----------
<S>                           <C>          <C>          <C>          <C>           <C>
Service fee revenue           $     3,533  $     3,105  $       880   $     1,165  $     8,683
Total operating expenses            2,766        2,147          586           868        6,367
                              -----------  -----------  -----------   -----------  -----------
Segment contribution                  767          958          294           297        2,316
Contribution margin                    22%          31%          33%           25%          27%
Depreciation and
  amortization expense                351          166           39           103          659
Interest Expense                       94           70            8            30          202
Segment Profit                        434          722          306           164        1,626

Segment assets                     28,268       14,565        7,747         5,832       56,412
Expenditures for
 segment assets                        --           --           --            --           --
</TABLE>

<TABLE>
<CAPTION>
Reconciliation of Profits                                   1997                      1998       
                                                     ------------------         -----------------
     <S>                                             <C>                       <C>
     Segment profit                                  $            1,626         $          39,141
     Unallocated amounts:
         Corporate general and administrative                    (4,910)                   (9,597)
         Corporate depreciation and amortization                   (229)                   (2,417)
         Corporate interest expense                                (415)                   (5,145)
                                                     ------------------                    ------
     Income (loss) before taxes                      $           (3,928)        $          21,982
                                                     ===================        =================
</TABLE>


                                      F-17
<PAGE>   59
10. SUBSEQUENT EVENTS:

      On January 4, 1999, the Company acquired all of the outstanding stock of
Emporia Radiology, P.C. ("Emporia"), a radiology practice located in Emporia,
Kansas. In connection with the acquisition, Emporia's physicians joined
Radiology and Nuclear Medicine, L.L.C. ("RNM"), and became subject to the
service agreement between RNM and the Company. The total purchase price was
$1,190,000. This acquisition will be accounted for using the purchase method.

      On February 6, 1999, the Company acquired all of the outstanding stock of
Steven P. Braff, M.D., P.C ("Braff"), a radiology practice located in
Rochester, New York. In connection with the acquisition, the professional
services will be provided by Ide Imaging Group, P.C. ("Ide"), subject to the
service agreement between Ide and the Company. The total purchase price was
$2,400,000. This acquisition will be accounted for using the purchase method.



                                      F-18
<PAGE>   60
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE.

Not applicable.

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      The information required by Items 401 and 405 of Regulation S-K is
contained under the caption "Directors and Executive Officers" in the
registrant's proxy statement for the 1999 annual meeting of stockholders and is
incorporated herein by reference to such proxy statement.

ITEM 11.  EXECUTIVE COMPENSATION.

      The information required by Item 402 of Regulation S-K is contained under
the caption "Executive Compensation" in the registrant's proxy statement for
the 1999 annual meeting of stockholders and is incorporated herein by reference
to such proxy statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      The information required by Item 403 of Regulation S-K is contained under
the caption "Security Ownership of Certain Beneficial Owners and Management" in
the registrant's proxy statement for the 1999 annual meeting of stockholders
and is incorporated herein by reference to such proxy statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      The information required by Item 404 of Regulation S-K is contained
herein under the caption "Certain Transactions" in the registrant's proxy
statement for the 1999 annual meeting of stockholders and is incorporated
herein by reference to such proxy statement.



                                       40
<PAGE>   61
                                    PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.


(a)            Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
      <S>    <C>
       2.1   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and among American Physician Partners, Inc., Carroll
             Imaging Associates, P.A., Diagnostic Imaging Associates, P.A.,
             Drs. Copeland, Hyman and Shackman, P.A., Drs. Decarlo, Lyon, Hearn
             & Pazourek, P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
             Radiologists, P.A., and Perilla, Syndler & Associates, P.A. **
       2.2   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., Radiology
             and Nuclear Medicine, A Professional Association. **
       2.3   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Mid
             Rockland Imaging Associates, P.C.**
       2.4   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and
             Rockland Radiological Group, P.C.**
       2.5   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and
             Advanced Imaging of Orange County, P.C. **
       2.6   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Central
             Imaging Associates, P.C. **
       2.7   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Nyack
             Magnetic Resonance Imaging, P.C. **
       2.8   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Pelham
             Imaging Associates, P.C. **
       2.9   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Women's
             Imaging Consultants, P.C. **
      2.10   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Pacific
             Imaging Consultants, A Medical Group, Inc. **
      2.11   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Total
             Medical Imaging, Inc.**
      2.12   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Valley
             Radiologists Medical Group, Inc. **
      2.13   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and The Ide
             Group, P.C. **
      2.14   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and M&S
             X-Ray Associates, P.A. **
      2.15   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and South
             Texas MR, Inc. **
      2.16   Agreement and Plan of Exchange, dated June 27, 1997 by and between
             American Physician Partners, Inc., and San Antonio MR, Inc. **
      2.17   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., Lexington MR, Ltd. and the
             Sellers. **
      2.18   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., Madison Square Joint Venture
             and the Sellers. **
</TABLE>

                                       41
<PAGE>   62

<TABLE>
     <S>     <C>
      2.19   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., South Texas No. 1 MRI Limited
             Partnership, a Texas limited partnership, and the Sellers. **
      2.20   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., San Antonio MRI Partnership No.
             2 Ltd., a Texas limited partnership, and the Sellers**
      2.21   Agreement and Plan of Exchange, dated June 27, 1997 by and between
             American Physician Partners, Inc., and the Sellers **
      2.22   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and among American
             Physician Partners, Inc., Carroll Imaging Associates, P.A.,
             Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop, Kim &
             Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A., Drs. DeCarlo,
             Lyon, Hearn & Pazourek, P.A., Harbor Radiologists, P.A., and
             Perilla, Sindler & Associates, P.A.**
      2.23   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Radiology and Nuclear Medicine, A
             Professional Association.**
      2.24   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Mid Rockland Imaging Associates,
             P.C.**
      2.25   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Rockland Radiological Group, P.C.**
      2.26   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Advanced Imaging of Orange County,
             P.C.**
      2.27   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Central Imaging Associates, P.C.**
      2.28   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Nyack Magnetic Resonance Imaging,
             P.C.**
      2.29   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Pelham Imaging Associates, P.C.**
      2.30   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Women's Imaging Consultants, P.C.**
      2.31   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Pacific Imaging Consultants, A
             Medical Group, Inc.**
      2.32   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Total Medical Imaging, Inc.**
      2.33   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Valley Radiologists Medical Group,
             Inc.**
      2.34   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and The Ide Group, P.C.**
      2.35   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and M & S X-Ray Associates, P.A.**
      2.36   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and South Texas MR, Inc.**
</TABLE>


                                       42
<PAGE>   63

<TABLE>
    <S>     <C>    
      2.37   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and San Antonio MR, Inc.**
      2.38   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and Lexington MR, Ltd.**
      2.39   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and Madison Square Joint Venture.**
      2.40   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and South Texas No. 1 MRI Limited Partnership.**
      2.41   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and San Antonio MRI Partnership No. 2, Ltd.**
      2.42   Asset Purchase Agreement, dated as of January 1, 1998, by and
             among American Physician Partners, Inc., Community Radiology
             Associates, Inc., Drs. Korsower and Pion Radiology, P.A., and the
             Principal Stockholders ****
      2.43   Asset Purchase Agreement, dated as of January 12, 1998, by and
             among American Physician Partners, Inc., Valley Imaging Partners,
             Inc., Questar Imaging, Inc. and Questar Imaging VR, Inc. ****
      2.44   Asset Purchase Agreement, dated as of January 23, 1998, by and
             among American Physician Partners, Inc., Valley Imaging Partners,
             Inc., PAL Imaging Corp. and the Principal Stockholders ****
      2.45   Asset Purchase Agreement, dated as of April 1, 1998, by and among
             American Physician Partners, Inc., Treasure Coast Imaging
             Partners, Inc. and Radiology Imaging Associates, Basilico,
             Gallagher and Raffa, M.D., P.A. and Robert F. Basilico, M.D.,
             Edward Gallagher, M.D., R.J. Raffa, M.D., Joseph T. Charles, M.D.,
             Alex N. Vennos, M.D., and Robin J. Connolly, M.D.*****
      2.46   Asset Purchase Agreement, dated as of April 1, 1998, by and among
             American Physician Partners, Inc., Treasure Coast Imaging
             Partners, Inc. and St. Lucie Imaging and Breast Center, Inc. and
             Robert F. Basilico, M.D., Edward Gallagher, M.D., R.J. Raffa,
             M.D., Joseph T. Charles, M.D., Alex N. Vennos, M.D., and Robin J.
             Connolly, M.D.*****
      2.47   Asset Purchase Agreement, dated as of April 28, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.,
             LXL, Ltd. and the Partners of LXL, Ltd.*****
      2.48   Asset Purchase Agreement, dated as of June 1, 1998, by and among
             American Physician Partners, Inc., Mid Rockland Imaging Partners,
             Inc., Empire State Imaging Partners, Inc., RF Management Corp. and
             Modern Medical Modalities Corporation*****
      2.49   Asset Purchase Agreement, dated as of June 23, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.,
             Brewster Imaging Center, Inc. and Each Principal Stockholder*****
      2.50   Asset Purchase Agreement, dated as of June 29, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.
             and Bryan M. Shieman, M.D., a sole proprietorship d/b/a El Camino
             Center for Osteoporosis and/or ECOO II*****
      2.51   Stock Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., WB&A Imaging Partners, Inc. and
             Vimla Bhooshan, M.D., John B. DeGrazia, M.D., Edwin Goldstein,
             M.D., Paul T. Lubar, M.D., Calvin D. Neithamer, M.D., William P.
             O'Grady, M.D., Robert A. Olshaker, M.D., Stanley M. Perl, M.D.,
             Michael S. Usher, M.D., Alan B. Kronthal, M.D., Steven A. Meyers,
             M.D., Victor A. Bracey, M.D. and Larry W. Busching ******
      2.52   Asset Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
             Magnetic Resonance Imaging Associates Limited Partnership and Paul
             T. Lubar, Stanley M. Perl, Michael S. Usher, John B. DeGrazia,
             Larry W. Busching, Vimla Bhooshan, William P. O'Grady, Robert A.
             Olshaker, and Calvin D. Neithamer ******
</TABLE>


                                       43
<PAGE>   64

<TABLE>
     <S>     <C>
      2.53   Asset Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
             Duke Associates Limited Partnership and Paul T. Lubar, Stanley M.
             Perl, Michael S. Usher, John B. DeGrazia, Larry W. Busching, Vimla
             Bhooshan, William P. O'Grady, Edwin Goldstein, Robert A. Olshaker,
             Calvin D. Neithamer and Alan J. Kronthal ******
       3.1   Restated Certificate of Incorporation of American Physician
             Partners, Inc.*** 3.2 Amended and Restated Bylaws of American
             Physician Partners, Inc.*** 4.1 Form of certificate evidencing
             ownership of Common Stock of American Physician Partners, Inc.***
       4.2   Form of Convertible Promissory Note of American Physician
             Partners, Inc.**
      10.1   American Physician Partners, Inc. 1996 Stock Option Plan.**
      10.2   Employment Agreement between American Physician Partners, Inc. and
             Gregory L. Solomon.**
      10.3   Employment Agreement between American Physician Partners, Inc. and
             Mark S. Martin.**
      10.4   Employment Agreement between American Physician Partners, Inc. and
             Sami S. Abbasi.**
      10.5   Employment Agreement between American Physician Partners, Inc. and
             Paul M. Jolas.**
      10.6   Form of Indemnification Agreement for certain Directors and
             Officers.***
      10.7   Form of Registration Rights Agreement.**
      10.8   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Advanced Radiology, Inc. and
             Carroll Imaging Associates, P.A., Diagnostic Imaging Associates,
             P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Drs. Copeland, Hyman
             and Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek, P.A.,
             Harbor Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
      10.9   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Ide Admin Corp. and Ide Imaging Group,
             P.C.**
     10.10   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., M & S X-Ray Associates, P.A. and M&S
             Imaging Associates, P.A.**
     10.11   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Rockland Radiological Group, P.C. and
             The Greater Rockland Radiological Group, P.C.**
     10.12   Service Agreement dated November , by and among American Physician
             Partners, Inc., Advanced Imaging of Orange County, P.C. and The
             Greater Rockland Radiological Group, P.C.**
     10.13   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Central Imaging Associates, P.C. and The
             Greater Rockland Radiological Group, P.C.**
     10.14   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Nyack Magnetic Resonance Imaging, P.C.
             and The Greater Rockland Radiological Group, P.C.**
     10.15   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Pelham Imaging Associates, P.C. and The
             Greater Rockland Radiological Group, P.C.**
     10.16   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Women's Imaging Consultants, P.C. and
             The Greater Rockland Radiological Group, P.C.**
     10.17   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Pacific Imaging Inc. and PIC
             Medical Group, Inc.**
     10.18   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Radiology and Nuclear Medicine, a
             Professional Association and RNM L.L.C.**
     10.19   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Valley Radiology, Inc. and Valley
             Radiology Medical Associates, Inc.**
     10.20   Consulting Agreement between American Physician Partners, Inc. and
             Michael L. Sherman, M.D.***
     10.21   Office Building Lease Agreement between Dallas Main Center Limited
             Partnership and American Physician Partners, Inc.***
     10.22   First Amendment to Office Building Lease Agreement between Dallas
             Main Center Limited Partnership and American Physician Partners,
             Inc.***
     10.23   Credit Agreement by and among American Physician Partners, Inc.,
             GE Capital Corporation and the other credit parties signatory
             thereto.***
</TABLE>


                                       44
<PAGE>   65

<TABLE>
     <S>     <C>
     10.24   Consulting Agreement between American Physician Partners, Inc. and
             Lawrence R. Muroff, M.D.***
     10.25   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Lawrence Muroff, M.D.***
     10.26   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Mark Martin.***
     10.27   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Sami Abbasi.***
     10.28   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Gregory L. Solomon.***
     10.29   First Amendment to Consulting Agreement between American Physician
             Partners, Inc. and Lawrence R. Muroff, M.D.***
     10.30   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Michael Sherman, M.D.***
     10.31   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Paul M. Jolas.***
     10.32   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Derace Schaffer, M.D.***
     10.33   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and John Pappajohn.***
     10.34   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Mary Pappajohn.***
     10.35   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Thebes Ltd.***
     10.36   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Halkis Ltd.***
     10.37   Service Agreement dated January 1, 1998, by and among American
             Physician Partners, Inc., Community Imaging Partners, Inc.,
             Community Radiology Associates, Inc. and Drs. Korsower and Pion
             Radiology, P.A.****
     10.38   Service Agreement dated April 1, 1998, by and among American
             Physician Partners, Inc., Treasure Coast Imaging Partners, Inc.
             and Radiology Imaging Associates - Basilico, Gallagher & Raffa,
             M.D., P.A. *****
     10.39   First Amendment to Credit Agreement and Consent dated May 19,
             1998, by and among American Physician Partners, Inc., General
             Electric Capital Corporation and the other credit parties
             signatory thereto*****
     10.40   Employment Agreement between American Physician Partners, Inc. and
             Mark L. Wagar*****
     10.41   Service Agreement dated September 1, 1998, by and among American
             Physician Partners, Inc., WB&A Imaging Partners, Inc. and WB&A
             Imaging, P.C. ******
     10.42   Office Building Lease Agreement between The Equitable-Nissei
             Dallas Company and Fibreboard Corporation ******
     10.43   Office Building Sublease Agreement by and between Fibreboard
             Corporation and American Physician Partners, Inc. ******
      21.1   Subsidiaries *
      24.1   Power of Attorney (contained on the signature page of this Form
             10-K)* 
      27     Financial Data Schedule *
</TABLE>

--------------
*        Filed herewith.

**       Incorporated by reference to the corresponding Exhibit number to the
         registrant's Registration Statement No. 333-31611 on Form S-4.

***      Incorporated by reference to the corresponding Exhibit number to the
         registrant's Registration Statement No. 333-30205 on Form S-1.



                                       45
<PAGE>   66

****     Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on May 15, 1998.

*****    Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on August 14, 1998.

******   Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on November 13, 1998.

     (b) Financial Statement Schedules.

      Schedules are omitted because they are not applicable, or the information
is included in the financial statements or the notes thereto.

     (c) Reports on Form 8-K.



                                       46
<PAGE>   67
                                 SIGNATURE PAGE

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, American Physician Partners, Inc. has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Dallas, State of Texas, on February 22, 1999.

                                        AMERICAN PHYSICIAN PARTNERS, INC.


                                        By:   /s/ Mark L. Wagar
                                              ------------------------------
                                              Mark  L. Wagar
                                              Chairman of the Board, President
                                              and Chief Executive Officer

                               POWER OF ATTORNEY

         Each individual whose signature appears below constitutes and appoints
Mark L. Wagar and Paul M. Jolas, and each of them, such person's true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for such person and in such person's name, place, and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K, and
to file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, this Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                TITLE                                          DATE
---------                                -----                                          -----
<S>                                     <C>                                            <C>
/s/ Mark L. Wagar                        Chairman of the Board of Directors,            February 22, 1999
-------------------------------          President, and Chief Executive Officer                                  
 Mark L. Wagar                           (Principal Executive Officer)                                           
                                                                                                                 
/s/ Sami S. Abbasi                       Senior Vice President and Chief Financial      February 22, 1999        
-------------------------------          Officer (Principal Financial Officer)                                   
 Sami S. Abbasi                                                                                                  
                                                                                                                 
/s/ David W. Young                       Treasurer and Controller (Principal            February 22, 1999        
-------------------------------                                                                                  
 David W. Young                          Accounting Officer)                                                     
                                                                                                                 
/s/ John Pappajohn                       Director                                       February 22, 1999        
-------------------------------                                                                                  
 John Pappajohn                                                                                                  
                                                                                                                 
/s/ Derace L. Schaffer, M.D.             Director                                       February 22, 1999        
-------------------------------                                                                                  
 Derace L. Schaffer, M.D.
</TABLE>


<PAGE>   68

<TABLE>
<S>                                      <C>                                           <C>
/s/ Michael L. Sherman, M.D.             Director                                       February 22, 1999        
-------------------------------                                                                                  
 Michael L. Sherman, M.D.                                                                                        
                                                                                                                 
/s/ John W. Colloton                     Director                                       February 22, 1999        
-------------------------------                                                                                  
 John W. Colloton                                                                                                
                                                                                                                 
/s/ Less T. Chafen, M.D.                 Director                                       February 22, 1999        
-------------------------------                                                        
 Less T. Chafen, M.D
</TABLE>

<PAGE>   69

                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
      <S>    <C>
       2.1   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and among American Physician Partners, Inc., Carroll
             Imaging Associates, P.A., Diagnostic Imaging Associates, P.A.,
             Drs. Copeland, Hyman and Shackman, P.A., Drs. Decarlo, Lyon, Hearn
             & Pazourek, P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Harbor
             Radiologists, P.A., and Perilla, Syndler & Associates, P.A. **
       2.2   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., Radiology
             and Nuclear Medicine, A Professional Association. **
       2.3   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Mid
             Rockland Imaging Associates, P.C.**
       2.4   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and
             Rockland Radiological Group, P.C.**
       2.5   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and
             Advanced Imaging of Orange County, P.C. **
       2.6   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Central
             Imaging Associates, P.C. **
       2.7   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Nyack
             Magnetic Resonance Imaging, P.C. **
       2.8   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Pelham
             Imaging Associates, P.C. **
       2.9   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Women's
             Imaging Consultants, P.C. **
      2.10   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Pacific
             Imaging Consultants, A Medical Group, Inc. **
      2.11   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Total
             Medical Imaging, Inc.**
      2.12   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and Valley
             Radiologists Medical Group, Inc. **
      2.13   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and The Ide
             Group, P.C. **
      2.14   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and M&S
             X-Ray Associates, P.A. **
      2.15   Agreement and Plan of Reorganization and Merger, dated June 27,
             1997 by and between American Physician Partners, Inc., and South
             Texas MR, Inc. **
      2.16   Agreement and Plan of Exchange, dated June 27, 1997 by and between
             American Physician Partners, Inc., and San Antonio MR, Inc. **
      2.17   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., Lexington MR, Ltd. and the
             Sellers. **
      2.18   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., Madison Square Joint Venture
             and the Sellers. **
</TABLE>

<PAGE>   70

<TABLE>
     <S>     <C>
      2.19   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., South Texas No. 1 MRI Limited
             Partnership, a Texas limited partnership, and the Sellers. **
      2.20   Agreement and Plan of Exchange, dated June 27, 1997 by and among
             American Physician Partners, Inc., San Antonio MRI Partnership No.
             2 Ltd., a Texas limited partnership, and the Sellers**
      2.21   Agreement and Plan of Exchange, dated June 27, 1997 by and between
             American Physician Partners, Inc., and the Sellers **
      2.22   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and among American
             Physician Partners, Inc., Carroll Imaging Associates, P.A.,
             Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop, Kim &
             Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A., Drs. DeCarlo,
             Lyon, Hearn & Pazourek, P.A., Harbor Radiologists, P.A., and
             Perilla, Sindler & Associates, P.A.**
      2.23   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Radiology and Nuclear Medicine, A
             Professional Association.**
      2.24   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Mid Rockland Imaging Associates,
             P.C.**
      2.25   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Rockland Radiological Group, P.C.**
      2.26   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Advanced Imaging of Orange County,
             P.C.**
      2.27   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Central Imaging Associates, P.C.**
      2.28   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Nyack Magnetic Resonance Imaging,
             P.C.**
      2.29   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Pelham Imaging Associates, P.C.**
      2.30   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Women's Imaging Consultants, P.C.**
      2.31   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Pacific Imaging Consultants, A
             Medical Group, Inc.**
      2.32   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Total Medical Imaging, Inc.**
      2.33   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and Valley Radiologists Medical Group,
             Inc.**
      2.34   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and The Ide Group, P.C.**
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      2.35   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and M & S X-Ray Associates, P.A.**
      2.36   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and South Texas MR, Inc.**
      2.37   Amendment No. 1 to the Agreement and Plan of Reorganization and
             Merger, dated as of September 30, 1997, by and between American
             Physician Partners, Inc., and San Antonio MR, Inc.**
      2.38   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and Lexington MR, Ltd.**
      2.39   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and Madison Square Joint Venture.**
      2.40   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and South Texas No. 1 MRI Limited Partnership.**
      2.41   Amendment No. 1 to the Agreement and Plan of Exchange, dated
             September 30, 1997, by and between American Physician Partners,
             Inc., and San Antonio MRI Partnership No. 2, Ltd.**
      2.42   Asset Purchase Agreement, dated as of January 1, 1998, by and
             among American Physician Partners, Inc., Community Radiology
             Associates, Inc., Drs. Korsower and Pion Radiology, P.A., and the
             Principal Stockholders ****
      2.43   Asset Purchase Agreement, dated as of January 12, 1998, by and
             among American Physician Partners, Inc., Valley Imaging Partners,
             Inc., Questar Imaging, Inc. and Questar Imaging VR, Inc. ****
      2.44   Asset Purchase Agreement, dated as of January 23, 1998, by and
             among American Physician Partners, Inc., Valley Imaging Partners,
             Inc., PAL Imaging Corp. and the Principal Stockholders ****
      2.45   Asset Purchase Agreement, dated as of April 1, 1998, by and among
             American Physician Partners, Inc., Treasure Coast Imaging
             Partners, Inc. and Radiology Imaging Associates, Basilico,
             Gallagher and Raffa, M.D., P.A. and Robert F. Basilico, M.D.,
             Edward Gallagher, M.D., R.J. Raffa, M.D., Joseph T. Charles, M.D.,
             Alex N. Vennos, M.D., and Robin J. Connolly, M.D.*****
      2.46   Asset Purchase Agreement, dated as of April 1, 1998, by and among
             American Physician Partners, Inc., Treasure Coast Imaging
             Partners, Inc. and St. Lucie Imaging and Breast Center, Inc. and
             Robert F. Basilico, M.D., Edward Gallagher, M.D., R.J. Raffa,
             M.D., Joseph T. Charles, M.D., Alex N. Vennos, M.D., and Robin J.
             Connolly, M.D.*****
      2.47   Asset Purchase Agreement, dated as of April 28, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.,
             LXL, Ltd. and the Partners of LXL, Ltd.*****
      2.48   Asset Purchase Agreement, dated as of June 1, 1998, by and among
             American Physician Partners, Inc., Mid Rockland Imaging Partners,
             Inc., Empire State Imaging Partners, Inc., RF Management Corp. and
             Modern Medical Modalities Corporation*****
      2.49   Asset Purchase Agreement, dated as of June 23, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.,
             Brewster Imaging Center, Inc. and Each Principal Stockholder*****
      2.50   Asset Purchase Agreement, dated as of June 29, 1998, by and among
             American Physician Partners, Inc., Valley Imaging Partners, Inc.
             and Bryan M. Shieman, M.D., a sole proprietorship d/b/a El Camino
             Center for Osteoporosis and/or ECOO II*****
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      2.51   Stock Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., WB&A Imaging Partners, Inc. and
             Vimla Bhooshan, M.D., John B. DeGrazia, M.D., Edwin Goldstein,
             M.D., Paul T. Lubar, M.D., Calvin D. Neithamer, M.D., William P.
             O'Grady, M.D., Robert A. Olshaker, M.D., Stanley M. Perl, M.D.,
             Michael S. Usher, M.D., Alan B. Kronthal, M.D., Steven A. Meyers,
             M.D., Victor A. Bracey, M.D. and Larry W. Busching ******
      2.52   Asset Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
             Magnetic Resonance Imaging Associates Limited Partnership and Paul
             T. Lubar, Stanley M. Perl, Michael S. Usher, John B. DeGrazia,
             Larry W. Busching, Vimla Bhooshan, William P. O'Grady, Robert A.
             Olshaker, and Calvin D. Neithamer ******
      2.53   Asset Purchase Agreement, dated September 1, 1998, by and among
             American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
             Duke Associates Limited Partnership and Paul T. Lubar, Stanley M.
             Perl, Michael S. Usher, John B. DeGrazia, Larry W. Busching, Vimla
             Bhooshan, William P. O'Grady, Edwin Goldstein, Robert A. Olshaker,
             Calvin D. Neithamer and Alan J. Kronthal ******
       3.1   Restated Certificate of Incorporation of American Physician
             Partners, Inc.*** 3.2 Amended and Restated Bylaws of American
             Physician Partners, Inc.*** 4.1 Form of certificate evidencing
             ownership of Common Stock of American Physician Partners, Inc.***
       4.2   Form of Convertible Promissory Note of American Physician
             Partners, Inc.**
      10.1   American Physician Partners, Inc. 1996 Stock Option Plan.**
      10.2   Employment Agreement between American Physician Partners, Inc. and
             Gregory L. Solomon.**
      10.3   Employment Agreement between American Physician Partners, Inc. and
             Mark S. Martin.**
      10.4   Employment Agreement between American Physician Partners, Inc. and
             Sami S. Abbasi.**
      10.5   Employment Agreement between American Physician Partners, Inc. and
             Paul M. Jolas.**
      10.6   Form of Indemnification Agreement for certain Directors and
             Officers.***
      10.7   Form of Registration Rights Agreement.**
      10.8   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Advanced Radiology, Inc. and
             Carroll Imaging Associates, P.A., Diagnostic Imaging Associates,
             P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Drs. Copeland, Hyman
             and Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek, P.A.,
             Harbor Radiologists, P.A., Perilla, Sindler & Associates, P.A.**
      10.9   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Ide Admin Corp. and Ide Imaging Group,
             P.C.**
     10.10   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., M & S X-Ray Associates, P.A. and M&S
             Imaging Associates, P.A.**
     10.11   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Rockland Radiological Group, P.C. and
             The Greater Rockland Radiological Group, P.C.**
     10.12   Service Agreement dated November , by and among American Physician
             Partners, Inc., Advanced Imaging of Orange County, P.C. and The
             Greater Rockland Radiological Group, P.C.**
     10.13   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Central Imaging Associates, P.C. and The
             Greater Rockland Radiological Group, P.C.**
     10.14   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Nyack Magnetic Resonance Imaging, P.C.
             and The Greater Rockland Radiological Group, P.C.**
     10.15   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Pelham Imaging Associates, P.C. and The
             Greater Rockland Radiological Group, P.C.**
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     10.16   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Women's Imaging Consultants, P.C. and
             The Greater Rockland Radiological Group, P.C.**
     10.17   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Pacific Imaging Inc. and PIC
             Medical Group, Inc.**
     10.18   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., Radiology and Nuclear Medicine, a
             Professional Association and RNM L.L.C.**
     10.19   Service Agreement dated November 26, 1997, by and among American
             Physician Partners, Inc., APPI-Valley Radiology, Inc. and Valley
             Radiology Medical Associates, Inc.**
     10.20   Consulting Agreement between American Physician Partners, Inc. and
             Michael L. Sherman, M.D.***
     10.21   Office Building Lease Agreement between Dallas Main Center Limited
             Partnership and American Physician Partners, Inc.***
     10.22   First Amendment to Office Building Lease Agreement between Dallas
             Main Center Limited Partnership and American Physician Partners,
             Inc.***
     10.23   Credit Agreement by and among American Physician Partners, Inc.,
             GE Capital Corporation and the other credit parties signatory
             thereto.***
     10.24   Consulting Agreement between American Physician Partners, Inc. and
             Lawrence R. Muroff, M.D.***
     10.25   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Lawrence Muroff, M.D.***
     10.26   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Mark Martin.***
     10.27   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Sami Abbasi.***
     10.28   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Gregory L. Solomon.***
     10.29   First Amendment to Consulting Agreement between American Physician
             Partners, Inc. and Lawrence R. Muroff, M.D.***
     10.30   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Michael Sherman, M.D.***
     10.31   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Paul M. Jolas.***
     10.32   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Derace Schaffer, M.D.***
     10.33   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and John Pappajohn.***
     10.34   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Mary Pappajohn.***
     10.35   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Thebes Ltd.***
     10.36   Side Letter dated November 12, 1997 by and between American
             Physician Partners, Inc. and Halkis Ltd.***
     10.37   Service Agreement dated January 1, 1998, by and among American
             Physician Partners, Inc., Community Imaging Partners, Inc.,
             Community Radiology Associates, Inc. and Drs. Korsower and Pion
             Radiology, P.A.****
     10.38   Service Agreement dated April 1, 1998, by and among American
             Physician Partners, Inc., Treasure Coast Imaging Partners, Inc.
             and Radiology Imaging Associates - Basilico, Gallagher & Raffa,
             M.D., P.A. *****
     10.39   First Amendment to Credit Agreement and Consent dated May 19,
             1998, by and among American Physician Partners, Inc., General
             Electric Capital Corporation and the other credit parties
             signatory thereto*****
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     10.40   Employment Agreement between American Physician Partners, Inc. and
             Mark L. Wagar*****
     10.41   Service Agreement dated September 1, 1998, by and among American
             Physician Partners, Inc., WB&A Imaging Partners, Inc. and WB&A
             Imaging, P.C. ******
     10.42   Office Building Lease Agreement between The Equitable-Nissei
             Dallas Company and Fibreboard Corporation ******
     10.43   Office Building Sublease Agreement by and between Fibreboard
             Corporation and American Physician Partners, Inc. ******
      21.1   Subsidiaries *
      24.1   Power of Attorney (contained on the signature page of this Form
             10-K)*
      27     Financial Data Schedule *
</TABLE>

--------------
*        Filed herewith.

**       Incorporated by reference to the corresponding Exhibit number to the
         registrant's Registration Statement No. 333-31611 on Form S-4.

***      Incorporated by reference to the corresponding Exhibit number to the
         registrant's Registration Statement No. 333-30205 on Form S-1.

****     Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on May 15, 1998.

*****    Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on August 14, 1998.

******   Incorporated by reference to the corresponding Exhibit number to the
         registrant's Form 10-Q filed on November 13, 1998.

     (b) Financial Statement Schedules.

      Schedules are omitted because they are not applicable, or the information
is included in the financial statements or the notes thereto.

     (c) Reports on Form 8-K.