<PAGE>   1

                   U.S. SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                                 FORM 10-KSB
           [x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

           [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                       COMMISSION FILE NUMBER 0-24696

                         NATIONAL DIAGNOSTICS, INC.
               (Name of small business issuer in its charter)

         FLORIDA                                               59-3248917
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                             Identification No.)

                           751 WEST BRANDON BLVD.
                              BRANDON, FLORIDA                      33511
                    (Address of principal executive offices)     (Zip Code)

                                 (813) 661-9501
                (Issuer's telephone number, including area code)

      SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:  NONE

             SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:

       UNITS CONSISTING OF ONE SHARE OF COMMON STOCK, WITHOUT PAR VALUE,
                     AND ONE COMMON STOCK PURCHASE WARRANT
                                (TITLE OF CLASS)

                        COMMON STOCK, WITHOUT PAR VALUE
                                (TITLE OF CLASS)

                         COMMON STOCK PURCHASE WARRANTS
                                (TITLE OF CLASS)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
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 [ ]                         No [x]

         Check if no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  [ ]

         Issuer's revenues for the fiscal year ended December 31, 1996 were
$8,876,652.

         As of April 10, 1997, there were outstanding 2,628,577 shares of
Common Stock, no par value.  The aggregate market value of the voting stock
held by non-affiliates of the registrant based on the closing bid price
reported on the Nasdaq SmallCap Market as of April 10, 1997 was $1,763,495.

                      DOCUMENTS INCORPORATED BY REFERENCE:

DOCUMENTS                                                    FORM 10-K REFERENCE




           TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
                     Yes [ ]                         No [x]

                               Page 1 of 57 Pages
<PAGE>   2

                           NATIONAL DIAGNOSTICS, INC.

                           FORM 10-KSB ANNUAL REPORT

                              TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                 PAGE NO.
                                                                                                                 --------
PART I
<S>              <C>                                                                                                   <C>
  Item 1         Description of Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
  Item 2         Description of Property  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      16
  Item 3         Legal Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      17
  Item 4         Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . . . . . . . . .      18

PART II
  Item 5         Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . .    18
  Item 6         Management's Discussion and Analysis or Plan of Operation  . . . . . . . . . . . . . . . . . . . .    19  
  Item 7         Financial Statements . . . . . . . . . . .   . . . . . . . . . . . . . . . . . . . . . . . . . . .    25  
  Item 8         Changes In and Disagreements with Accountants on Accounting and Financial
                   Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47  

PART III
  Item 9         Directors, Promoters and Control Persons; Compliance with
                       Section 16(a) of the Exchange Act  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    48  
  Item 10        Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    49  
  Item 11        Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . .    50  
  Item 12        Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . .    51  
  Item 13        Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    53  
</TABLE>


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                                     PART I

ITEM 1 -- DESCRIPTION OF BUSINESS

GENERAL

         National Diagnostics, Inc., its wholly-owned subsidiaries, SunPoint
Diagnostic Center, Inc. ("SunPoint"), National Diagnostics/Orange Park, Inc.
("Orange Park"), National Diagnostics/Riverside, Inc. ("Riverside"), Alpha
Associates, Inc. ("Alpha Associates") and Alpha Acquisitions Corp. ("Alpha
Acquisitions"), and Brandon Diagnostic Center, Ltd., a limited partnership of
which Alpha Associates and Alpha Acquisitions are the general and limited
partner, respectively, provide diagnostic imaging services through several
outpatient centers located in the State of Florida.  Sundance Partners (a
wholly owned general partnership) owns the land and building associated with
the outpatient center leased to Orange Park.  (As used herein, the term
"Company" refers to National Diagnostics, Inc., including its subsidiaries.)
The Company's principal facility is located in Brandon, just east of Tampa.
This facility accounted for 55% of the Company's net revenues in 1996.  The
SunPoint facility is located in Ruskin, Florida.  The Company  acquired,
through its Orange Park subsidiary, substantially all of the assets of an
existing mobile diagnostic imaging business in greater metropolitan
Jacksonville in February, 1995. In August, 1995 the company opened in the
Jacksonville area a third fixed site facility.  In September, 1995 the Company
expanded its mobile facilities by adding both a mobile MRI unit and mobile
cardiology unit in the Jacksonville area.  In July 1996, the Company opened its
fourth fixed site facility with its Riverside facility in Jacksonville.  This
expansion from one facility to four was made financially possible by the
Company's initial public offering in September, 1994 and other credit
arrangements.

         The Company provides full service diagnostic imaging services to
patients and physicians in a comfortable, service-oriented environment located
outside of an institutional setting.  Diagnostic imaging services provided
include magnetic resonance imaging ("MRI"), computer tomography ("CT"),
ultrasound, nuclear medicine, general radiology and fluoroscopy,
neurodiagnostic testing, and mammography.  The Company's diagnostic imaging
procedures are performed by trained radiologic technologists and board
certified radiologists.  Medical services are provided at each facility by
interpreting physicians, who are board certified radiologists and members of
physician groups with whom the Company has entered into long-term contracts.
The Company provides management, administrative, marketing and technical
services, as well as equipment and facilities, to its interpreting physicians.
The Company accepts Medicare, Medicaid, Worker's Compensation and most
commercial insurance.  The Company has contracted with many health maintenance
organizations and preferred provider organizations.  In 1995 and 1996, the
Company's total net revenues were $6,232,000 and $8,919,000, respectively,
reflecting approximately 29,000 and 52,000 respective diagnostic imaging
procedures.

         The Company was incorporated in Florida in June of 1994.  The
Company's executive headquarters are located at 751 West Brandon Blvd.,
Brandon, Florida  33511, and its telephone number is (813) 661-9501.


DIAGNOSTIC IMAGING SERVICES INDUSTRY

  Overview

         During the past ten years, the diagnostic imaging industry has
experienced substantial growth as well as a major shift from inpatient to
outpatient delivery of services.  Due to the contrast and detail of a high
quality MRI scan, the use of MRI equipment frequently facilitates the
identification of disease and disorders of a patient and often reduces the
amount and cost of care needed to treat the patient and the need for certain
invasive


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procedures, like exploratory surgery.  The number of MRI units in operation has
increased from fewer than 100 in 1984 to more than 4,800 in 1994.  This rapid
growth resulted from increasing acceptance by physicians and patients of MRI as
well as an increasing need for MRI usage in imaging different body organ
systems and disease conditions.  New software programs and hardware
capabilities, coupled with new contrast agents (chemicals administered to the
patient that enhance the signal generated by body tissues), are anticipated to
expand further the usage of the technology by physicians.

         In addition, inpatient health care cost containment pressures have led
to the growth of outpatient delivery of services.  Prior to 1983, most imaging
services were delivered to patients in a hospital radiology department.  In
1983, the federal government instituted the Prospective Payments System, which
limited the amount paid by Medicare to hospitals for inpatient care for most
categories of diseases.  This restrictive reimbursement environment was a prime
factor in the shift from inpatient to freestanding, outpatient imaging centers,
since hospitals became less likely to purchase or lease expensive diagnostic
imaging equipment.

         Ownership of outpatient diagnostic imaging centers remains highly
fragmented, with no dominant national provider.  Most of the equity in
outpatient centers is owned by hospitals, independent radiologists, management
companies or other groups. This fragmentation provides the Company with
potential acquisition opportunities.

  Equipment and Modalities

         Diagnostic imaging systems are based on the ability of energy waves to
penetrate human tissue and generate images of the body which can be displayed
either on film or on a video monitor.  Imaging systems have evolved from
conventional x-rays to the advanced technologies of MRI, computerized
tomography, ultrasound, nuclear medicine, neurology and mammography.  The
principal diagnostic imaging modalities used by the Company include the
following:

                 Magnetic Resonance Imaging.  MRI is a sophisticated diagnostic
         imaging system that utilizes a strong magnetic field in conjunction
         with low energy electromagnetic waves which are processed by a
         dedicated computer to produce high resolution multiple images of body
         tissue.  A principal virtue of MRI imaging is that atoms in various
         kinds of body tissue behave differently in response to a magnetic
         field, enabling the differentiation of internal organs and normal and
         diseased tissue.  During an MRI procedure, a patient is placed in a
         large, cylindrical magnet.  Multiple images to various planes and
         cross-sections can be created without moving the patient.  The images
         can be displayed on a computer screen, stored within the computer, or
         transferred to film for interpretation by a physician and retention in
         a patient's file.  Unlike computerized tomography and general
         radiology and fluoroscopy, MRI does not utilize ionizing radiation
         which can cause tissue damage in high doses.  As with many other
         diagnostic imaging technologies, MRI is generally non-invasive.

                 Computerized Tomography.  CT is used to detect tumors and
         other conditions affecting the skeleton and internal organs.  CT
         provides higher resolution images than conventional x-rays, but
         generally not as well defined as those produced by MRI.  During a CT
         procedure, a patient is placed inside a ring on which a rotating x-ray
         tube is mounted.  A dedicated computer directs the movement of the
         x-ray tube to produce multiple cross sectional images of a particular
         organ or area of the body.

                 Ultrasound. Ultrasound has widespread application,
         particularly for procedures in obstetrics, gynecology and cardiology.
         Ultrasound imaging relies on the computer-assisted processing of sound
         waves to develop images of internal organs and the vascular system.
         The sound waves are generated and

                                      4
<PAGE>   5

         recorded by probes that are either passed over or inserted into the
         body.  A dedicated computer processes sound waves as they are
         reflected by body tissue, providing an image that may be viewed
         immediately on a computer screen or recorded continuously or in single
         images for further interpretation.

                 Nuclear Medicine.  Nuclear medicine is used primarily to study
         anatomy and metabolic functions.  During a nuclear medicine procedure,
         short-lived radioactive isotopes are administered to the patient by
         ingestion or injection.  The isotopes break down rapidly, releasing
         small amounts of radioactivity that can be recorded by a gamma or
         scintigraphic camera and processed by a computer to produce a flat
         image of various anatomical structures.

                 General Radiology and Fluoroscopy.  The most frequently used
         type of imaging equipment, radiology uses "x-rays" or ionizing
         radiation to penetrate the body and record its images on film.
         Fluoroscopy uses a video viewing system for real-time monitoring of
         the organs being visualized.

                 Neurology.  Neurological diagnostic testing, consisting of
         nerve conduction studies, electromyography, evoked-potentials and
         electroencephalography (EEG), is used for the evaluation of patients
         with suspected radiculophy of the cervical and lumbar nerves and
         diseases of the nervous system, such as multiple sclerosis (MS).
         Neurological diagnostic testing equipment is designed to assess the
         integrity, conduction ability and functioning of the nervous system
         through electro-physiological stimulation.

                 Mammography.  Mammography is a specialized form of radiology
         equipment using low dosage x-rays to visualize breast tissue.  It is
         the primary screening tool for breast cancer.


THE COMPANY'S GROWTH STRATEGY

         The Company's strategy for growth involves increasing the revenues and
profitability of its existing facilities,  establishing and developing
additional  diagnostic imaging centers and acquiring existing imaging
facilities in certain target markets, as well as expanding its existing
operations to include mobile diagnostic imaging capabilities.

  Expansion of Existing Facilities.

         The Brandon facility is currently a full service imaging facility.
The Brandon facility was expanded in March, 1995 to include a Center for Women
that focuses on providing additional mammography and ultrasound services.  In
December of 1996 the Company entered into a commitment to purchase a new
non-surgical mammography biopsy unit which will expand the services offered in
its Center for Women.

         In June, 1995, the Company  relocated Orange Park's principal facility
from Middleburg to Orange Park and expanded the range of diagnostic imaging
services offered thereby.  With the addition of a mobile MRI unit in September,
1995 to its modalities  Orange Park  became a full-service imaging facility.
See "--The Orange Park Facility."

         In September, 1995,  a mobile cardiology unit was placed into service
and expanded its service area in the Northeast Florida to the greater
Jacksonville area, Fernandina Beach, Lake City and Palatka.

                                      5
<PAGE>   6

         The SunPoint Diagnostic Center is a full-service imaging facility,
with the exception of MRI.  The Company intends to add MRI capabilities to the
SunPoint facility at such time as the demand for such services warrants the
acquisition of MRI equipment.  See "The SunPoint Facility."

         In July of 1996, a new full service center "Riverside" was opened in
the Riverside area of Jacksonville, Florida.  The new facility utilizes the
mobile MRI unit form Orange Park to offer MRI services.


  Center Development and New Center Acquisitions.

         Currently, the Company  intends to defer its external expansion in
1997; focusing more directly on the continuing effort to build efficiencies and
profitability into existing new start ups.

         The Company's long range external growth strategy includes the
development and/or acquisition of diagnostic imaging facilities in target areas
identified by management initially in the State of Florida, with the potential
for expansion to other regions in the Southeastern United States.  The Company
intends to operate each newly developed or acquired facility through a
separate, wholly-owned subsidiary.  In seeking suitable locations for the
development of new centers or the acquisition of existing centers, the Company
will focus primarily on demographic studies and its analysis of local
competition, physician referral patterns and imaging services supply and
demand.  Also, the Company will focus on its ability to either utilize the
professional services of its existing interpreting physicians to interpret test
results or affiliate with other qualified interpreting physicians.

         Installation and maintenance costs on equipment can be substantial,
particularly with respect to MRI units.  Consequently, new facilities initially
will include most or all of the modalities offered by the existing Brandon
facility, with the exception of MRI.  MRI has historically accounted for
approximately 20-30% of the Company's revenues.  MRI procedures are expensive
to perform and have historically generated high margins for the Company.  Due
to the significant capital expenditure required to install and maintain MRI
equipment, however, a minimum average number of procedures must be performed
daily at each facility offering MRI to cover fixed costs associated with MRI
equipment.  As a result, the Company currently intends to perform all MRI
procedures required by its facilities not offering MRI directly either at the
Company's nearest full service facility or via a mobile MRI unit acquired by
Orange Park and placed into operation in September, 1995.  The Company expects
to provide MRI services in this manner until such time as management determines
that the demand for MRI procedures at a particular facility is at a level that
will generate revenue sufficient to cover fixed costs associated with MRI
equipment.

         The Company also believes that it can successfully acquire existing
imaging centers. Acquisition opportunities have diminished that were tied to
the enactment of federal and state laws and regulations restricting physician
referrals to health care facilities in which such physicians have a financial
interest and limiting permissible affiliations  between tax exempt hospitals
and "for profit" outpatient medical centers.  See "Business-Government
Regulation."  The required divestitures of physician-owned centers have already
occurred.  Nevertheless, management believes that acquisition opportunities
continue to exist due to the fragmented nature of the imaging center business.

         The Company believes that it can successfully integrate the operations
of its new facilities and any facilities that it chooses to acquire by
leveraging its existing corporate infrastructure.  No assurances can be given,
however, that adequate financing will be available to fund the development of
this or any other new facilities.


  Increased Mobile Diagnostic Imaging Capabilities.

         The Company's growth strategy also includes expanding its mobile
diagnostic imaging capabilities.  In January, 1995, the Company entered into an
agreement with an established group of cardiologists in Orange Park, Florida to
provide mobile nuclear cardiology imaging services.  In September 1995 the
Company placed into

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operation a fully operational mobile unit to service such group as well as
other cardiological centers and specialists.  See "--NDCI Mobile Services."
The Company's Orange Park facility currently provides mobile ultrasound and
neurological diagnostic imaging services.  The Company expanded the operations
of its Orange Park subsidiary in September, 1995 with the inclusion of  mobile
MRI services.  See "--The Orange Park Facility."

         THERE CAN BE NO ASSURANCES THAT THE COMPANY CAN OR WILL SUCCESSFULLY
IMPLEMENT ITS CENTER GROWTH OR EXTERNAL GROWTH STRATEGIES.

  Imaging Equipment.

         The Company obtains its imaging equipment from large, well-established
companies, including Siemens Medical Systems Inc., Toshiba, Inc., Lo-Red Co.
and Raytheon, Inc. The Company is not dependent on any one supplier and
believes that it has satisfactory relationships with its suppliers.

         Equipment acquisition costs can vary dramatically, depending upon the
model and peripheral equipment acquired.  The Company reviews the technological
capabilities of new product offerings in order to improve and upgrade equipment
when necessary.  Currently, equipment costs range as follows:

<TABLE>
<CAPTION>
                 EQUIPMENT                                         PRICE RANGE
                 ---------                                         -----------
                 <S>                                        <C>                <C>         
                 MRI                                        $900,000  to       $1,700,000
                 CT                                          300,000  to          900,000
                 Ultrasound                                  100,000  to          250,000
                 Nuclear Medicine                            250,000  to          400,000
                 Radiology                                    40,000  to           75,000
                 Fluoroscopy                                 200,000  to          350,000
                 Mammography                                  50,000  to           80,000
                 Neurology                                    25,000  to           60,000
                                                                                         
</TABLE>

         Installation and maintenance costs on the equipment can be
substantial, particularly with respect to MRI units.  Installation costs can
range from $35,000 to $125,000 for an MRI unit, depending on the particular
installation circumstances.

         The Company generally obtains financing for its equipment from lenders
and lessors, with the equipment and other assets serving as security for the
loans.  Leases for smaller medical equipment average three years and leases for
larger medical equipment are for seven years.  Certain of such loans are
personally guaranteed by Mr. Alliston.

  Operations

         The Company provides diagnostic imaging services to patients referred
by physicians who are either in private practice or affiliated with managed
care providers or other groups.  Patients are scheduled for an appointment,
informed of any medications needed for the test, and pre-qualified with respect
to their medical requirements and insurance coverage by Company personnel.
Procedures are designed to avoid the admission and administrative complexities
of in-hospital diagnostic imaging services.  All of the Company's imaging
services are performed on an outpatient basis by trained medical technologists
under the direction of the interpreting physician.  Following the diagnostic
procedures, the images are reviewed by the interpreting physicians, who prepare
a report of these tests and their findings.  These reports are transcribed by
Company


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personnel and then delivered to the referring physicians.  The interpreting
physicians are board certified specialists in radiology, nuclear medicine,
nuclear cardiology or neuroradiology, as appropriate.  Such interpreting
physicians are members of an independent health care provider group with which
the Company has entered into a long-term contract, and are not employees of the
Company.  The Company is not engaged in the practice of medicine.

         Typically, patients are charged an all-inclusive fee for the imaging
studies.  The administrative staff is responsible for billing and collecting
the fee.

         The Company contracts for interpreting  physician services for which
typically the interpreting physician receives a fixed percentage of monthly
collections.  The Company believes that the structure of its compensation
arrangement with its interpreting physicians encourages high quality service
and fairly compensates these physicians for the interpretation services they
provide. The Company's agreement with its interpreting physicians is typically
for a three-year term and requires each physician to obtain medical malpractice
insurance.


THE BRANDON, FLORIDA FACILITY

         The Brandon, Florida facility was established in 1991 as a
full-service diagnostic facility specializing in outpatient radiology.  The
Brandon facility generally provides medical diagnostic services to the general
population living within approximately ten miles of Brandon, Florida.  The
Brandon, Florida area population, currently in excess of 250,000, consists
primarily of an expanding base of middle income families and retirees.  In 1995
and 1996, the Brandon facility generated net revenues of approximately
$3,900,000 and $4,900,000, respectively, reflecting approximately 21,000 and
32,000 respective diagnostic imaging procedures.

         The Brandon facility currently has one unit for each of MRI, CT and
nuclear medicine and two units for each of mammography, radiology, ultrasound
and fluoroscopy.

         Annual expenses for equipment maintenance and repairs at the Brandon
facility were approximately $137,000 and $114,000 for the fiscal years ended
December 31, 1995 and December 31, 1996, respectively.  The Company typically
enters into agreements with equipment manufacturers or other third parties for
equipment maintenance.

         Patients at the Brandon facility are invoiced in the name of Brandon
Diagnostic Center.  The interpreting physician's P.A. with which the Company
has currently contracted for interpreting physician services at the Brandon
facility receives a fixed percentage (fourteen percent) of monthly collections.

         Brandon facility's interpreting physician is certified by the American
Board of Radiology.  The interpreting physician's P.A. is responsible for
subcontracting with additional physicians to assure adequate coverage during
peak times, absences, etc.  The following is a brief biographical summary of
the Brandon facility's principal interpreting physician:

         DR. ROBERT D. MARSHALL, M.D. received his Doctor of Medicine degree
from the University of Miami School of Medicine, Miami, Florida in June, 1974.
Dr. Marshall performed his internship and residency from 1974 to 1978 at the
University of South Florida, School of medicine, Tampa, Florida.  In February,
1987 Dr. Marshall had taken a fellowship in MRI at Huntington Memorial
Hospital, Pasadena, California.  In addition to MRI, Dr. Marshall has received
training and experience in computed tomography, mammography, ultrasound and
nuclear medicine in 1977 and 1978.


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         The Brandon facility is open from 7:30 a.m. to 6:00 p.m. Monday,
Wednesday & Friday, 7:30 a.m. to 8:00 p.m. Tuesday and Thursday, 8:00 a.m. to 
2:00 p.m. on Saturdays and on an as-needed basis on Sundays.

THE SUNPOINT FACILITY

         The Company, through its SunPoint subsidiary, opened its SunPoint
Diagnostic Center in Ruskin, Florida, approximately twenty miles south of
Brandon, in November, 1994.  This facility is located near the Sun City Center
retirement community.  The Ruskin area has a total population of approximately
45,000, including roughly 38,000 retirees.  The SunPoint facility is a
full-service imaging facility, with the exception of MRI.  It currently has one
unit for each of CT, ultrasound, nuclear medicine, mammography, radiology and
fluoroscopy.  The equipment located at the SunPoint facility is obtained from
the same manufacturers as the Brandon facility equipment.

         Consistent with the Company's expansion strategy, the Company intends
to add MRI capabilities to the SunPoint Diagnostic Center only as the demand
for such services develops and warrants the acquisition of MRI equipment.
Until such time, all MRI procedures required by SunPoint facility patients will
be performed at the nearby Brandon facility.  All SunPoint patients requiring
MRI procedures are offered a free shuttle service to and from the Brandon
facility.

         The operational procedures at the SunPoint facility are virtually
identical to those described above under "Operations,"  the patients are
invoiced in the name of SunPoint Diagnostic Center.  The SunPoint facility is
staffed by fourteen employees and one interpreting physician, who rotates with
the other interpreting physician serving the Brandon facility.  The
interpreting physician's P.A. with which the Company has currently contracted
for interpreting physician services at the SunPoint Diagnostic Center receives
a fixed percentage (fourteen percent) of monthly collections.

         The SunPoint facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday, and on an as needed basis on Saturdays.

THE ORANGE PARK FACILITY

         In February, 1995, the Company, through its Orange Park subsidiary,
acquired substantially all of the assets of Medical Imaging Consultants, Inc.
and certain of its affiliates, providers of both mobile and fixed site
ultrasound and related diagnostic testing services in the cardiac, cerebral
vascular and neurophysiology areas.  (See Note 12 to the Consolidated Financial
Statements.)

         Orange Park currently provides mobile and fixed diagnostic services in
Clay, Duval, Nassau and St. Johns counties in northeastern Florida. Its
principal facility is located in Orange Park, Florida, where it has three
mobile units for neurology, two units for ultrasound, one each for  nuclear
cardiology and MRI.  All equipment at the Orange Park facility is either owned
directly or leased through an independent leasing company. The Orange Park
facility became a full service imaging facility, with its mobile Facilities, by
September, 1995.  The Company has one unit for each for CT, ultrasound,
mammography, radiology, and fluoroscopy at its Orange Park subsidiary.  This
mobile unit is used to provide MRI services at Orange Park and any future
facilities developed by the Company in northeastern Florida.  See "--The
Company's Growth Strategy--Center Development and New Center Acquisitions."

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<PAGE>   10

         Orange Park follows the same operational procedures as the Company's
other facilities, except that patients are invoiced directly in the name of
Orange Park.  The Orange Park facility is currently staffed by thirty-four
employees.  All interpreting services are provided by eight interpreting
physicians who are members of an independent health care provider group with
which the Company has entered into a long-term contract.  These physicians are
not employees of the Company and the Company is not engaged in the practice of
medicine.  The interpreting physician group with which the Company has
contracted for interpreting physician services at the Orange Park facility
receives a monthly fee equal to 17% of the  monthly collections.

         The Orange Park facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday, and on an as- needed basis on Saturdays.

THE RIVERSIDE FACILITY

         The Company, through its Riverside subsidiary, opened in July of 1996
the Riverside Diagnostic Center in the Riverside area of Jacksonville, Florida.
The facility is located in proximity of a thousand bed hospital in an old
"upscale" residential area of Jacksonville.  The Riverside facility is a
full-service imaging facility, inclusive of mobile MRI services which it
obtains form the Orange Park facility (see Orange Park Facility).  It currently
has one unit each for CT, ultrasound, nuclear cardiology, nuclear medicine and
radiology and two units each for mammography and fluoroscopy.

         Riverside follows the same operational procedures as the Company's
other facilities, except that patients are invoiced directly in the name of
Riverside.  The Riverside facility is currently staffed by eight employees.
All interpreting services are provided by a group of physicians who received a
percentage (15% of the first $200,000 and 20% thereafter) of monthly
collections.

         The Riverside facility is currently open from 7:30 a.m. to 5:30 p.m.
Monday through Friday.

CARDIOLOGY MOBILE SERVICES

         In January, 1995, the Company, through its cardiology subsidiary,
entered into an exclusive agreement with Diagnostic Cardiology Associates, an
established group of 18 cardiologists based in Jacksonville and other physician
groups in northeast Florida, to provide mobile nuclear cardiology imaging
services.   The Company  acquired a mobile unit and placed it into operation in
September, 1995.  Since then the Company has expanded its operations to
Fernandina Beach, Lake City and Palatka, Florida. The Company will seek to
enter into similar arrangements with other groups of cardiologists, but no
assurances can be made that such opportunities exist or can be realized.  In
May 1996, the wholly owned cardiology company was merged into Orange Park.

MARKETING

         The Company provides diagnostic imaging services to patients referred
by physicians who are either in private practice or affiliated with managed
care providers or groups.  Consequently, the Company's marketing program
focuses on establishing and maintaining referring physician relationships by
efficiently providing needed medical services to patients of those physicians,
and maximizing reimbursement yields.  The Company's marketing program targets
selected market segments consisting of local physicians who may have a need for
diagnostic imaging services.  The Company utilizes a variety of marketing
techniques in its market areas to educate physicians in the availability and
capabilities of the various imaging technologies, including personal visits by
the Company's clinical coordinators to local physicians and their staffs,
direct mailings of marketing


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<PAGE>   11

brochures and participation in seminars on recent developments in diagnostic
imaging and related technology.

         The Company's clinical coordinators seek to maintain the satisfaction
of referring physicians by frequent contact with them, both to ascertain the
physicians' needs and, when appropriate, to seek suggestions on how to improve
the Company's delivery of services.  The Company continually seeks to improve
the quality of its services by encouraging interaction between referring
physicians and interpreting physicians.  The Company has also developed a
database containing referring physician and patient information in order to
more effectively coordinate its marketing activities with respect to its
referring physicians.  The Company has joined the Florida Imaging Network,
Inc., an association recently established to develop and operate a statewide
diagnostic imaging services network to interface with managed care providers in
the State of Florida.  The Company believes that this will provide an
additional method of expanding its referral base.

REIMBURSEMENT, BILLING AND COLLECTION

         The Company charges patients a fee for each imaging study performed,
which is billed in the name of the applicable diagnostic center.  The Company
generally accepts assignment by the patient of payment from insurers and is
reimbursed for services performed by payment, directly and indirectly, from
third-party commercial insurers, managed care organizations, government payors,
workmen's compensation and other sources.  In many instances, the patient is
responsible for payment of a co-payment or deductible and, in some instances,
the patient remains responsible for payment of the entire fee.  The extent to
which services provided by the Company are reimbursable depends upon a number
of factors, including the type of insurance coverage carried by the patient,
the type of imaging services provided to the patient, prevailing practices in
the relevant geographic area and the identity of the third-party payor.

         The following table sets forth the approximate percentages of
collections received during 1996 in each of the following categories:

<TABLE>
<CAPTION>
                                                                       PERCENT OF
                         SOURCE                                        COLLECTIONS
                         -------                                       -----------
                 <S>                                                     <C>
                 Managed Care/HMO                                         33%
                 Private Insurance                                        37
                 Medicare/Medicaid                                        18
                 Private Pay                                               8
                 Workmen's Compensation                                    4
</TABLE>


          The Company maintains a competitive billing strategy based upon
evaluation of available pricing data.  The Company maintains sufficient price
flexibility to enable it to compete with other MRI imaging services provided in
the local community.

          Obtaining the maximum amount of allowable reimbursement and
collecting receivables on a timely basis are critical to the Company's success
and are a priority of management.  The Company has developed and is continuing
to develop systems to process claims.  The Company endeavors to provide
complete and accurate claims data to the relevant payor sources to obtain the
maximum amount of allowable reimbursement and to accelerate the collection of
accounts receivable.  Approximately seventeen of the Company's employees are
involved in reimbursement, billing and collection activities.  There can be no
assurance that the Company will


                                      11
<PAGE>   12

be successful with respect to the foregoing.

          Third-party payors, including Medicare, Medicaid and certain
commercial payors, have taken extensive steps to contain or reduce the costs of
health care.  A significant change in coverage or a reduction in payment rates
by third-party payors could have a material adverse effect upon the Company's
business.  In 1995 and 1996, approximately 0.3% and 0.8%, respectively, of the
Company's total revenues were derived from providing imaging services to
patients involved in personal injury claims.  The Company sometimes experiences
significant collection delays in connection with these services due to the fact
that the Company may not be paid for its services until the underlying legal
action is resolved.

COMPETITION

          The outpatient diagnostic imaging industry is highly competitive.
The Company believes that its principal competitors are hospitals, independent
or management company-owned imaging centers, some of which are owned, in whole
or in part, by physician investors, and mobile diagnostic units.  Some of these
competitors have greater financial and other resources than the Company.  The
Company's competitors in the immediate Brandon area are a 120 bed hospital
providing full inpatient service and a new outpatient diagnostic center opened
in January of 1997.  The Brandon facility has experienced a 1% decline in gross
revenues in the 1st quarter of 1997 compared to 1996 but is not able to
determine if this is from competitor pressures since its case load has
continued to increase.  The Company's sole competitor in the Ruskin area is a
50 bed hospital also providing full inpatient service.  The Company has many
competitors in the Jacksonville area, including hospitals, independent or
management company-owned imaging centers and mobile diagnostic units, but, to
the best of management's knowledge, none of these competitors is a full
modality center offering mobile and fixed site diagnostic imaging services.

          The Company believes that as a result of its operating efficiencies,
it can provide outpatient diagnostic services more competitively than other
local providers.  Principal competitive factors include quality and timeliness
of test results, type and quality of equipment, facility location, convenience
of scheduling and availability of patient appointment times.  The Company may
benefit, or experience increased competition, to the extent proposed or future
regulations will reduce self referrals from physician investors and make their
referrals part of the market for which any center may compete.  The Company
currently has no physician investors and, therefore, derives 100% of its
revenues from non-investor referrals.

GOVERNMENT REGULATION

          The health care industry is highly regulated at the federal, state
and local levels.  Although the following is not an exhaustive discussion, it
summarizes the key regulatory factors that affect the Company's operations and
development activities:

          Certificates of Need and Licensing.  Under Certificate of Need laws,
a health care provider is typically required to substantiate the need for, and
financial feasibility of, certain expenditures related to the construction of
new facilities, commencement of new services or purchases of medical equipment
in excess of statutory thresholds.  The provision of outpatient health
services, including outpatient MRI, is exempt from Certificate of Need review
in the State of Florida.  The operations of outpatient imaging centers are
subject to federal and state regulations relating to licensure, standards of
testing, accreditation of certain personnel and compliance with governmental
reimbursement programs.  The Company is required to obtain and maintain general
business licenses from certain counties in which it operates centers, as well
as licenses from the State of Florida for the 



                                      12
<PAGE>   13
handling and disposal of radioactive materials used in nuclear medicine
procedures.  Radioactive materials are currently delivered daily to the
Company's Brandon, SunPoint and Cardiology  facilities.  Medical waste
contaminated with radioactive material is placed in locked hazardous waste
containers and picked up daily for disposal by a licensed hazardous waste
vendor.  The Company is subject to surprise inspection by nuclear inspectors. 
Although the Company believes that it has obtained all necessary licenses, the
failure to obtain a required license could have a material adverse effect on
the Company's business.  The Company believes that diagnostic testing will
continue to be subject to intense regulation at the federal and state levels
and it cannot predict the scope and effect thereof.

          Medicare/Medicaid Anti-Kickback Provisions.  The Medicare/Medicaid
Anti-Kickback Statute (the "Anti-Kickback Statute") prohibits the offering,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare or Medicaid patients for any item or service that is
covered by Medicare or Medicaid.  Violation of the Anti-Kickback Statute is
punishable by substantial fines, imprisonment for up to five years or both.  In
addition, the Medicare and Medicaid Patient and Program Protection Act of 1987
(the "Protection Act") provides that persons guilty of violating the
Anti-Kickback Statute may be excluded from participating as providers or
suppliers in the Medicare or Medicaid programs.  Investigations leading to
prosecutions and/or program exclusion may be conducted by the Office of the
Inspector General ("OIG") of the United States Department of Health and Human
Services ("HHS"), the United States Department of Justice and State of Florida
agencies.

          Under the Anti-Kickback Statute, law enforcement authorities, HHS and
the courts are increasingly scrutinizing arrangements between health care
providers and referral sources (such as physicians) in order to ensure that the
arrangements are not designed as a mechanism to exchange remuneration for
patient referrals.  This scrutiny is not limited to financial arrangements that
involve a direct payment for patient referrals, but extends to payment
mechanisms that carry the potential for inducing Medicare or Medicaid
referrals, including situations where physicians hold investment interests in,
or compensation arrangements with, a health care entity to which such 
physicians refer patients.

          Safe Harbor Regulations.  The Protection Act directed the OIG to
publish regulations delineating health care payment practices that would not be
subject to criminal prosecution and would not provide a basis for program
exclusion under the Anti-Kickback Statute.  In 1991, the OIG published final
safe harbor regulations that specify the conditions under which certain kinds
of financial arrangements, including (i) investment interests in public
companies, (ii) investment interests in small entities, (iii) management and
personal services contracts, and (iv) leases of space and equipment, will be
protected from criminal prosecution or civil sanctions under the Anti-Kickback
Statute.  The OIG has stated that failure to satisfy the conditions of an
applicable "safe harbor" does not necessarily indicate that the arrangement in
question violates the Anti-Kickback Statute, but means that the arrangement is
not among those that the "safe harbor" regulations protect from criminal or
civil sanctions under that law.

          One provision of the Safe Harbor Regulations includes a public
company exception applicable to investment in the Company by referring
physicians.  The Company currently does not qualify for this exception.  A
return on investment, such as a dividend or interest, is not a prohibited
payment if, within the previous fiscal year or 12 month period, the public
company possesses more than $50 million in  undepreciated net tangible assets
which are related to the furnishing of health care items and services and the
Company meets all five of the following standards:

         i)      Equity securities must be registered with the Commission under
                 15 U.S.C. 78l(b) or (g);



                                      13
<PAGE>   14
         ii)     The investment interest of an investor in a position to make
                 or influence referrals to, furnish items or services to, or
                 otherwise generate business for, the Company must be obtained
                 on terms

                 equally available to the public through trading on a
                 registered national securities exchange or on Nasdaq;

         iii)    The Company or any investor must not market or furnish the
                 Company's items or services to passive investors
                 (non-management shareholders) differently than to
                 non-investors;

         iv)     The Company must not loan funds to or guarantee a loan for an
                 investor who is in a position to make or influence referrals
                 to furnish items or services to, or otherwise generate
                 business for the entity if the investor uses any part of the
                 loan to make the investment; and

         v)      The amount of payment to the investor in return for the
                 investment interest must be directly proportional to the
                 amount of the investor's capital investment.

         The Company does not meet the $50 million net tangible assets
criterion and, therefore, in order to avoid any issue as to fraud and abuse
compliance, a physician who owns any of the Company's securities might be
prohibited from making any patient referrals to the Company's diagnostic
imaging facilities, whether or not the remaining standards have been complied
with.

         With respect to the arrangements between the Company and its
interpreting physicians, there is a safe harbor for personal service agreements
which requires that such arrangements be in writing and last for at least one
year, and that the compensation paid to the physicians be based on the fair
market value of the professional services they provide and not on any referrals
or business generated between the parties.  To the extent that the compensation
arrangements with the interpreting physicians do not fit within all of the
requirements of the safe harbor, they are not per se illegal, but in order to
avoid all risk of fraud and abuse issues, the interpreting physicians would not
be permitted to make any referrals to the Company for imaging services.

         Florida Prohibition of Referrals.  On March 13, 1992, the Florida
Legislature passed the "Patient Self-Referral Act of 1992" (the "1992 Act"),
which took effect April 9, 1992.  The Act, as amended in 1993, prohibits
physicians' referrals of patients for designated health services, including
diagnostic imaging services, to facilities in which they own an investment
interest.  Therefore, physicians who own Common Shares or Common Share Purchase
Warrants are prohibited from making any patient referrals to the Company's
diagnostic imaging facilities.

         Medicare Reimbursement.  Diagnostic imaging services provided to
Medicare beneficiaries are reimbursed based on Medicare's Resource-Based
Relative Value Scale, which sets limits on reimbursement for both the technical
and physician components of these services.  There is no guarantee that the
amount paid by Medicare, either now or in the future, will be adequate to meet
the Company's costs of providing the imaging services.  There is also no
guarantee that the U.S.  Government will not enact law or adopt regulations
restricting the ability of free-standing diagnostic imaging centers from
providing services to Medicare or Medicaid patients, although the Company is
currently unaware of any proposal to do so.

         Omnibus Budget Reconciliation Act of 1993.  As part of the Omnibus
Budget Reconciliation Act of 1993, Congress passed the "Stark II" law, which
prohibits a physician from referring Medicare and other federal program
patients for designated health services, including imaging services, to certain
entities with which the



                                      14
<PAGE>   15

physician or a member of his or her immediate family has a financial
relationship.  A "financial relationship" would include either an ownership
interest in, or compensation arrangement with, the entity.  The Stark II law
has been incorporated into Section 1877 of Title XVIII of the Social Security
Act.  The Company, as a provider of radiology and other diagnostic services,
would be such an entity, and therefore, a physician with such a financial
relationship with the Company could not make referrals of Medicare or Medicaid
business to the Company, unless the relationship falls within one of the
limited exceptions offered by Stark II.  These limitations became effective
January 1, 1995.

         Stark II provides an exception for referrals by a physician who, or a
member of whose immediate family, owned investment securities in a public
entity which may be purchased on terms generally available to the public, but
only if the entity met the following criteria: (i) its securities are listed on
a recognized stock exchange or traded on Nasdaq; and (ii) the entity has at the
end of its most recent fiscal year or on average during the previous three
fiscal years, stockholder equity exceeding $75 million.  The Company does not
meet these criteria and, therefore, a physician who owns Common Shares or
Common Share Purchase Warrants of the Company is prohibited from making
Medicare and other federal program patient referrals to any of the Company's
diagnostic imaging facilities.  The Company also is prohibited from presenting
a claim for services rendered in connection with such a prohibited referral.
It would not be necessary for the Company to have knowledge that the referral
was unlawful in order for there to be a violation for which the penalty could
be denial of payment for the claim or a refund to the payer.  Penalties of up
to $15,000 for each violation and exclusion from Medicare and other programs
could be assessed if a bill is presented and the entity knows or should have
known that it is the result of a prohibited referral.

         Physicians with compensation arrangements with the Company, such as
its interpreting physicians, also are subject to the foregoing referral
prohibition, unless the arrangement fits within a Stark II exception.  Stark II
permits personal arrangements between such physicians and the Company if
various criteria are met, including that the arrangement is set out in writing,
has a duration of at least one year and the compensation paid to the physicians
represents the fair market value of the professional services provided and does
not take into account the volume or value of any referrals or other business
generated between the parties.  Stark II also specifically states that a
prohibited referral does not include a request by a radiologist for diagnostic
radiology services if such services are furnished by or under the supervision
of that radiologist.

         To its knowledge the Company currently does not have any physicians
who are significant shareholders and, therefore, the Company's revenue growth
has been derived entirely from non-investor physician referrals.  In the event
the Company has physician shareholders in the future federal and state law will
prohibit referrals by such investors to any of the Company's imaging  centers.

         As a provider of diagnostic services, the Company is required to
report the names and unique identification number of physicians who, or whose
immediate family members, have an investment interest in or compensation
arrangement with the Company.  The Company's current shareholders are not
physicians and, therefore, do not provide referrals in potential violation of
the foregoing provisions.  In the future, however, many of the Company's Common
Shares or Warrants may be held by physicians or their immediate family members
or in "street name", and therefore, not readily subject to discovery.
Management believes that monitoring of such ownership would be extremely
difficult.  However, management is investigating methods of minimizing its
exposure to inadvertently accepting a prohibited referral.  Management will
also assess and monitor its compensation arrangements with physicians.

         Although the Company believes that it is in material compliance with
all applicable federal and state laws


                                      15
<PAGE>   16

and regulations, there can be no assurance that such laws or regulations will
not be enacted, interpreted or applied in the future in such a way as to have a
material adverse impact on the Company, or that federal or state governments
will not impose additional restrictions upon all or a portion of the Company's
activities, which might adversely affect the Company's business.

EMPLOYEES

         As of March 31, 1997, the Company had 113 employees (all full time),
including 3 executive officers, 68 administrative personnel, 2 sales and
marketing person and 40 technical personnel.  The Company is not a party to any
collective bargaining agreement and considers its relationship with its
employees to be good.

INSURANCE

         The Company  carries workmen's compensation insurance, comprehensive
and general liability coverage, fire and allied perils coverage in amounts
deemed adequate by management.  The Company is not engaged in the practice of
medicine and, therefore, does not carry medical malpractice insurance.  See
"Risk Factors." There is no assurance that potential claims will not exceed the
coverage amounts, that the cost of coverage will not substantially increase or
require the Company to insure itself or that certain coverages will not be
reduced or become unavailable.  The Company also requires that physicians
practicing at the imaging centers carry medical malpractice insurance to cover
their individual practices.  The interpreting physicians are responsible for
the costs of this insurance.


ITEM 2 -- DESCRIPTION OF PROPERTY

         The Company's executive office and its primary diagnostic facility are
located in Brandon, Florida and occupy approximately 11,325 square feet of
space.  The Company entered into a lease with respect to such facilities on
September 1, 1994, expiring August 31, 1997, which is followed by a renewal
option of five years.  The new lease consolidated prior leases pertaining to
the Brandon facility's then existing space and provided additional space to
accommodate the Company's Center for Women.  Under both prior leases and its
existing lease, the Company paid an aggregate of approximately $126,000
(including common area maintenance and real estate taxes) in fiscal 1996 for
space at such facility.  Pursuant to the lease terms, the annual
rental for the Brandon facility is subject to an annual escalation of up to
four percent based upon the Consumer Price Index.  Additionally, the annual
rental is subject to a one-time 10% escalation upon the Company's exercise of
its renewal option.

         The Company entered into a month to month  lease for 1,500 square feet
of office space in Jacksonville to serve as the Company's northeast Florida
regional office.  Annual rent approximates $18,000.  The lease for this space
is with Ronald Baugh, the President and Chief Operating Officer of Orange Park.

         The Company also has entered into a lease relating to its 6,390 square
foot SunPoint facility in Ruskin, Florida.  The initial term of the Ruskin
lease is five years, beginning September 1, 1994, with one five year renewal
option.  Base rental payments (excluding common area maintenance and real
estate taxes) under the lease will be approximately $23,000 in 1995 and $48,000
annually thereafter.  Pursuant to the lease terms, the annual rental for the
Ruskin facility is subject to a four percent annual escalation after 1996.


                                      16
<PAGE>   17

         Orange Park had based its mobile operations from a leased facility in
Middleburg, Florida from Ronald Baugh, the President and Chief Operating
Officer of Orange Park, on a month-to-month basis.  In July of 1995, Orange
Park moved to a 5,100 square foot fixed site facility located in Orange Park,
Florida and owned by Sundance Partners, a Florida general partnership in which
all general partners were directors and/or shareholders of the Company.  A
triple net lease was entered into with an initial term of ten years, beginning
April 1, 1995.  Base rental payments under the lease are approximately $ 44,000
annually.  Rent expense including common  area maintenance for 1996
approximated $58,000. The facility was owned by a general partnership
(Sundance).  The Company's majority stockholders owned a majority interest in
the Sundance.  Effective December, 1995, The Company purchased a 100% interest
in the general partnership by issuing stock valued at $51,057 and assumed a
mortgage note for $295,279.  The underlying assets in the partnership appraised
at over $600,000.

         The Company entered into a triple net lease for its Riverside facility
(which opened in July of 1996) with Sundance Partners II, a Florida general
partnership in which the general partners are officers/directors and majority
shareholders of the Company.  The facility is a newly constructed 7,100 square
foot stand alone medical center constructed to Company specifications.  The
lease has an initial term of five years with a one time renewal option for five
more years.  Base rental payments are $110,050 annually.  The base rent shall
escalate up each year by $.25 per square foot.  Rent expense for 1996
approximated $58,000.

         The Company believes its present and anticipated leased facilities to
be in excellent condition and suitable for their intended operations.

ITEM 3 -- LEGAL PROCEEDINGS

         In December, 1995 the physician group which contracted with Brandon
and SunPoint for radiology readings terminated the contract.  On February 9,
1996 the physician group filed a suit entitled East Pasco Radiology Associates,
P.A. vs. Brandon Diagnostic Center, Ltd., and SunPoint Diagnostic Center, Inc.
in the Hillsborough County Florida Circuit Court against the Company alleging
the centers materially breached the contract by failing to pay physician fees
timely and incorrectly billing certain procedures.  The physician group sought
payment for services rendered (approximately $178,000) and lost profits
(approximately $850,000).  In February of 1997, the court denied the claim for
lost profits and entered an award in favor of the physician group relating to
services rendered.  The Company adequately reserved for the claim for services
and satisfied the judgement in February of 1997.  Subsequently, a motion by the
physicians for a rehearing was denied. The physicians filed a notice of appeal
for the lost profits claim in April, 1997. Also a motion for costs relating to 
the law suit (approximately $10,000) was filed by the physicians group.  The
company believes the costs to be substantially less than the amount claimed and
intends to contest the amount.

         On March 10, 1995 legal action was instituted against A.T. Brod & Co.,
Inc. (a national stock brokerage firm) by a terminated employee of A. T. Brod &
Co., Inc ("A.T. Brod").  A. T. Brod was a major market maker for National
Diagnostic, Inc. stock.  The Company was named in the suit entitled James I.
Blackey vs. A.T. Brod & Co., Inc., Arthur M. Stupay, Jugal Taneja, R.K. Khosla,
Bancapital Investment Corporation, and National Diagnostics, Inc. pending the
Supreme Court of the State of New York, County of Erie, Index Number
I-1995-2249.  Mr. J. Taneja is Chairman, Chief Executive Officer and Director
of both A. T. Brod and the Company.  The action alleges wrongful discharge,
breach of contract, deformation of character, conspiracy and tortious
interference with a contract arising out of the alleged wrongful termination of
the plaintiff by A.T. Brod and seeks compensatory and punitive damages of
$2,830,000.  In April of 1997 the Company reached a settlement for $5,000 
which has been fully paid by the Company.


                                      17
<PAGE>   18

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

         No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.

                                    PART II

ITEM 5 -- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Since October 12, 1994, the Company's Common Shares have been traded
separately in the Nasdaq SmallCap Market under the symbol NATD.  The following
table sets forth the high and low bid prices for Common Shares as reported by
Nasdaq for the periods indicated.  These prices are not necessarily indicative
of prices at which actual buy and sell transactions could occur.



<TABLE>
<CAPTION>
                                                            HIGH             LOW
                                                            ----             ---
<S>      <C>                                                <C>              <C>
1994     

         Fourth Quarter (from October 12)                   $4-3/4           $3
1995

         First Quarter                                      $6-1/4           $1-7/8
         Second Quarter                                     $4               $1-1/2
         Third Quarter                                      $1-7/8           $1
         Fourth Quarter                                     $3-1/2           $1-11/16
1996
         First Quarter                                      $3-3/8           $2-5/16
         Second Quarter                                     $4-1/2           $2-1/2
         Third Quarter                                      $4               $2-1/2
         Fourth Quarter                                     $2-3/4           $1-11/16
1997
         First Quarter                                      $2-7/16          $1-1/4
</TABLE>


         On April 10, 1997, the closing bid quote for the Common Shares was
$1.62 per share, and there were 42 holders of record of Common Shares.  The
majority of over 300 individual shareholders held their stock in a "street
name".

         The Company has not paid cash dividends on its Common Shares and does
not anticipate doing so in the foreseeable future.  The Company intends to
retain earnings, if any, for future growth and expansion opportunities.
Payment of cash dividends in the future, as to which there can be no assurance,
will be dependent upon the Company's earnings, financial condition, capital
requirements and other factors determined to be relevant by the Board of
Directors.


                                      18
<PAGE>   19

ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's audited consolidated financial statements included elsewhere herein.
Due to the Company's net loss for 1996 of $1,241,661, and operating losses 
for 1996 and 1995 which resulted in an accumulated deficit of $2,048,165, at
December 31, 1996, our independent certified public accountants have qualified
their accountants' report dated March 20, 1997, on the Company's 1996 financial
statements as to a going concern uncertainty. The following commentary within
"Management Discussion and Analysis" addresses the Company's operations for
1996 and its plan to improve future results. These matters are also discussed
in Note 2k to the financial statements.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.

         Net revenues for fiscal 1996 were $8,877,000 as compared to $6,233,000
for fiscal 1995, representing an approximately 42% increase. This increase was
primarily attributable to new start up facilities and an increase in the volume
of procedures performed at pre-existing facilities. Orange Park mobile
operations started up in February 1995, opening a fixed site facility in
August; and in September a mobile MRI facility and a mobile cardiology unit
were placed in service. Riverside operations started up in July, 1996. The
start up facilities accounted for approximately $1,344,000 of the increase in
revenues. The Brandon facility increased its revenues $1,005,000 or
approximately 26% to $4,927,000 in 1996. SunPoint increased its revenues
$314,000 or approximately 30% to $1,276,000 in 1996.

         The Company's net accounts receivable increased $630,000 to $2,131,000
from $1,501,000 at December 31, 1996 and 1995, respectively. Approximately 52%
of this increase is the direct result of the Company's start up operations
inclusive of the Orange Park Center opened in August, 1995. The cash position
of the Company decreased to $104,000 from $128,000 at December 31, 1996 and
1995, respectively.

         The following table sets forth selected operating results as a
percentage of net revenues for 1996 as compared to 1995.


<TABLE>
<CAPTION>
                                                                FISCAL 1996                        FISCAL 1995
                                                                -----------                        -----------
<S>                                                               <C>                                <C>
Net Revenue                                                       100.0%                             100.0%
Direct Operating Expenses                                          54.6                               56.0
General and Administrative Expense                                 40.3                               42.3
Depreciation and Amortization                                      13.6                               14.2
Operating loss                                                     (8.6)                             (12.6)
Interest                                                            6.3                                5.3
Other Income                                                        0.1                                1.7
Income Taxes (benefit)                                                0                               (2.9)
Net Loss                                                          (14.0)                             (13.3)
</TABLE>

         Direct operating expenses increased approximately 38% to $ 4,850,000
for 1996 from $3,495,000 for 1995. This increase is a direct result of the
increased number of diagnostic procedures performed in 1996 compared to the
preceding year. Direct costs as a percentage of net revenue decreased
approximately 2% from the preceding year. This is attributable to various costs
that do not vary proportionately with net revenue. Rents increased approximately
2% as a percent of revenues primarily from the costs associated 


                                      19

<PAGE>   20

with the operating lease for the Orange Park mobile MRI which completed its
first full year of operation. In addition, radiology reading fees as a percent
of net revenue decreased approximately 3% due to the more favorable contracts
the Company entered into for 1996; wages decreased approximately 1% as a percent
of net revenue due to increased efficiencies.

         General and administrative expenses increased approximately 35% to
$3,576,000 for 1996 as compared to $2,635,000 for 1995. This increase was
primarily attributable to the addition of personnel and the related payroll and
related benefit costs associated with such personnel. Such personnel costs
increased approximately $631,000 to $1,986,000 inclusive of executive
compensation. The personnel were added in response to the expansion of
facilities and increased volume of procedures performed. Executive compensation
increased from approximately $468,000 in 1995 to $555,000 in 1996 as a result
of the employment of two additional executives in 1995 receiving their first
full year of salary in 1996. General and administrative expenses also increased
because of current operating expenses for start-up operations relating to the
addition of Riverside (an increase of $137,000 exclusive of personnel related
costs).

         Depreciation (depreciation expense approximating $1,085,000) and
amortization increased 36% to $1,210,000 in 1996 as compared to $890,000 during
1995, while decreasing as a percentage of net revenue. The dollar increase was
principally attributable to the acquisition of new equipment for the start-ups
and amortization (approximately $50,000) of previously capitalized start-up
costs which are amortized over 12 months commencing with the date of first
patient services.

         Interest expense increased to $564,000 in 1996 from $334,000 in 1995
as a result of additional financing for equipment acquisitions and working
capital.

         The increase in net revenues was offset by a greater increase in
expenses resulting in a net loss of $1,242,000 for 1996 compared to a net loss
of $835,000 in 1995. This is primarily attributable to the start up operations
which bear the costs of a fully operational diagnostic facility while building
its patient and referring physician base from day one. Orange Park in its first
full year of operation has a loss of $ 898,000. Riverside in its six months of
operation has a loss of $511,000. Revenues increased steadily; however, the
ramp up of revenues for the new starts did not meet the Company's expectations.
The Company has responded in the first quarter of 1997 by terminating certain
management and executive personnel and placing additional emphasis on marketing
for the new start ups. The Company estimates this will save approximately
$150,000 in executive compensation. Additionally, the Board has acted effective
of January 1, 1997 to eliminate C.E.O. and C.O.O. bonuses ( in the 1996 this
approximated $136,000) until the Company becomes profitable for two consecutive
quarters.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994.

         Net revenues for fiscal 1995 were $6,232,515 as compared to $3,708,603
for fiscal 1994, representing a 68% increase. This increase was primarily
attributable to new start up facilities and an increase in the volume of
procedures performed at pre-existing facilities. SunPoint completed its first
full year of operation (two months operation in 1994); Orange Park mobile
operations started up in February 1995, opening a fixed site facility in
August; and in September a mobile MRI facility and a mobile cardiology unit
were placed in service. The 1995 start ups accounted for approximately 52% of
the increased in revenues. The Brandon facility increased its revenues 8% to 
$3,922,000 in 1995.


                                      20


<PAGE>   21

         The Company's net accounts receivable increased $886,145 to $1,500,841
from $614,696 at December 31, 1995 and 1994, respectively. Approximately 87% of
this increase is the direct result of the Company's start up operations
inclusive of the SunPoint Diagnostic Center, Inc. opened in November, 1994. The
cash position of the Company decreased to $128,094 from $1,497,510 at December
31, 1995 and 1994, respectively. Approximately 23% or $309,000 of this decrease
was a result of the Company's operational losses (for further discussion
regarding cash and liquidity see "Liquidity and Capital Resources").

         The following table sets forth selected operating results as a
percentage of net revenues for 1995 as compared to 1994.


<TABLE>
<CAPTION>
                                                               FISCAL 1995                        FISCAL 1994
                                                               -----------                        -----------
<S>                                                               <C>                                <C>
Net Revenue                                                       100.0%                             100.0%
Direct Operating Expenses                                          56.0                               44.4
General and Administrative Expense                                 42.3                               27.8
Depreciation and Amortization                                      14.2                               15.2
Operating Income (loss)                                           (12.6)                              12.6
Interest                                                            5.3                                7.3
Other Income                                                        1.7                                0.3
Income Taxes (benefit)                                             (2.9)                               0.2
Net Income (Loss)                                                 (13.3)                               5.4
</TABLE>

         Direct operating expenses increased 112.3% to $3,494,691 for 1995 from
$1,646,175 for 1994, also increasing as a percentage of net revenue. This
increase is attributable to several factors: (1) an increase in certain costs
which do not vary proportionately with revenue changes (example: rents
increased approximately $147,000 to $189,915 and compensation for start ups and
expansion which increased approximately $493,000 to $898,317.) and (2)
increased fee expense to the Company for its interpreting physicians for
Brandon in accordance with the terms of their agreement (an increase of
approximately $234,000 to $786,713). The increase was also a result of the
additional cost of medical supplies resulting from the increase in the volume
of procedures performed.

         General and administrative expenses increased 155.8% to $2,639,696 for
1995 as compared to $1,031,807 for 1994, also increasing as a percentage of net
revenue. This increase was primarily attributable to the addition of personnel
and the related payroll and related benefit costs associated with such
personnel. Such personnel costs increased approximately $826,000 to $1,178,440
inclusive of executive compensation. The personnel were added in response to
the expansion of facilities and increased volume of procedures performed.
Executive compensation increased from approximately $163,000 in 1994 to
$468,000 in 1995 as a result of changes in employment contracts (see Note 11 to
the financial statements) and the employment of two additional executives in
1995. General and administrative expenses also increased more rapidly than net
revenues because of start-up operations relating to the addition of Orange Park
and Cardiology (an increase of $477,000 exclusive of personnel related costs).
Additionally, the Company took a charge of $82,000 against earnings
representing costs associated with a secondary stock offering which the Board 
determined not to be in the best interest of the Company due to market 
conditions.

                                      21


<PAGE>   22

         Depreciation and Amortization increased 58.3% to $889,530 in 1995 as
compared to $561,767 during 1994, while decreasing as a percentage of net
revenue. The dollar increase was attributable to the acquisition of new
equipment for the start-ups and amortization of previously capitalized start-up
costs which are amortized over 12 months.

         Interest expense increased to $334,499 in 1995 from $273,466 in 1994
as a result of additional financing for equipment acquisitions and working
capital.

         The increase in net revenues was offset by greater increases in
expenses resulting in a net loss of $835,058 for 1995 compared to a net profit
of 119,535 in 1994. This is primarily attributable to the start up operations
which bear the costs of a fully operational diagnostic facility while building
its patient and referring physician base from day one. Revenues have steadily
increased through out the year while operating losses have been declining since
the second quarter high.

LIQUIDITY AND CAPITAL RESOURCES

         Medical equipment, capital improvements, acquisitions and new center
development historically have been funded through third-party capital lease and
debt obligations and internally generated cash flow. The leases are generally
secured by the equipment, and sometimes other assets, of particular facilities.
Interest rates in connection with the leases and borrowing range from fixed
rates of up to 14.5% to a variable rate equal to the bank prime rate, plus 1 to
2%. The Company at December 31, 1996 was and currently is in default exclusive
of the receipt of a recent waiver of its capital lease obligations due to late
payments of approximately $497,000 as a result of its liquidity problems
discussed more fully below. Generally, while in default the lessor may
accelerate the lease obligation (at December 31, 1996 total long-term portion of
all leases approximated $3,454,000). The Company has received notification from
its major lessor indicating they will work with the Company if the Company will
adhere to a work out schedule where in all leases will be brought to a current
status by December 31, 1997. The agreement is predicated upon the Company making
a $200,000 payment toward arrearages by April 25, 1997. The Company has 
currently paid the $200,000; a portion of which came out of proceeds from a
second mortgage note given on its Sundance property. The other remaining lessors
(approximately 17% of the total loans outstanding at December 31, 1996) have
been cooperating with the Company, generally allowing not more than 60 days past
due on lease payments. There is no assurance the Company will be successful in
achieving these goals.

         Capital expenditures, including capital lease obligations, for the
years ended December 31, 1996 and 1995 totaled approximately $2,930,000 and
$2,610,000, respectively. The Company anticipates capital expenditures of
approximately $247,000 during 1997. The Company has already entered into a
$197,000 capital lease for an equipment upgrade the Company took receipt of in
the first quarter of 1997. In December the Company obtained bank financing for
a $150,000 new non-surgical mammography biopsy unit which will expand the
Company's Women Center in the Brandon Facility. The Company took delivery of
the unit in the 1st quarter of 1997.

         The Company intends to curtail further external expansion (new
start-ups or acquisitions) until the Company's current new start-ups achieve
acceptable levels of operation, and/or the Company achieves additional capital
infusion. In 1996 the Company retained the services of an investment banking
firm to explore strategic alternatives designed to maximize stockholder value.
The Company is currently considering different alternatives which includes but
are not limited to capital infusion and/or merger or sale of the Company.


                                      22


<PAGE>   23

         In September 1996, the Company refinanced with South Hillsborough
Community Bank a $216,000 equipment term loan (at prime rate plus 1%)
previously financed with another financial institution. The Company also
entered into a $2,000,000 line of credit with DVI Business Credit Corporation
("DVI", a lender specializing in medical receivables). The lender has a first
security interest on all accounts receivable. Interest is at prime plus 1.6%.
Initial proceeds from the line went to pay off $517,000 of existing lines of
credit with other financial institutions leaving approximately $380,000 to fund
current operations. At year end the line availability and loan balance
approximated $131,000 and $1,125,000, respectively. At March 31, 1997 the line
availability and loan balance approximated $15,000 and $1,059,000,
respectively.

         In February of 1997 the Company settled its litigation with its prior
radiologists (see Item 3-Legal Proceedings). The settlement plus legal fees
approximated $205,000. This amount was borrowed from DVI in 1997 at an interest
rate of "base" plus 3% (at March 31, 1997 11.5%). The loan calls for 28 weekly
payments of $7,500; the balance to be paid in full by August 29, 1997. The loan
is secured by accounts receivable and is being paid out of current collections.
The Company is current with its payments. In March of 1997, the Company
borrowed $125,000 from a related party corporation (majority owned by Messrs.,
Taneja and Alliston). The proceeds were used to pay property taxes. The loan is
due April 29, 1997 and is expected to be paid out of receipts from overdue
providers payments.

         Due to the rapid expansion of facilities and increases in additional
personnel and related costs the Company has continued to experience difficulty
in meeting timely its current obligations to its lessor (discussed above) and
trade creditors. As of year end and as of March 31, 1997, the Company has past
due payables in the amount of $705,000 and $959,000, respectively. Most of the
vendors have accepted late payments. However, certain vendors will ship only on
a cash on delivery basis. The Company has been able to operate to date with no
lost revenues; however, how long it can continue in this manner cannot be
determined. The Company has identified cost cutting measures which will
approximate an annual savings of $286,000. These cost cutting measures were
instituted in the first quarter of 1997.

         In 1996 the Company reduced its net cash by $24,000. Operations
contributed $464,000 of the total cash increases. Purchases of equipment
approximating $794,000 for expansion and new start-ups contributed totally to
the cash reduction. Financing contributed $306,000. Equipment acquired through
capital leasing approximated $2,136,000.

         The Company is currently negotiating a contract that would accelerate
the ramp up of its newest start-up facility. If the Company is successful in
obtaining the contract it could result in an estimated increase in net revenues
of approximately $500,000 to $800,000. As a result of its cost cutting
measures, increasing revenues coupled with an accelerated ramp up of its newest
start-up, satisfaction of its property and equipment needs for current
operations, and if the Company's vendors and lessors continue to allow a grace
period of sixty to ninety days, the Company believes that its presently
anticipated short-term needs for operation, capital repayments and capital
expenditures for its current operations can be satisfied through internally
generated funds and existing credit facilities with DVI. The Company feels that
its ability in the short-term to improve its working capital is positive;
however, marginal. Therefore, the Company is currently discussing capital
infusion alternatives which may consist of selling additional stock. Should the
above possibilities not materialize and to assure continued operations the
Company is prepared to sell off certain assets that have not yet matured
sufficiently to allow a positive return. There is no assurance that these
short-term needs can be met.

         The Company's long term growth strategies will require additional
funds. In the event that the Company proceeds with the establishment of
additional facilities, or encounters favorable acquisition opportunities in the

                                      23


<PAGE>   24
near future, the Company may incur, from time to time, additional indebtedness
and attempt to issue equity or debt securities in public or private
transactions. There is no assurance that the Company will be successful in
securing additional financing or capital through equity or debt securities.

          The Company's determination whether to proceed with new facilities in
Florida or elsewhere in the southeastern United States will depend on
management's consideration of such factors as (i) the demographics of a
particular area, (ii) competition from other diagnostic service providers in
such area, (iii) physician referral patterns, (iv) the mix of managed care
providers, Medicare/Medicaid patients and patients insured by commercial
insurance carriers, (v) estimates of potential sales in relation to the capital
investment required to establish a facility, (vi) the availability of
commercial lease property for a start-up facility, and (vii) financial analysis
of potential acquisition targets.

         The Company has over the last few years experienced increased
pressures on reimbursement from third parties. The Company expects such
pressures to cause reduced pricing in the aggregate for diagnostic procedures
in the future. Due primarily from the Company's revenue mix the effects of
reduced pricing have been minimized. Approximately 49% of the company's revenue
has been derived from private insurance carriers, individuals, worker's
compensation and other sources that have not experienced reimbursement
pressures characteristic of managed care providers, Medicare and Medicaid.
Additionally, the Company has entered into certain capitation contracts with
minimum flooring reimbursements which the Company believes will ultimately
bring new found business to the Centers. The capitation contracts are fixed fee
arrangements made with HMO's wherein the Company receives a fixed fee per HMO
participant regardless of whether the participant receives patient services or
not. A minimum floor reimbursement (example: approximately 70% of the Medicare
allowable rate) is agreed to which serves to minimize the risk to the Company
should an excess number of participants require patient services. The advantage
to the Company results when the aggregated fixed fee per HMO participant
exceeds the fees earned from actual HMO participant patient services rendered.
Additionally, the Company may obtain regular fee for service revenues from
referred HMO participants for services not covered under the capitation
contract.

SEASONALITY

         The Company usually experiences approximately an 8 to 12% decrease in
revenues during the third quarter of the fiscal year due to reduced activity
during the summer months. This trend was not evident in 1996 due to the upward
trend for services experienced in the new start ups.

EFFECTS OF INFLATION

         The impact of inflation and changing prices on the Company has been
primarily limited to salary, medical and film supplies and rent increases and
has not been material to the Company's operations to date. Management is aware
of increased inflationary expectations and believes that the Company may not be
able to raise the prices for its diagnostic imaging procedures in an amount
sufficient to offset inflation. The Company, however, does believe that this can
be offset by increased volume.


                                      24



<PAGE>   25

ITEM 7 -- FINANCIAL STATEMENTS

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                                              <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...............................................................26

CONSOLIDATED BALANCE SHEETS

         As of December 31, 1996 and 1995........................................................................27

CONSOLIDATED STATEMENTS OF OPERATIONS

         Years ended December 31, 1996 and 1995..................................................................29

CONSOLIDATED STATEMENTS OF CASH FLOWS

         Years ended December 31, 1996 and 1995..................................................................30

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

         Years ended December 31, 1996 and 1995..................................................................32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................................33
</TABLE>

                                      25


<PAGE>   26






              Report of Independent Certified Public Accountants

Board of Directors
National Diagnostics, Inc.

We have audited the accompanying consolidated balance sheets of National
Diagnostics, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated financial position of National
Diagnostics, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared, assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,241,661 during the year ended December 31,
1996, and, as of that date, the Company has a retained earnings (accumulated
deficit) of $(2,048,165) and a working capital (deficiency) of $(2,159,581). The
working capital deficiency has required the Company to extend the payment of
certain of its obligations, including those associated with capital leases which
contain acceleration provisions, some of which have been conditionally waived on
either a formal or informal basis. The Company's ability to fund its operations
and meet its obligations in 1997 will be dependent upon the Company improving
its overall level of profitability and/or obtaining additional financing or an
infusion of capital. These factors, among others, addressed in Note 2k raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 2k. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                                       GRANT THORNTON LLP

Tampa, Florida
April 9, 1997 (except for
paragraph three of Note 6, as
to which the date is April 25, 1997)

                                      26


<PAGE>   27



                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS

                                    ASSETS


<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,                      DECEMBER 31,
                                                                                     1996                               1995
                                                                                  ------------                      ------------
<S>                                                                               <C>                               <C>
Current assets:
  Cash                                                                            $    104,335                      $    128,094
  Accounts receivable, net of allowances of $664,402 and
     $342,900 in 1996 and 1995, respectively                                         2,131,284                         1,500,841
  Prepaid expenses and other current assets                                            220,864                           301,761
                                                                                  ------------                      ------------

             Total current assets                                                    2,456,483                         1,930,696
                                                                                  ------------                      ------------

Property and equipment                                                               9,481,198                         6,732,150
  Less:  accumulated depreciation and
     amortization                                                                   (3,264,655)                       (2,197,420)
                                                                                  ------------                      ------------

              Net property and equipment                                             6,216,543                         4,534,730
                                                                                  ------------                      ------------

Other assets:

  Excess of purchase price over net assets acquired,
     net of accumulated amortization of $61,274 and
     $36,547 in 1996 and 1995, respectively                                            428,187                           452,914
  Deposits                                                                              47,444                            53,115
  Other                                                                                 51,020                            57,805
                                                                                  ------------                      ------------


              Total other assets                                                       526,651                           563,834
                                                                                  ------------                      ------------


                                                                                  $  9,199,677                      $  7,029,260
                                                                                  ============                      ============
</TABLE>



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

                                      27


<PAGE>   28


                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                    LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,                      DECEMBER 31,
                                                                                      1996                              1995
                                                                                   ------------                     ------------
<S>                                                                                <C>                              <C>
Current liabilities:
  Lines of credit                                                                  $    993,818                     $    409,500
  Notes due to related parties                                                           99,882                           49,243
  Note payable, other                                                                     4,294                            8,000
  Current installments of long-term debt                                                105,410                          100,487
  Current installments of obligations under
     capital leases                                                                   1,103,952                          648,909
  Accounts payable                                                                    1,080,236                          604,479
  Accrued radiologist fees                                                              489,785                          225,815
  Accrued expenses, other                                                               738,687                          411,262
  Due to related party                                                                 -                                  57,231
                                                                                   ------------                     ------------

             Total current liabilities                                                4,616,064                        2,514,926


Long-term liabilities:
  Long-term debt, excluding current installments                                        619,227                          541,124
  Obligations under capital leases,
     excluding current installments                                                   3,454,456                        2,489,444
  Deferred lease payments                                                               236,912                          210,335
                                                                                   ------------                     ------------

             Total liabilities                                                        8,926,659                        5,755,829
                                                                                   ------------                     ------------

Commitments and contingencies                                                          -                                -

Stockholders' equity:
  Preferred stock, no par value, 1,000,000
     shares authorized, no shares issued
     and outstanding                                                                   -                                -
  Common stock, no par value, 9,000,000
     shares authorized, 2,628,577 and 2,539,629 shares
     issued and outstanding in 1996 and 1995                                                686                              668
  Additional paid-in capital                                                          2,320,497                        2,079,267
  Retained earnings, (accumulated deficit)                                           (2,048,165)                        (806,504)
                                                                                   ------------                     ------------

             Net stockholders' equity                                                   273,018                        1,273,431
                                                                                   ------------                     ------------

                                                                                   $  9,199,677                     $  7,029,260
                                                                                   ============                     ============
</TABLE>


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


                                      28


<PAGE>   29



                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                   YEAR ENDED                       YEAR ENDED
                                                                                   DECEMBER 31,                     DECEMBER 31,
                                                                                   1996                              1995
                                                                                ---------------                   --------------
<S>                                                                             <C>                               <C>
Net revenue                                                                     $     8,876,652                   $    6,232,515
                                                                                ---------------                   --------------

Operating expenses:
  Direct operating expenses                                                           4,850,088                        3,494,691
  General and administrative                                                          3,576,087                        2,634,973
  Depreciation and amortization                                                       1,210,245                          889,530
                                                                                ---------------                   --------------

             Total operating expenses                                                 9,636,420                        7,019,194
                                                                                ---------------                   --------------

             Operating loss                                                            (759,768)                        (786,679)

Interest expense                                                                        563,951                          334,499
Other income                                                                             82,058                          106,120
                                                                                ---------------                   --------------

Loss before income taxes                                                             (1,241,661)                      (1,015,058)

Income tax (benefit)                                                                    -                               (180,000)
                                                                                ---------------                   --------------

Net loss                                                                        $    (1,241,661)                  $     (835,058)
                                                                                ===============                   ==============

Loss per common share                                                           $          (.48)                  $         (.44)
                                                                                ===============                   ==============

Weighted average number of common
  shares outstanding                                                                  2,579,380                        1,887,672
                                                                                ===============                   ==============
</TABLE>




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


                                      29

<PAGE>   30


                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED                       YEAR ENDED
                                                                                  DECEMBER 31,                     DECEMBER 31,
                                                                                      1996                            1995
                                                                                ---------------                  ---------------
<S>                                                                             <C>                              <C>
Cash flows from operating activities:
  Net loss                                                                      $    (1,241,661)                 $      (835,058)

  Adjustments to reconcile net loss to net cash provided (used) by operating
     activities:
        Depreciation and amortization                                                 1,210,245                          889,530
        Increase in accounts receivable allowances                                      321,502                          244,300
        Deferred income taxes                                                           -                               (169,000)
        Warrants issued for services                                                      8,000                          -
        Gain (loss) on disposition of equipment                                          23,551                          (37,712)
        Increase in accounts receivable                                                (951,945)                      (1,130,445)
        Increase (decrease) in prepaid expenses and
           other assets                                                                  (9,026)                        (277,539)
        Increase  in accounts payable and
           accrued expenses                                                           1,067,152                          740,499
        Increase due to related party                                                    10,067                          -
        Decrease in income taxes payable                                                 -                               (11,000)
        Increase in deferred lease payments                                              26,577                          210,335
                                                                                ---------------                  ---------------

        Net cash provided (used) by operating activities                                464,462                         (376,090)
                                                                                ---------------                  ---------------

Cash flows used in investing activities:
        Purchases of property and equipment                                            (793,870)                      (1,204,763)
        Payment for purchase of Orange Park                                             -                                (62,000)
                                                                                ---------------                  ---------------

        Net cash used in investing activities                                          (793,870)                      (1,266,763)
                                                                                ---------------                  ---------------

Cash flows provided by (used in) financing activities:
        Proceeds from issuance of common stock, net                                     165,950                           84,800
        Proceeds from borrowings on line of credit                                      584,318                          409,500
        Proceeds from note payable                                                        4,294                            8,000
        Repayment of note payable                                                        (8,000)                        -
        Proceeds from borrowings on long-term debt                                      164,358                          415,464
        Repayment of long-term borrowings                                               (81,332)                         (84,518)
        Proceeds of borrowing from related parties                                       67,306                          106,474
        Repayment of related parties borrowings                                         (16,667)                         -
        Repayment of other notes payable                                                -                               (102,187)
        Principal payments under capital lease obligations                             (580,249)                        (524,515)
        Decrease (increase) in deposits                                                   5,671                          (39,581)
                                                                                ---------------                  ---------------

        Net cash provided by financing activities                                       305,649                          273,437
                                                                                ---------------                  ---------------
</TABLE>

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

                                                                  (continued)

                                      30


<PAGE>   31



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED                  YEAR ENDED
                                                                                  DECEMBER 31,                DECEMBER 31,
                                                                                     1996                        1995
                                                                                 -------------               -------------
<S>                                                                              <C>                         <C>
Net increase (decrease) in cash                                                        (23,759)                 (1,369,416)

Cash at beginning of period                                                            128,094                   1,497,510
                                                                                 -------------               -------------

Cash at end of period                                                            $     104,335               $     128,094
                                                                                 =============               =============



Supplemental disclosure of cash flow information:

     Interest paid                                                               $     453,712               $     330,000
                                                                                 =============               =============

     Income tax paid                                                             $       -                   $      15,723
                                                                                 =============               =============

     Non-cash investing financing activities:

          Capital lease obligations incurred                                     $   2,136,163               $   1,066,889
                                                                                 =============               =============

          Capital lease obligations canceled and return of equipment
               (net book value of equipment approximating $120,000)              $     135,859               $       -
                                                                                 =============               =============

          Stock issued as satisfaction of related party debt (See Note 12)       $      67,292               $       -
                                                                                 =============               =============

          Note received on disposal of equipment                                 $       9,770               $       -
                                                                                 =============               =============
</TABLE>


In February 1995, the Company acquired certain business assets (principally
mobile equipment) totaling $203,000 related to its Orange Park facility for
consideration of $62,000 cash, issuance of a note payable of $45,000, the
obligation to issue common stock in the amount of $51,000 and the assumption of
liabilities of $45,000 (see note 12).

In December of 1995, the Company acquired a partnership interest representing
real estate assets of $346,000 by assuming long-term debt of $295,000 and the
issuance of 116,711 shares of common stock amounting to $51,000 (see note 12).

In September of 1996 the Company refinanced its bank lines of credit
approximating $517,000 with a new line from DVI Business Credit (see note 4).
Additionally, the Company refinanced a $208,000 equipment loan and a $50,000
related party note.

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

                                      31


<PAGE>   32


                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                                     RETAINED
                                                               ADDITIONAL            EARNINGS
                                               COMMON           PAID-IN            (ACCUMULATED        STOCKHOLDERS'
                                               STOCK            CAPITAL              DEFICIT)             EQUITY
                                           -------------     ------------          ------------         ----------
<S>                                        <C>               <C>                   <C>                  <C>
Balances at December 31, 1994              $         500     $  1,943,579          $     28,554         $1,972,633

Exchange of 642,918 shares of
  National Diagnostics, Inc.
  common  stock at $1.5625 per
  share for 1,607,295 warrants
  at $.625 per warrant                               129             (129)                -                -

Exercise of director stock options
  (80,000 shares)                                     16           84,784                 -                 84,800

Issuance of common stock
  (116,711 shares)                                    23           51,033                 -                 51,056

Net Loss                                            -              -                   (835,058)          (835,058)
                                           -------------     ------------          ------------         ----------

Balances at December 31, 1995              $         668     $  2,079,267          $   (806,504)        $1,273,431
                                           -------------     ------------          ------------         ----------

Issuance of common stock
  (33,448 shares)                                      7           67,291                 -                 67,298
                                                                                                            
Issuance of warrants                                                                                        
(100,000 warrants)                                  -               8,000                 -                  8,000
                                                                                                            
Exercise of warrants                                                                                        
(55,500 shares)                                       11          165,939                 -                165,950  


Net Loss                                            -              -                 (1,241,661)        (1,241,661)   
                                           -------------     ------------          ------------         ----------

Balance at December 31, 1996               $         686     $  2,320,497          $ (2,048,165)        $  273,018
                                           =============     ============          ============         ==========
</TABLE>




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

                                      32


<PAGE>   33



                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          DECEMBER 31, 1996 AND 1995

1)       ORGANIZATION AND BASIS OF PRESENTATION

         The consolidated financial statements include the accounts of National
         Diagnostics, Inc. (Company), Alpha Associates, Inc. (Associates), Alpha
         Acquisitions Corp. (Acquisitions), SunPoint Diagnostic Center, Inc
         (SunPoint), National Diagnostics/Orange Park, Inc (Orange Park), and
         National Diagnostics/Riverside, Inc. (Riverside).  Associates and
         Acquisitions hold 100% of the partnership interests in Brandon
         Diagnostic Center, Ltd. (Brandon).  The Company and Orange Park hold
         100% of the partnership interests in Sundance Partners (a real estate
         holding partnership.) National Diagnostics, Inc., is a holding company
         which was formed in June 1994.

         On September 1, 1995, the Company formed a wholly-owned subsidiary
         National Diagnostics/Cardiology, Inc. (Cardiology) which was merged
         into Orange Park in 1996.

         The Company provides medical imaging services to patients at its
         centers or mobile facilities in Brandon (Brandon), Ruskin (SunPoint),
         and greater Jacksonville area (Orange Park and Riverside), Florida.

         In preparing financial statements in conformity with generally
         accepted accounting principles, management makes estimates and
         assumptions that affect the reported amounts of assets and liabilities
         and disclosures of contingent assets and liabilities at the date of
         the financial statements, as well as the reported amounts of revenues
         and expenses during the reporting period. As an example of such an
         estimate is the Company's determination of its contractual adjustments
         and doubtful accounts provision. Actual results could differ from
         those estimates.

         The consolidated financial statements include the accounts of the
         Company and its wholly owned subsidiaries and their affiliates. All
         significant intercompany balances and transactions have been
         eliminated.

2)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A)       PROPERTY EQUIPMENT

                  Property and equipment is stated at cost. Depreciation
                  expense is charged to operations over the estimated useful
                  service period of the assets using the straight-line method.
                  Property and equipment held under capital leases are
                  generally amortized straight-line over the shorter of the
                  lease term or estimated useful life of the asset. The Company
                  uses accelerated depreciation for tax purposes.

         B)       INCOME TAXES

                  Income taxes are provided based upon provisions of Statement
                  of Financial Accounting Standards No. 109, "Accounting for
                  Income Taxes". Under the asset and liability method of
                  Statement 109, deferred tax assets and liabilities are
                  recognized for the future tax consequences attributable to
                  differences between the financial statement carrying amounts
                  of existing assets and liabilities and their respective
                  tax bases. Deferred tax assets and liabilities are measured
                  using enacted tax rates expected to apply to taxable income in
                  the years in which those temporary differences are expected to
                  be recovered or settled. Under Statement 109, the effect on
                  deferred tax assets and liabilities of a change in tax rates
                  is recognized in income in the period that includes the
                  enactment date.



                                      33


<PAGE>   34

                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         C)       PRE-OPENING COSTS

                  Pre-opening costs consisting of outside consulting, other
                  directly related professional fees, equipment testing and
                  calibration and office set up which are incurred prior to
                  opening are deferred and amortized over 12 months commencing
                  with a Center opening. Such costs which are included net of
                  amortization in other current assets totaled approximately
                  $59,089 and $196,518 at December 31, 1996 and 1995,
                  respectively. Amortization expense for pre-opening costs for
                  1996 and 1995 was $73,665 and $96,575 respectively.

         D)       EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED

                  Excess of purchase price over net assets acquired are
                  amortized over 20 years. Management reviews the performance
                  of the related assets on a quarterly basis to determine if
                  impairment has taken place. No impairment costs have been
                  realized in the current years. Amortization expense for the
                  excess of purchase price over net assets acquired for 1996
                  and 1995 was $24,476 and $24,187 respectively.

         E)       CASH AND CASH EQUIVALENTS

                  For financial statement purposes cash equivalents include
                  short-term investments with an original maturity of ninety
                  days or less. At December 31, 1996 and 1995, respectively,
                  the Company had investments in money market accounts 
                  of $-0- and $4,384.

         F)       ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR 
                  LONG-LIVED ASSETS TO BE DISPOSED OF

                  Effective January 1, 1996 the Company adopted statement of
                  Financial Accounting Standards No. 121, Accounting for the
                  Impairment of Long-Lived Assets and for Long-Lived Assets to
                  Be Disposed of (SFAS No. 121). SFAS No. 121 requires that
                  long-lived assets and certain identifiable intangibles held
                  and used by an entity along with goodwill should be reviewed
                  for impairment whenever events or changes in circumstances
                  indicate that the carrying amount of an asset may not be
                  recoverable. If the sum of the expected future cash flows
                  (non-discounted and without interest) is less than the
                  carrying amount of the asset, an impairment loss is
                  recognized. Measurement of that loss would be based on the
                  fair value of the asset. SFAS No. 121 also generally requires
                  long-lived assets and certain identifiable intangibles to be
                  disposed of to be reported at the lower of the carrying
                  amount or the fair value less cost to sell. The company
                  adoption of SFAS No. 121 had no impact on the Company's
                  financial statements.

                  There was no impairment loss recorded in 1996.

         G)       REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

                  Revenues are recognized on the date services and related
                  products are provided to patients and are recorded at amounts
                  estimated to be received under reimbursement arrangements
                  with third party payors, including private insurers, prepaid
                  health plans, Medicare and Medicaid. Net revenue represents
                  gross revenue less contractual adjustments and provision for
                  bad debts (bad debts are not material to the Company's 
                  financial statements) (see note 10). The Company's 
                  management at least quarterly determines the adequacy of the 
                  accounts receivable valuation allowances by, among other 
                  procedures, reviewing historical experience for changes in 
                  factors affecting billing and collections (e.g. third party 
                  reimbursement arrangements). For all years presented, 
                  approximately 18% to 23% of the Company's

                                      34


<PAGE>   35



                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  revenues are reimbursed under arrangements with
                  Medicare/Medicaid. No other third party payor group
                  represents 10% or more of the Company's revenues. Therefore,
                  concentration of credit risk with respect to the remaining
                  accounts receivable is limited due to the large number of
                  payors representing the patient base.

                  The Brandon facility contributed approximately 55% and 63% of
                  total revenues for 1996 and 1995, respectively.

         H)       ACCOUNTING FOR STOCK BASED COMPENSATION

                  Effective January 1, 1996, the Company adopted SFAS No.
                  123, Accounting for stock Based Compensation.  For employee
                  stock awards, as allowed by SFAS No. 123, the Company has
                  elected to continue using the accounting method promulgated by
                  the Accounting Principals Opinion No. 25. Accounting for Stock
                  Issued to Employees to measure compensation.  As a result,
                  SFAS No. 123 proforma disclosures are required in these
                  financial statements.  The adoption of SFAS No. 123 accounting
                  and reporting provisions had no effect on the Company's 
                  financial statement (see Note 13.

         I)       LOSS PER COMMON SHARE

                  Loss per share for the years ended December 31, 1996 and
                  1995, is computed using the weighted average number of common
                  shares. Generally, common stock equivalents such as
                  outstanding incentive stock options and warrants are included
                  in the calculation if they have a dilutive effect on earnings
                  per share. The Company's options and warrants were not
                  included in the calculation because they had an antidilutive
                  effect.

         J)       FAIR VALUE OF FINANCIAL INSTRUMENTS

                  At December 31, 1996 and 1995, the carrying amount of cash,
                  accounts receivable, accounts payable and accrued expenses
                  approximate fair value because of the short-term maturities
                  of these assets.

                  The carrying amounts of current obligations approximate the
                  fair market value due to either the short-term maturity of
                  the obligation or the interest rate changes with market
                  interest rates. Carrying amounts of long-term obligations
                  approximate the fair market value due to either the fact that
                  the obligation was recently financed or refinanced, or in the
                  case of other obligations, the interest rates approximate
                  that which the Company is able to obtain currently.

         K)       OPERATIONAL MATTERS AND LIQUIDITY

                  The Company has a net loss for 1996 of $1,241,661 and at
                  December 31, 1996 has a retained earnings accumulated deficit
                  of $2,048,165 and a working capital deficiency of $2,159,581,
                  which has resulted in late lease payments which have payment
                  acceleration provisions. In view of these matters,
                  recoverability of a major portion of the recorded asset
                  amounts shown in the accompanying balance sheet is dependent
                  upon continued operation of the Company, which in turn is
                  dependent upon either the Company's ability to succeed in its
                  future operations or its ability to obtain additional funding.
                  The financial statements do not include any adjustments
                  relating to the recoverability and classification of recorded
                  asset amounts or amounts and classification of liabilities
                  that might be necessary should the


                                      35


<PAGE>   36



                          NATIONAL DIAGNOSTICS, INC.
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Company be unable to continue in existence. The following
                  commentary addresses the Company's operations for 1996 and
                  its plan to improve future results.

                  The Company attributes the loss in 1996 primarily to the
                  effect the losses from its new start up facilities had on the
                  Company: Orange Park completed its first full year of
                  operation with a loss of $898,000 and Riverside (opened July
                  of 1996) had a loss of $511,000. Due to the expansion and
                  growth the Company's working capital has decreased to the
                  extent that the Company has fallen behind in meeting its
                  lease and vendor obligations. Most of the vendors have been
                  cooperative by allowing extended terms. The Company has
                  received from its major lessor a waiver of default based on
                  the Company adhering to a work out schedule which will bring 
                  the leases to a current status by December 31, 1997. Other
                  lessors have also been cooperative with extended terms (see
                  note 6). The Company believes as the increase in revenues for
                  start ups continues and certain cost cutting measures
                  (estimated unaudited annual savings approximately $286,000
                  inclusive of Officer's bonuses) take effect that the Company
                  will return to a profitable position though no absolute
                  assurances can be given. The Company has curtailed its plan
                  for further external expansion unless additional capital
                  funding is obtained.

3)       PROPERTY AND EQUIPMENT

         Property and equipment consists of the following:


<TABLE>
<CAPTION>
                                                                                                                       Estimated
                                                                                   December 31,        December 31,     service
                                                                                      1996                 1995       life (years)
                                                                                  -------------        ------------   -----------
           <S>                                                                    <C>                  <C>               <C>
           Land                                                                   $      85,000        $     85,000       -
           Buildings                                                                    253,041             253,041       39
           Medical Equipment                                                          7,414,946           5,200,475        7
           Office furniture and equipment                                               665,295             477,739        7
           Leasehold improvements                                                       837,699             483,353      3-5
           Vehicles                                                                     225,217             232,542      5-7
                                                                                  -------------        ------------

                                                                                  $   9,481,198        $  6,732,150
                                                                                  -------------        ------------
</TABLE>


4)         LINES OF CREDIT

           In 1996 the Company refinanced its bank lines of credit with a
           lender that specializes in medical receivable financing. The lender
           has a first security interest on all accounts receivable. The
           borrowing base on the line fluctuates proportionately with accounts
           receivable balance and is adjusted on a weekly basis The line has an
           interest rate of prime plus 1.6% (at December 31, 1996, 9.85%) paid
           monthly, the line matures September, 1998.


<TABLE>
<CAPTION>
                                                                                      1996
                                                                                 --------------
                     <S>                                                         <C>
                     Line of credit limit                                        $    2,000,000
                     Qualifying borrowing base                                        1,124,967
                     Outstanding loan balance at December 31, 1996                      993,818
</TABLE>





                                      36


<PAGE>   37




                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5)         LONG-TERM DEBT

           Long-term debt is summarized as follows:                        

<TABLE>
<CAPTION>
                                                                                   December 31,        December 31,
                                                                                       1996                1995
                                                                                   ------------        ------------
           <S>                                                                     <C>                 <C>
           Installment loans payable which consist of a number of separate
           installment loan contracts secured by equipment and vehicles. The
           loans require monthly installments of principal and interest over
           terms that vary from two to five years. At December 31, 1996, the
           loans bear interest at rates ranging from 9.0% to 12.25%.                    432,681            346,334
           

           Mortgage note payable in monthly installments of $2,445.88 including
           interest at 8.75%; maturing April, 2020; secured by
           mortgaged real estate property.                                              291,956             295,277
                                                                                   ------------        ------------

           Total long-term debt                                                         724,637             641,611

           Less current installments of long-term debt                                  105,410             100,487
                                                                                   ------------        ------------

           Long-term debt, excluding current installments                          $    619,227        $    541,124
                                                                                   ============        ============
</TABLE>


           The aggregate principal payments of long-term debt required annually
           are:


<TABLE>
           <S>                                    <C>          <C>                             
           Year ending December 31:               1997         $    105,410                    
                                                  1998              118,590                    
                                                  1999              107,030                    
                                                  2000               81,213                    
                                                  2001               44,555                    
                                                  Thereafter        267,839                    
                                                                -----------                    
                                                                                               
                                                                $   724,637                    
                                                                ===========                    
</TABLE>

                                      37


<PAGE>   38



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6)         LEASES

           The Company has entered into capital leases for medical equipment
           which expire in 2001. The gross amount of equipment and related
           accumulated depreciation recorded under capital leases are as 
           follows:

<TABLE>
<CAPTION>
                                                                                    December 31,        December 31,
                                                                                       1996                1995
                                                                                   ------------        ------------
              <S>                                                                  <C>                 <C>
              Medical equipment                                                    $  7,012,716        $  5,012,412

              Less accumulated depreciation                                           2,472,716           2,045,692
                                                                                   ------------        ------------

                                                                                   $  4,540,000        $  2,966,720
                                                                                   ============        ============
</TABLE>


           The present value of future minimum capital lease payments based on
           interest rates ranging from 9% to 14.5% is as follows:

<TABLE>
    <S>                                     <C>                               <C>
    Year ending December 31:                1997                              $1,103,952
                                            1998                               1,214,745
                                            1999                                 866,279
                                            2000                                 632,207
                                            2001                                 546,180
                                            Thereafter                           195,045
                                                                              ----------
                Present value of minimum capital lease payments                4,558,408

                Less current installments of obligations under capital leases  1,103,952
                                                                              ----------
                Obligations under capital leases, excluding
                   current installments                                       $3,454,456
                                                                              ==========
</TABLE>


           The Company was at December 31, 1996 and currently (April, 1997) is
           in default exclusive of the receipt of a recent waiver of its capital
           lease obligations due to late payments of approximately $497,000.
           Generally, while in default the lessor may accelerate the lease
           obligation. The Company received notification (a conditional waiver)
           from its major lessor indicating they will work with the Company if
           the Company will adhere to a work out schedule where in all leases
           will be brought to a current status by December 31, 1997. The
           agreement is predicated upon the Company making a $200,000 payment
           toward the arrearages by April 25, 1997. The Company has currently
           paid the $200,000, a portion of which came out of proceeds from a
           second mortgage note given on its Sundance property. The other
           remaining lessors (approximately 17% of the total leases obligations
           outstanding at December 31, 1996) have also been cooperating with the
           Company; generally allowing not more than 60 days past due on lease
           payments. The long-term portion of the these lease approximates
           $3,454,000. because of the existing waiver and the present intent of
           all parties, classification of the long-term capital lease
           obligations to current has not been adjusted in the Company's
           financial statements.

                                      38


<PAGE>   39



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           The Company is obligated under noncancellable operating leases that
           expire through 2002.

           Future minimum lease payments under these leases are as follows:


<TABLE>
           <S>                                    <C>          <C>
           Year ending December 31:               1997               949,508
                                                  1998               804,799
                                                  1999               669,377
                                                  2000               608,423
                                                  2001               610,904
                                                  Thereafter          79,100
                                                               -------------

                                                               $   3,722,111
                                                               =============
</TABLE>

           Rental expense related to these non-cancelable leases was
           approximately $1,066,000 and $396,000 for the years ended December
           31, 1996 and 1995, respectively.

7)         NOTES PAYABLE TO RELATED PARTIES

           Note payable to related parties are as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,      December 31,
                                                                                      1996              1995
                                                                                 --------------    ---------------
           <S>                                                                   <C>               <C>
           Note payable with imputed interest at 10%,
           due January 31, 1996                                                  $        -        $        49,243

           Installment note payable with interest at 10%
           payable in monthly payments of $4,167 plus interest
           due August 15, 1997                                                   $       33,333    $        -

           Notes payable with interest at 8% payable
           on demand                                                             $       66,549    $        -
                                                                                 --------------    ---------------

                                                                                 $       99,882    $        49,243
                                                                                 ==============    ===============
</TABLE>

           Interest expense to related parties totaled $3,469 and $4,021 for
           the years ended December 31, 1996 and 1995, respectively.

8)         NOTES PAYABLE, OTHER

           Other notes payable are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  December 31,        December 31,
                                                                                     1996                1995
                                                                                ---------------      --------------
           <S>                                                                  <C>                  <C>
           Installment note payable with interest at 10.25%
           due December 1997; unsecured.                                        $         4,294      $       -

           Note payable with interest at 9.5%, due
           April, 1996; unsecured                                                       -                     8,000
                                                                                ---------------      --------------

                  Total other notes payable                                     $         4,294      $        8,000
                                                                                ===============      ==============
</TABLE>

                                      39


<PAGE>   40



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9)         INCOME TAXES

           The provision for income tax expense (benefit) at December 31,
           consists of the following:

<TABLE>
<CAPTION>
                                                                                   1996               1995
                                                                            ---------------      --------------
                 <S>                                                        <C>                  <C>
                 Current                                                    $        -           $      (11,000)
                 Deferred                                                            -                 (169,000)
                                                                            ---------------      --------------

                                                                            $        -           $     (180,000)
                                                                            ===============      ==============
</TABLE>

           The income tax provision for 1996 and 1995 reconciled to the tax
           computed at the statutory rate of 34% is as follows:


<TABLE>
<CAPTION>
                                                                                       1996                1995
                                                                                   ------------       -------------
           <S>                                                                     <C>                <C>
           Income taxes at statutory rate                                          $   (422,100)      $    (345,100)
           State income taxes                                                           (48,000)            (50,800)
           Current year net operating loss not utilized                                 453,700             188,600
           Non deductible expenses                                                       16,400              27,300
                                                                                   ------------       -------------

                                                                                   $      -           $    (180,000)
                                                                                   ============       =============
</TABLE>


           The deferred tax asset and liability consist of the following at
           December 31:

<TABLE>
<CAPTION>
                                                                                      1996                1995
                                                                                  ------------        -------------
           <S>                                                                    <C>                 <C>
           Assets
                Net operating loss carry forward                                  $    477,400        $     158,000
                Allowance for doubtful accounts                                        259,100              133,700
                Deferred rents                                                          87,800               75,800
                Nondeductible accrued compensation                                      47,300               18,600
                Pre-opening costs                                                       44,800               29,900
                Acquisition basis difference                                           121,500              122,300
                                                                                  ------------        -------------
                                                                                     1,037,900              538,300
                Less:  valuation allowance                                            (763,800)            (310,900)
                                                                                  ------------        -------------
                                                                                       274,100              227,400
                                                                                  ------------        -------------
           Liabilities
                Fixed assets                                                           273,200              227,000
                Goodwill                                                                   900                  400
                                                                                  ------------        -------------
                                                                                       274,100              227,400
           Net deferred taxes                                                     $      -            $       -
                                                                                  ============        =============
</TABLE>





                                      40


<PAGE>   41



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           Management, using SFAS 109 criteria and placing greater weight on
           the 1995/1996 taxable losses along with expectations for 1997,
           concluded that the above valuation allowance at December 31, 1996,
           was reasonable.

           At December 31, 1996 approximately $1,200,000 in net operating carry
           forwards remain which will expire if not utilized by 2011.

10)        CONCENTRATION OF ACCOUNTS RECEIVABLE

           The Company's accounts receivable are due from the following:

<TABLE>
<CAPTION>
                                                                                   December 31,        December 31,
                                                                                      1996                1995
                                                                                  -------------        ------------
           <S>                                                                    <C>                  <C>
           Commercial insurance carriers                                          $   1,077,500        $    530,000
           Managed care providers                                                       753,100             382,400
           Private patients                                                             431,300             528,400
           Worker's compensation                                                        140,700             100,700
           Medicare/Medicaid                                                            393,086             302,241
                                                                                  -------------        ------------

                                                                                      2,795,686           1,843,741
           Less allowances:
                 Contractual adjustments                                                625,402             331,900
                 Doubtful accounts                                                       39,000              11,000
                                                                                  -------------        ------------

                                                                                  $   2,131,284       $   1,500,841
                                                                                  =============       =============
</TABLE>


11)        COMMITMENTS AND CONTINGENCIES

           A)     GUARANTEES

           Certain equipment loans of the Company are fully guaranteed by an
           officer/stockholder.

           B)     EMPLOYMENT CONTRACTS

           The President and Chief Executive Officer operate under three year
           employment contracts that became effective July 1, 1995. The
           President and Chief Executive Officer receive salaries of $150,000
           and $75,000, respectively, plus certain benefits. Under the
           contracts each executive is to receive a 5% bonus of the annual net
           income of the Company in excess of the prior fiscal year's income.
           Additionally, a bonus equal to 2.5% of net revenue in excess of
           the prior year's net revenue is to be paid to each executive. In 1997
           the bonus arrangement was eliminated until the Company experiences
           two consecutive profitable quarters.

           Total compensation earned by the Chief Executive Officer and
           President under the current and previously existing contracts for
           the years ended December 31, 1996 and 1995 was approximately
           $401,741 and $414,764 respectively.

                                      41


<PAGE>   42

                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           The Company entered into an employment agreement with the President
           of Orange Park for a three year period commencing February 1, 1995.
           The executive is to receive as compensation an annual salary of
           $100,000 (adjusted from $85,000 in July) plus certain benefits. In
           addition, the executive will earn a 10% bonus based on the increase
           in adjusted profits of the Orange Park center. No bonus was awarded
           in 1996.

           In November, 1995 the Company entered into a three year employment
           agreement with the Vice President of Development. The executive is
           to receive a salary of $85,000 plus certain benefits. This executive
           was terminated effective February 1997.

           C)     PROFESSIONAL SERVICES AGREEMENT

           The Company enters into agreements with physician groups to
           provide radiological services. During 1995 the Company paid the
           physician group operating in Brandon 15% of the first $200,000 net
           monthly receipts from reading fees and 25% of net receipts from
           reading fees over $200,000 and at SunPoint 15% of the first $100,000
           of net receipts and 20% of net receipts over $100,000. These
           contracts were terminated in December 1995 and the Company entered
           into new contracts wherein physicians' reading fees for both Brandon
           and SunPoint are paid at the rate of 14% of net receipts.

           The Company paid the physician group operating in Orange Park 17% of
           net receipts from reading fees. This contract was terminated
           effective December 31, 1996 and subsequently negotiated a rate of
           14%. At its Riverside facility the physician group is paid at the
           rate of 15% of the first $200,000 of net monthly receipts and 20%
           thereafter.

           The Company entered into new radiological service contracts that
           take effect in the first half of 1997 which call for reading fees at
           the rate of 14% for its Brandon, SunPoint and Orange Park
           facilities. The contracts call for a "contract termination without
           cause" penalty of approximately $123,000 and $62,000 in the first
           and second year, respectively.

           Physician service expense under the current and previously existing
           contracts for the years ended December 31, 1996 and 1995 was
           approximately $1,228,000 and $1,013,000, respectively.

           (D)  LEGAL ACTION

           In December of 1995, the physician group terminated its contract for
           reading services with the Brandon and SunPoint centers and in
           February of 1996, filed suit against the centers alleging the
           centers materially breached the contract by failing to pay physician
           fees timely and incorrectly billed certain procedures. The physician
           group sought payment for services rendered (approximately $178,000)
           and lost profits (approximately $850,000). In February of 1997, the
           court denied the claim for lost profits and entered an award in
           favor of the physician group relating to services rendered. The
           Company substantially reserved for the claim for services and
           satisfied the judgement in February of 1997 by obtaining financing
           for approximately $205,000 from its accounts receivable lender
           (balance due by August, 1997). Subsequently, a motion by the
           physicians for a rehearing was denied. The physicians filed a notice
           of appeal for the lost profits claim in April, 1997. Also a motion 
           for costs relating to the lawsuit (approximating $10,000) was filed 
           by the physician group. The Company believes the costs to be 
           substantially less than the amount claimed and intends to contest 
           the amount.

           On March 10, 1995 legal action was instituted against A.T. Brod
           & Co., Inc. (a national stock brokerage firm) by a terminated
           employee of A.T. Brod & Co., Inc. ("A.T. Brod").  A.T. Brod was a
           major market maker for National Diagnostics, Inc. stock.  The Company
           was named in the suit entitled James I. Blackey vs. A.T. Brod &

                                      42


<PAGE>   43



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           Co., Inc., Arthur Stupay, Jugal Taneja, R.K. Khosla, Bancapital
           Investment Corporation, and National Diagnostics, Inc. pending the
           Supreme Court of the State of New York, County of Erie, Index Number
           I-1995- 2249.  Mr. J. Taneja is Chairman, Chief Executive Officer and
           Director of both A.T. Brod and the Company. The action alleged
           wrongful discharge, breach of contract, deformation of character,
           conspiracy and tortious interference with a contract arising out of
           the alleged wrongful termination of the plaintiff by A.T. Brod and
           sought compensatory and punitive damages of $2,830,000.  In April of
           1997 the Company reached a settlement for $5,000 which has been 
           paid by the Company.

12)        BUSINESS COMBINATIONS

           In February 1995, the Company acquired certain business assets
           (principally mobile equipment) totaling $203,000 related to its
           Orange Park facility for consideration of $62,000 cash, issuance of a
           note payable of $45,000, the obligation to issue common stock in the
           amount of $51,000 and the assumption of liabilities of $45,000.
           Additionally, in 1996 the Company issued 33,448 shares of common
           stock equivalent in value to $67,292 consisting of; $57,231 of the
           seller's accounts receivable not part of the purchase; and $10,061 of
           vendor payments made by the seller on behalf of the Company. Pro
           forma information is not provided herein because of the transaction's
           insignificant effect on the Company's financial statement.

           On December 31, 1995 the Company and a subsidiary purchased for
           $346,000 a 100% interest in a general partnership formed earlier in
           1995 which owns the fixed site facility used by Orange Park. As the
           Company's consideration for the partnership interest a mortgaged
           note of $295,000 was assumed and 116,711 shares of common stock were
           issued. Since the Company's controlling shareholders also controlled
           the general partnership, the combination was recorded at historical
           cost similar to a pooling of interest. Accordingly, a value of $.44
           per share was ascribed to the stock issued. This combination had an
           immaterial impact on the Company's statement of operations in 1995.

13)        SHAREHOLDERS' EQUITY

           STOCK OPTIONS

           On April 21, 1995 the Board of Directors approved an Employee Stock
           Option Plan ("employee plan") and a Non-employee Director Stock
           Option plan ("director plan") for the purpose of competing
           successfully in attracting, motivating, and retaining employees and
           non-employee directors with outstanding abilities. Options granted
           under the employee plan are intended to be incentive stock options.
           The total number of shares to which options may be granted under the
           employee and director plans are 200,000 shares. Generally, the
           exercise price shall be fixed at no less than 100% of the average
           fair market value of the shares at date of option.

           In 1995 pursuant to the director plan the Board of Directors were
           issued options for 80,000 shares in December 1995. These options
           were exercised in December ,1995, at $1.06 per share for which the
           Company received $84,800.

           During 1996 options for 10,000 shares were granted under the
           employee plan.

                                      43


<PAGE>   44


                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           A summary of the status of the Company's outstanding stock options
           as of December 31, 1996, and 1995, and changes during the years
           ending on those dates is presented below.

<TABLE>
<CAPTION>
Weighted Average

Exercise Price                                                                                         Shares           
                                                                                                       ------
           <S>                                                                    <C>                   <C>
           Options outstanding, December 31, 1994                                   -                    -

           Options granted                                                        80,000               $1.06
           Options exercised                                                      80,000                1.06
           Options outstanding, December 31, 1995                                   -                    -

           Options granted                                                        10,000                3.00
           Options exercised                                                        -                    -
                 Options outstanding, December 31, 1996                           10,000                3.00
</TABLE>


           The following table summarizes information concerning currently
           outstanding and exercisable stock options.

<TABLE>
<CAPTION>
                                                                             Weighted               Weighted
                                                      Range of                Number            Remaining Contract        Average
                                                  Exercise Prices           Outstanding            Life (Years)           Exercise
                                                  ---------------           -----------         ------------------        --------
           <S>                                         <C>                     <C>                     <C>                  <C>
           Outstanding Options:                       $3.00                    10,000                  9                   $3.00
                                                       
           Exercisable Options:                        3.00                    10,000                  9                    3.00
</TABLE>

           The Company has adopted only the disclosure provisions of Financial
           Accounting Standard No. 123 "Accounting of Stock-Based
           Compensation," as it relates to employment awards. It applies APB
           Option No. 25, "Accounting for Stock Issued to Employees," and
           related interpretations in accounting for its plans. If the
           Company had elected to recognize compensation plans other than for
           restricted stock. If the Company had elected to recognize
           compensation expense based upon the fair value at the grant date for
           wards under these plans consistent with the methodology prescribed by
           SFAS 123, the Company's net loss per common share would be increased
           to the pro forma amounts indicated below for the years ended December
           31:


<TABLE>
<CAPTION>
                                                                                    1996                    1995
                                                                                    ----                    ----
           <S>                               <C>                                  <C>                      <C>
           Net loss                          As reported                         $1,241,661               $835,058
                                             Pro forma (unaudited)                1,261,661                837,458

           Loss per common share             As reported                         $      .48               $    .44
                                             Pro forma (unaudited)                      .49                    .44
</TABLE>

                                      44


<PAGE>   45



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           The fair value of each option grant is estimated on the date of grant
           using the Binomial options-pricing model with the following
           weighted-average assumptions used for grants in 1996 and 1995, no
           dividend yield for all years, expected volatility of approximately
           124%; risk-free interest rates of approximately 6% and expected lives
           of approximately 0-2.5 years. The Company's common stock activity has
           had a volatile history. Because of the insignificant effect on the
           pro forma amounts presented above, the Company has elected not to
           attempt to adjust (lower) the volatility factor used. Such adjustment
           would account for the various factors or conditions that probably
           impacted the Company's common stock prices and which are possibly
           non-recurring and not representative of future stock prices. Such an
           adjustment which would lower the volatility factor used would further
           reduce the calculated fair value of the options.

           WARRANTS

           In July, 1995 the Company offered to holders of outstanding common
           stock purchase warrants (1,700,000) the opportunity to exchange five
           warrants for two shares of stock. In September, 1995 the offer was
           concluded. Approximately 94% of the outstanding warrants were
           tendered in exchange for 642,918 shares of common stock.

           Pursuant to consulting agreement dated March 29, 1996 between the
           Company and an outside computer consultant the Board was authorized
           100,000 warrants exercisable at $3.00 to be issued for services
           rendered. The warrants were issued on July 25, 1996 and valued at
           the fair value of the contracted services performed ($8,000.) 55,500
           of these warrants were exercised during 1996.

           In March on 1996, the Company entered into an agreement for
           financial, consulting and investment banking services. The Company
           agreed to pay a compensation for these services $16,000 plus issue
           80,000 warrants for common stock as follows: 40,000 at $2.50 per
           share exercisable through March 1999 and 40,000 at $3.00 per share
           exercisable through March of 2001. The Company recognized $16,000 of
           services in 1996. The 80,000 warrants, which have not yet been issued
           (awarded) will be valued based upon the value of services to be
           completed in 1997.

           A summary of the status of the Company's outstanding warrants as of
           December 31, 1996 and 1995, and changes during the years ending on
           those dates is presented below.

<TABLE>
<CAPTION>
Weighted Average

Exercise Price                                                                                              Warrants             
                                                                                                            --------
           <S>                                                                        <C>                      <C>
           Warrants outstanding, December 31, 1994                                    1,700,000               $7.20
           Warrants granted                                                            -                       -
           Warrants exchanged(1)                                                      1,607,295                7.20
           Warrants outstanding                                                          92,705                7.20

           Warrants granted                                                             100,000                3.00
           Warrants exercised                                                            55,500                3.00
           Warrants outstanding, December 31, 1996                                      137,205                3.00(2)
</TABLE>

           -----------------
           (1)      In July of 1995, the Company offered to its holders of
                    outstanding warrants the opportunity to exchange five
                    warrants for two shares of common stock.  The offer
                    concluded in September of 1995, with 94% of the outstanding 
                    warrants exchanged for 642,918 common shares.


                                      45

<PAGE>   46



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           (2)      Effective May 24, 1996 the Company lowered the strike       
                    price to $3.00 a share (the fair market value of the common
                    shares at that date) for all outstanding warrants at 
                    that date.


           The following table summarizes information concerning currently
           outstanding and exercisable warrants:

<TABLE>
<CAPTION>
                                                                             Weighted               Weighted
                                                        Range of              Number           Remaining Contract         Average
                                                    Exercise Prices        Outstanding            Life (Years)            Exercise
                                                    ---------------        -----------         ------------------         --------
           <S>                                           <C>                 <C>                       <C>                   <C>
           Outstanding Warrants:                        $3.00                137,205                   1                    $3.00

           Exercisable Warrants:                         3.00                137,205                   1                     3.00
</TABLE>

                                                             
(14)       RELATED PARTIES

           At December 31, 1996 the Company is indebted to the President of
           Orange Park for $33,000 which is reflected in the December 31, 1996
           balance sheet in a "Notes due to related parties." During the year
           the Company reimbursed this executive approximately $10,000 for
           expenses that he paid on behalf of the Company.

           In February 1995, the Company, through a wholly-owned subsidiary,
           National Diagnostics/Orange Park, Inc. ("Orange Park"), acquired the
           assets of Medical Imaging Consultants, Inc., and certain of its
           affiliates, providers of both mobile and fixed site ultrasound and
           related diagnostic testing services in the cardiac, cerebral
           vascular and neurophysiology areas, which currently operates in the
           Jacksonville, Orange Park, Middleburg and Fernandina Beach areas of
           Northern Florida. In connection therewith, the Company entered into
           a lease agreement with Sundance Partners, a Florida general
           partnership ("Sundance"), effective April 1, 1995. The lease relates
           to Orange Park's approximately 5,100 square foot diagnostic facility
           in Orange Park, Florida and is for a term of ten years providing
           annual rental payments of approximately $44,000, subject to annual
           adjustments based on the Consumer Price Index. The Company is the
           guarantor of Orange Park's obligations under the lease. Messrs.
           Taneja, Alliston, Traber, Ward and Baugh (the President and Chief
           Operating Officer of Orange Park) were all general partners of
           Sundance and collectively owned a 95% interest therein. Mr. Alliston
           was the managing partner of Sundance. The Company believes the terms
           of the lease are no less favorable than those that can be obtained
           from unaffiliated third parties. In December 1995, the Company
           purchased for $346,000 a 100% interest in Sundance. The partnership
           costs in the underlying property was approximately $346,000 with an
           appraised value of $660,000 (see note 12 to the financial
           statements).

                                      46


<PAGE>   47



                         NATIONAL DIAGNOSTICS, INC.
                              AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           The Company through its Orange Park facility utilizes various
           diagnostic and office equipment leased by Neurophysiology
           Associates, Inc ("NPA"). NPA is 100% owned by Ron Baugh, President
           and Chief Operating Officer of Orange Park. The Company has agreed
           to compensate NPA in no more or less favorable terms than the
           original lease calls for. Monthly payments approximate $1,920;
           annual rent expense approximated $22,874 in 1996. Certain payments
           by the Company are made directly to the third party lessor.

           In July of 1996, the Company entered into a month to month rental
           arrangement for its regional office (approximately 2,200 square
           feet) in northeast Florida with Medical Consultants Inc. Ron Baugh
           (President and Chief Operating Officer of Orange Park) is 100% owner
           of Medical Consultants, Inc. The agreement calls for rental payments
           of $1,500 per month. Rent expense for these spaces in 1996 totaled
           $9,000.

           In July of 1996, a triple net lease became effective between the
           Company and Sundance Partners II (a Florida general partnership) for
           a free standing 7,100 medical facility used for Riverside's
           Diagnostic Center. The facility is located in the Riverside area of
           Jacksonville, Florida. The lease term is for an initial five years
           with a one time option to extend for a five year period. Rent expense
           for 1996 approximated $58,000. Sundance Partners II is 100% owned by
           Messrs. J. Taneja and C. Alliston.

           During 1995 the Company incurred approximately $88,000 in costs
           related to a potential opening of a new site . Under an agreement
           with Sundance III (a Florida general partnership) Sundance III was
           to rent the Company its building for the above mentioned site.
           However, in the event the Company was to abandon the opening,
           Sundance III was to sell off the building and reimburse the Company
           from the proceeds of such sale. In 1996, the project was abandoned,
           sold and the reimbursement made. 

           In November 1996, J. Taneja and C. Alliston loaned the Company
           approximately $33,000 each.  The loans are due on demand and bear an
           8% interest rate.  The balance is recorded in "Notes due to
           related parties."

           One of the Company's directors (currently resigned) Mr. Traber is a
           partner of Foley and Lardner, a law firm that is one of the
           Company's legal counselors. Total expense to the firm amounted to
           approximately $36,000 in 1996.

           In March 1997, the Company borrowed $125,000 from a related party
           corporation (majority owned by Messrs. Taneja and Alliston). The
           proceeds were used to pay property taxes. The loan is due April 29,
           1997 and is expected to be paid out of receipts from overdue
           provider payments.

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

           None.

                                      47


<PAGE>   48



                                  PART III

ITEM 9 - DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
         WITH SECTION 16(A) OF THE EXCHANGE ACT

Prior to February 1, 1997, the Board of Directors consisted of Jugal K. Taneja,
Curtis L. Alliston, Martin A. Traber, Donald Ward and Susan Carmichael.  Mr.
Ward resigned as a director effective January 1, 1997.  Mr. Traber resigned as
director effective March 27, 1997.  Susan Carmichael resigned as director
effective April 7, 1997.

JUGAL K. TANEJA, Age 51, currently is a director, the Chief Executive officer
and Secretary of the Company. Mr. Taneja also serves as the Chairman, Chief
Executive Officer and director of NuMED Home Health Care, Inc. and Chief
Executive Officer and director of NuMED Surgical, Inc., publicly-held entities
involved in the home health care and medical equipment industries. He also
serves as the President and director of Bancequity Petroleum, Inc. Before his
association with Bancapital and NuMED, Mr. Taneja served as Senior Vice
President of Union Commerce Bank and Huntington National Bank.

CURTIS L. ALLISTON, Age 52, currently is a director, the President and Chief
Operating Officer of the Company. He also serves as a director and the
President and Chief Executive Officer of Brandon Clinical Associates, Inc., a
home health care group, and President and Chief Executive Officer of Alliston
Enterprises, an investment and construction Company. From 1988 to 1992, he
served as President and Chief Executive Officer of Tampa Medical Group
Management, a medical practice management firm, and President and Chief
Executive Officer of Bay Cardiac Imaging, a mobile cardiac ultrasound service
provider. Mr. Alliston was the founder of Positron Partners, Inc., a joint
venture specializing in positron emission tomography, and served as its
President and Chief Executive Officer from 1990 to 1992. Also, from 1990 to
1993, Mr. Alliston served as the President and Chief Executive officer of
Cleveland Avenue Real Estate Partners, a medical real estate investment group.

MARTIN A. TRABER, Age 48, is a partner in the law firm of Foley & Lardner, a
national general practice law firm. He has also served as an Adjunct Professor
of Law at Cleveland Marshall Law School where he structured a course on and
lectured in the area of real estate finance. Prior to joining Foley & Lardner
in August, 1994, he practiced with Arter & Hadden since 1970 and was a partner
in the Cleveland office.

DONALD G. WARD, Age 53, has served as Administrative Director of Clay
Cardiology Associates, P.A., a group of cardiology specialists associated with
several major hospitals in northeastern Florida and northeastern Georgia, since
1992. From 1990 to 1992, Mr. Ward was the Director of Special Projects/Mobile
Imaging Services for St. Vincent's Health Care Systems in Jacksonville,
Florida. Prior thereto, he has served in various position in the health care
industry.

SUSAN J. CARMICHAEL, Age 48, is currently President and Chief Operating Officer
of NuMED Home Health Care, Inc. and Board Director since 1991. Ms. Carmichael
was the past President of Whole Person Home Health Care and Pennsylvania
Medical Concepts prior to being purchased by NuMED to serve as its entrance
into the home health industry. NuMED employs an average of 500+ employees and
caring for 700+ clients in Florida, Pennsylvania, and Ohio. Previously
Co-owner, President, and Chairperson of the Board for Health Consulting
Associates (1981-1985), served as Chairperson for the Erie Pennsylvania Mental
Health/Mental Retardation Board for two, six-year terms, and has received the
"Outstanding Service to the Community" citation from Erie County.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and holders of more than 10% of the Common Stock to file
with the Securities Exchange commission initial reports of beneficial ownership
and reports of changes in beneficial ownership of Common Stock and any other
equity securities of the Company. To the Company's knowledge, based solely upon
a review of the forms filed with the Company by such person, all such Section
16(a) filing requirements were complied with by such persons in 1996.

                                      48


<PAGE>   49



ITEM 10 -- EXECUTIVE COMPENSATION

                           EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation paid
to or earned by the Company's Chief Executive Officer and President. No other
executive officer earned more than $100,000 for the fiscal years ended December
31, 1995 and 1996. The directors of the Company receive no compensation.

<TABLE>
<CAPTION>
LONG-TERM

COMPENSATION AWARDS                                                                                         ANNUAL COMPENSATION
                                                                                                            -------------------
                                       FISCAL                                             ALL OTHER        SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION             YEAR            SALARY          BONUS           COMPENSATION              OPTIONS
---------------------------            -----            ------          -----           ------------       ---------------------
<S>                                     <C>             <C>            <C>                <C>                      <C>
Jugal K. Taneja,                        1996            75,000         68,015(2)          20,356(1)                    -
  Chief Executive Officer               1995            76,250         75,614             18,958(1)                25,000
                                        1994            10,000         10,000             16,400(1)                    -
                                        1993               -              -                   -                        -


Curtis L. Alliston,                     1996           150,000          68,015(2)         20,356(1)                    -
  President and Chief                   1995           150,000          69,125            19,708(1)                25,000
     Operating officer                  1994            83,600          54,000             8,700(1)                    -
                                        1993            75,000            -                6,700(1)                    -

</TABLE>

--------------
(1)      Represents club dues and automobiles expense allowance.
(2)      Not yet paid at April 11, 1997

The following tables set forth information with respect to grants of options to
purchase shares of Common Stock during 1996 to the executive officers named in
the Summary Compensation Table. The amounts shown as potential realizable
values on the options are based on assumed annualized rates of appreciation in
the price of the Common Stock of 0%, 5% and 10% over the term of the options,
as set forth in rules of the Securities and Exchange Commission. Actual gains,
if any, on stock option exercises are dependent on future performance of the
Common Stock. There can be no assurance that the potential realizable values
reflected in this table will be achieved.

                                      49


<PAGE>   50


                         STOCK OPTION GRANTS IN 1996


<TABLE>
<CAPTION>
                                                                          MARKET                                              
                                       % OF TOTAL                        PRICE PER        POTENTIAL REALIZABLE VALUE AT ASSUMED
                                         OPTIONS                          SHARE OF             ANNUAL RATES OF STOCK PRICE     
                       NUMBERS OF       GRANTED TO                       UNDERLYING          APPRECIATION FOR OPTION TERM (2)  
                       SECURITIES       EMPLOYEES                       SECURITY ON       -----------------------------------  
                       UNDERLYING       IN FISCAL        EXERCISE         DATE OF        EXPIRATION
     NAME           OPTIONS GRANTED       1996        PRICE PER SHARE    GRANT (1)          DATE          0%       5%      10%
---------------    ----------------   ------------    ---------------  -------------     ----------     ------   ------  -------
<S>                <C>                <C>             <C>              <C>               <C>            <C>      <C>     <C>

</TABLE>

  No options were granted to executive officers in 1996.

----------------
The following table sets forth information concerning each exercise of options
during 1996 by the executive officers named in the Summary Compensation Table.
No options were outstanding as of December 31, 1996.

                           OPTION EXERCISES IN 1995


<TABLE>
<CAPTION>
                                SHARES ACQUIRED ON
     NAME                           EXERCISE                    VALUE REALIZED ($)
     ----                       ------------------              ------------------
     <S>                        <C>                             <C>

</TABLE>

No options were exercised by executives in 1996.                            
                                                                            

ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                            PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the Record Date, with respect to: (i) each of
the Company's directors; (ii) each of the Company's executive officers named in
the Summary Compensation Table; (iii) all directors and executive officers of
the Company as a group; and (iv) each person known by the Company to own
beneficially more than 5% of the Common Stock. Except as otherwise indicated,
each of the shareholders listed below has sole voting and investment power over
the shares beneficially owned.

<TABLE>
<CAPTION>
                                                                                                             BENEFICIALLY OWNED
                                                                                                           ----------------------
NAME                                                                                                         SHARES       PERCENT
----                                                                                                       ---------      -------
<S>                                                                                                        <C>            <C>
Jugal K. Taneja(1)(2)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,020,000      38.8%
Curtis L. Alliston(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     520,000      19.8%
Donald G. Ward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        5936       *
Martin A. Traber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      11,671       *
Susan J. Carmichael  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         -          -
Directors and executive officers as a group (5 persons)(4) . . . . . . . . . . . . . . . . . . . . . . .   1,557,607      59.3%
</TABLE>

----------------------
* Less than 1%

(1)        The business address of Messrs. Taneja and Alliston is 751 West
           Brandon Boulevard, Brandon, Florida 33511.
(2)        Includes 100,000 shares of Common Stock held by First Delhi
           Trust established in 1987 which was established for the benefit of
           Mr. Taneja's children, over which Mr. Taneja will exercise voting
           rights; 720,000 shares are held by Twenty First Century Health Care
           Fund, LLC ("CHCF") over which Mr. Taneja has no economic interest but
           shares voting rights with other members of CHCF.

                                      50


<PAGE>   51



(3)        Includes 100,000 shares of Common Stock held by Alliston Family
           Limited Partnership, which was established for the benefit of Mr.
           Alliston's children, over which Mr. Alliston will exercise voting
           rights.
(4)        Includes notes (1) through (3) above.



ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                             CERTAIN TRANSACTIONS

On April 21, 1995 the Board of Directors approved an Employee Stock Option Plan
("employee plan") and a Non-employee Director Stock Option plan ("director
plan") for the purpose of competing successfully in attracting, motivating, and
retaining employees and non-employee directors with outstanding abilities.
Options granted under the employee plan are intended to be incentive stock
options. The total number of shares to which options may be granted under the
employee and director plans are 200,000 shares. Generally, the exercise price
shall be fixed at no less than 100% of the average fair market value of the
shares at date of option.

In 1995 pursuant to the director plan the Board of Directors were issued
options for 80,000 shares. These options were exercised at $1.06 per share for
which the Company received $84,800. During 1996 the Company granted options for
10,000 shares exercisable at $3 per share under the Employee Plan. At December
31, 1996 there are no outstanding options under the Director Plan and there are
10,000 outstanding options under the Employee Plan.

In July, 1995 the Company offered to holders of outstanding common stock
purchase warrants (1,700,000) the opportunity to exchange five warrants for two
shares of stock. In September, 1995 the offer was concluded. Approximately 94%
of the outstanding warrants were tendered in exchange for 642,918 shares of
common stock. Messrs. Taneja and Alliston received 320,000 and 160,000 common
shares of stock, respectively in exchange of the warrants they were holding.

In March of 1996, the Company entered into an agreement with Judson
Enterprises, LTD to provided financial, consulting and banking services. As
compensation for these services the Company agreed to pay Judson Enterprises,
Inc. $16,000 and issue warrants for the purchase of 80,000 shares of common
stock. Forty thousand (40,000) warrants will be exercisable at $2.50 per share
expiring March, 1999; forty thousand (40,000) warrants will be exercisable at
$3.00 per share expiring March, 2001. Currently, the Company owes $12,000
toward the balance and has not issued the warrants.

During 1995 the Company incurred approximately $88,000 in costs related to a
potential opening of a new site . Under an agreement with Sundance III (a
Florida general partnership) Sundance III was to rent the Company its building
for the above mentioned site. However, in the event the Company was to abandon
the opening, Sundance III was to sell off the building and reimburse the
Company from the proceeds of such sale. In 1996, the project was abandoned,
sold and the reimbursement made. 

All future material affiliated transactions and loans will be made or entered
into on terms no less favorable to the Company than those that can be obtained
from unaffiliated third parties, and all future material affiliated members of
the Company's board of directors who do not have an interest in the
transaction.

The Company through its Orange Park facility utilizes various diagnostic and
office equipment leased by Neurophysiology Associates, Inc ("NPA").  NPA is 100%
owned by Ron Baugh, President and Chief Operating Officer of Orange Park. The
Company has agreed to compensate NPA in no more or less favorable terms than the
original lease calls for.  Monthly

                                      51


<PAGE>   52

payments approximate $1,920; annual rent expense approximated $22,874 in 1996.
Certain payments by the Company are made directly to the third party lessor.

In July of 1996, the Company entered into a month to month rental arrangement
for its regional office (approximately 2,200 square feet) in northeast Florida
with Medical Consultants Inc. Ron Baugh (President and Chief Operating Officer
of Orange Park) is 100% owner of Medical Consultants, Inc. The agreement calls
for rental payments of $1,500 per month. Rent expense for these spaces in 1996 
totaled $9,000.

In July of 1996, a triple net lease became effective between the Company and
Sundance Partners II (a Florida general partnership) for a free standing 7,100
medical facility used for Riverside's Diagnostic Center. The facility is
located in the Riverside area (an old "upscale" residential area) of
Jacksonville, Florida. The lease term is for an initial five years with a one
time option to extend for a five year period. Rent expense for 1996
approximated $58,000. Sundance Partners II is 100% owned by Messrs. J. Taneja
and C. Alliston.

One of the Company's directors (currently resigned) Mr. Traber is a partner of
Foley and Lardner, a law firm that is one of the Company's legal counselors.
Total expense to the firm amounted to approximately $36,000 in 1996.

In November, 1996 J. Taneja and C. Alliston loaned the Company approximately
$33,000 each.  The loans are due on demand and bear an 8% interest rate.  The
balance due is recorded in "Notes due to related parties."

At December 31, 1996 the Company is indebted to the President of Orange Park
for $33,000 which is reflected in the December 31, 1996 balance sheet in a
"Notes due to related parties." During the year the Company reimbursed this
executive approximately $10,000 for expenses that he paid on behalf of the
Company.

In March of 1997 the Company borrowed $125,000 from a related party corporation
(majority owned by Messrs. Taneja and Alliston). The proceeds were used to pay
property taxes.

                                      52


<PAGE>   53

ITEM 13 -- EXHIBITS AND REPORTS ON FORM 8-K

  (a) List of exhibits filed as part of this report:

<TABLE>
<CAPTION>
Exhibit
Number                                                    Description
-------                                                   -----------
<S>      <C>

3.1      Articles of Incorporation of the Company (Exhibit 3.1 to the company's Form SB-1 Registration Statement (Reg. No. 33-80612)
         is incorporated by reference herein).

3.2      By-laws of the Company (Exhibit 3.2 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated
         by reference herein).

4.1      1995 Employee Stock Option Plan. (Exhibit 4.1 of Company's Form S-8 Registration No. 33-80293 is incorporated by reference
         herein).

4.2      1995 Non-Employee Director Stock Option Plan. (Exhibit 4.2 of Company's Form S-8 Registration No. 80293 is incorporated by
         reference herein).

4.3      Warrants Agreement (Exhibit 4.4 to Amendment No. 3 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is
         incorporated by reference herein).

10.1     Employment Agreement by and between the Company and Curtis L. Alliston dated April 4, 1995. (Exhibit 10.1 of Company's Form
         10-QSB for the period ended March 31, 1995 is incorporated by reference herein).

10.2     Employment Agreement by and between the Company and Jugal K. Taneja dated April 4, 1995. (Exhibit 10.2 of Company's Form
         10-QSB for the period ended March 31, 1995 is incorporated by reference herein).

10.3     Lease Agreement dated April 1, 1995 by and between National Diagnostics/Orange Park, Inc. and Sundance Partners.  (Exhibit
         10.3 of Company's Form 10-QSB for the period ended March 31, 1995 is incorporated by reference herein).

10.4     Brandon Diagnostic Center, Ltd.'s Revolving Note dated May 30, 1995.  (Exhibit 10.1 of Company's Form 10-QSB for the
         period ended June 30, 1995 is incorporated by reference herein.)

10.5     Employment Agreement by and between the Company and Curtis L. Alliston dated November 10, 1995.(Exhibit 10.1 of Company's
         Form 10-QSB for the period ended September 30, 1995 is incorporated by reference herein).

10.6     Employment Agreement by and between the Company and Jugal K. Taneja dated November 10, 1995. (Exhibit 10.2 of Company's
         Form 10-QSB for the period ended September 30, 1995 is incorporated by reference herein).

10.7     Lease Agreement dated July 12, 1995 between National Diagnostics/Orange Park, Inc. and Siemens Medical Systems, Inc.
         effective September 14, 1995. (Exhibit 10.3 of Company's Form 10-QSB for the period ended September 30, 1995 is
         incorporated by reference herein).

10.8     Professional services agreement dated December 21, 1995 between Brandon Diagnostic Center, Ltd., SunPoint Diagnostic
         Center, Inc. and Robert D. Marshall, M.D., P.A (Exhibit 10.8 of Company's Form 10-KSB for the period ended December 31,
         1995 filed on April 1, 1996 is incorporated by reference herein).

10.9     Purchase agreement dated February 19, 1996 between National Diagnostics, Inc., National Diagnostics/Orange Park, Sundance
         Partners, and partners (Exhibit 10.9 of the Company's Form 10-KSB for the period ended December 31, 1995 filed on 
         April 1, 1996 is incorporated by reference herein).
</TABLE>

                                      53


<PAGE>   54
<TABLE>
<S>      <C>
         December 31, 1995 filed on April 1, 1996 is incorporated by reference herein).

10.10    Agreement of Partnership of Sundance Partners (a Florida partnership) date March 1, 1995. (Exhibit 10.10 of the Company's
         Form 10-KSB for the period ended December 31, 1995 filed on April 1, 1996 is incorporated by reference herein).

10.11    Lease Agreement dated September 3, 1991 and modification thereto dated August 8, 1992 by and between
         Brandon Diagnostic Center, Ltd. and Bay Land Investment, Inc. relating to a portion of the Company's Brandon,
         Florida facility (Exhibit 10.2 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is
         incorporated by reference herein).

10.12    Lease Agreement dated February 1, 1992 and modification thereto dated August 8, 1992 by and between Brandon
         Diagnostic Center, ltd. and Bay Land Investment, Inc. relating to a portion of the Company's Brandon Florida
         facility (Exhibit 10.3 to the Company's Form SB-1 Registration Statement Reg. No. 33-80612) is incorporated by
         reference herein).

10.13    Lease Agreement dated January 15, 1993 by and between Brandon Diagnostic Center, ltd. and Bay Land
         Investment, Inc. relating to a portion of the Company's Brandon, Florida facility (Exhibit 10.4 to the Company's
         Form SB-1 Registration Statement (Reg. no. 33-80612) is incorporated by reference herein).

10.14    Lease Agreement dated May 4, 1994 by and between Alpha Associates, Inc. and Sun Point Associates, Inc. and
         Sun Point Associates relating to the Company's Ruskin, Florida facility (Exhibit 10.5 to the Company's for SB-1
         Registration Statement (Reg. No. 33-80612) is incorporated by reference herein).

10.15    Equipment Lease Agreement dated September 11, 1991 by and between Brandon Diagnostic Center, ltd. and
         Siemens Credit Corporation and supplements thereto relating to the Company's magnetic resonance imaging
         equipment (Exhibit 10.6 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is
         incorporated by reference herein).

10.16    Equipment Lease Agreement dated September 11, 1991 by and between Brandon Diagnostic Center, ltd. and
         Siemens Credit Corporation and supplement thereto relating to the Company's computer tomography equipment
         (Exhibit 10.7 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
         reference herein).

10.17    Equipment Lease Agreement dated November 18, 1991 by and between Brandon Diagnostic Center, ltd. and
         Siemens Credit Corporation and supplements thereto relating to the Company's nuclear medicine equipment
         (Exhibit 10.9 to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by
         reference herein).

10.18    Professional Services Agreement dated June 7, 1993 by and between Brandon Diagnostic Center, Ltd. and East
         Pasco Radiology Associates, P.A. (Exhibit 10.13 to the Company's Form SB-1 Registration Statement (Reg. No.
         33-80612) is incorporated by reference herein).

10.19    Lease Agreement dated September 1, 1994 by and between Highland Properties of Gulf Coast, Ltd. and Brandon
         Diagnostic Center, ltd. relating to the Company's Brandon, Florida facility (Exhibit 10.21 to Amendment No. 3 to
         the Company's form SB-1 Registration Statement (Reg. No. 33-80612 is incorporated by reference herein).

10.20    Asset Purchase Agreement effective November 1, 1993 by and between Alpha Acquisitions Corp. and Equipment
         Company of Brandon, Inc. pertaining to the acquisition by Alpha Acquisitions Corp. of the 40% limited
         partnership interest in Brandon Diagnostic Center, Ltd. (Exhibit 10.22 to Amendment No. 3 to the company's
         form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by reference herein).
</TABLE>

                                      54


<PAGE>   55
<TABLE>
<S>      <C>
10.21    Unit Purchase Option dated September 27, 1994 relating to 50,000 Units (Exhibit 4.5 to Amendment No. 2 to the
         Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by reference herein).

10.22    Equipment Lease Agreement dated July 19, 1994 by and between Medical Consultants of Middleburg, Inc. and Copelco Capital
         Corporation relating to Orange Park's ultrasound equipment (Exhibit 10.17 to the Company's form 10-KSB for December 31,
         1994 is incorporated by reference herein).

10.23    Master Lease Agreement dated June 27, 1994 by and between Alpha Associates, Inc. d/b/a Brandon Diagnostic Center and
         Copelco Leasing Corporation and schedules thereto relating to SunPoint's diagnostic imaging equipment (Exhibit 10.18 to the
         Company's form 10-KSB for December 31, 1994 is incorporated by reference herein).

10.24    Equipment Lease Agreement dated August 1, 1994 by and between Brandon Diagnostic Center, ltd. and Siemens Credit
         Corporation relating to SunPoint's diagnostic imaging equipment (Exhibit 10.19 to the Company's form 10-KSB for December
         31, 1994 is incorporated by reference herein).

10.25    Asset Purchase Agreement, dated February 6, 1995 and effective as of January 31, 1995, as amended, by and
         among Middleburg Medical Imaging Consultants, Inc. (renamed National Diagnostics/Orange Park, Inc.), Medical
         Consultants of Middleburg, Inc. and Medical Imaging Consultants, Inc. (Exhibit 10.20 to the Company's form 10-
         KSB for December 31, 1994 is incorporated by reference herein).

10.26    Employment Contract, dated February 6, 1995 and effective as of January 31, 1995, by and between Ronald D. Baugh and
         Middleburg Medical Imaging consultants, Inc. (Exhibit 10.21 to the Company's form 10-KSB for December 31, 1994 is
         incorporated by reference herein).

10.27    Professional Services Agreement, effective as of November 7, 1994, by and between SunPoint Diagnostic Center,
         Inc. and East Pasco Radiology Associates, Inc. (Exhibit 10.22 to the Company's form 10-KSB for December 31,
         1994 is incorporated by reference herein).

10.28    Professional Services Agreement, dated November 30, 1994, by and between the Company and Drs. Hurt, Isaacs, Johnston and
         Cranford, P.A. (Exhibit 10.23 to the Company's form 10-KSB for December 31, 1994 is incorporated by reference herein).

10.29    Services Agreement, dated November 17, 1994, by and between Diagnostic Cardiology Associates, P.A. and the Company (Exhibit
         10.24 to the Company's form 10-KSB for December 31, 1994 is incorporated by reference herein).

10.30    Term Loan Agreement and Revolving Loan Agreement, both dated March 6, 1994, by and between Brandon Diagnostic Center, Ltd.
         and SouthTrust Bank of West Florida, and related Notes and Security Agreements (Exhibit 10.25 to the Company's form 10-KSB
         for December 31, 1994 is incorporated by reference herein).

10.31    Lease Agreement dated August 15, 1995 between National Diagnostics/Riverside, Inc. ("Riverside") and Sundance Partners II
         relating to the Company's Riverside fixed site facility. (Exhibit 10.33 to the Company's 10-QSB for June 30, 1996 is
         incorporated by reference herein).

10.32    Equipment Lease Agreement dated July 15, 1996 between National Diagnostics/Riverside, Inc. and Siemens Credit Corporation
         relating to Riverside's computer tomography equipment. (Exhibit 10.34 to the Company's 10-QSB for September 30, 1996 is
         incorporated by reference herein).

10.33    Equipment Lease Agreement dated August 12, 1996 between National Diagnostics/Riverside, Inc. and Siemens Credit Corporation
         relating to the Riverside's ultrasound equipment. (Exhibit 10.35 to the Company's 10-QSB for September 30, 1996 is
         incorporated by reference herein). 
</TABLE>


                                      55


<PAGE>   56
<TABLE>
<S>      <C>
10.34    Promissory Note and Business Loan Agreement dated September 9, 1996 between Brandon Diagnostic Center, Ltd. and South
         Hillsborough Community Bank related to equipment refinancing. (Exhibit 10.36 to the Company's 10-QSB for September 30, 1996
         is incorporated by reference herein).

10.35    Equipment Lease Agreement dated September 11, 1996 between National Diagnostics/Riverside, Inc. ("Riverside") and Siemens
         Credit Corporation relating to Riverside's Sireskop C. (Exhibit 10.37 to the Company's 10-QSB for September 30, 1996 is
         incorporated by reference herein).

10.36    Loan and Security Agreement dated September 13,1996 between National Diagnostics, Inc. and DVI Business
         Credit Corporation relating to the Company's line of credit.  (Exhibit 10.38 to the Company's 10-QSB for
         September 30, 1996 is incorporated by reference herein).

10.37    Promissory Note and Business Loan Agreement dated December 23, 1996 between Brandon Diagnostic Center,
         Ltd. and South Hillsborough Community Bank related to the purchase of  Stereotactic Mammography  equipment.

10.38    Equipment Lease Agreement dated January 22, 1997 between Brandon Diagnostic Center, Ltd. ("Brandon") and
         Siemens Credit Corporation relating to Brandon's Sireskop C.

10.39    Professional Service Agreement, effective February 1, 1997, by and between SunPoint Diagnostic Center, Inc. and
         TeleQuest, Inc.

10.40    Professional Service Agreement, effective February 1, 1997, by and between National Diagnostics/Orange Park,
         Inc. and TeleQuest, Inc.

10.41    Professional Service Agreement, effective February 1, 1997, by and between Brandon Diagnostic Center, Ltd. and
         TeleQuest, Inc.

10.42    Promissory Note and Security Agreement dated February 18, 1997 between National Diagnostics, Inc. and DVI
         Business Credit Corporation relating to the Company's installment loan.

20.1     National Diagnostics, Inc. Offer to Exchange dated July 6, 1995.  (Exhibit 20.1 to the Company's Form 10-QSB
         for the period ended June 30, 1995 is incorporated by reference herein).

21       Subsidiaries of Registrant.

23.1     Consent of Independent Certified Public Accountants-Grant Thornton LLP

24       Powers of Attorney (included on signature page) (Exhibit 24 of the Company's Form 10-KSB for the period ended December 31,
         1995 filed on April 1, 1996 is incorporated by reference herein).

27       Financial Data Schedule (for SEC use only).
</TABLE>

  (b)    Reports on Form 8-K.

No Form 8-K was filed by the Company in 1996.

                                      56


<PAGE>   57


                                 SIGNATURES

         IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

Date:  April 15, 1997                  NATIONAL DIAGNOSTICS, INC.
                                       
                                       
                                       By:      /s/ Curtis L. Alliston
                                                -----------------------------
                                                Curtis L. Alliston
                                                President and Chief Operating
                                                Officer
                                       
                                       By:      /s/ Dennis C. Hult
                                                -----------------------------
                                                Dennis C. Hult
                                                Comptroller






                                      57


<PAGE>   58



                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                       <C>
3.1      Articles of Incorporation of the Company (Exhibit 3.1 to the company's Form
         SB-1 Registration Statement (Reg. No. 33-80612) is incorporated
         by reference herein).

3.2      By-laws of the Company  (Exhibit 3.2 to the Company's Form SB-1 Registration
         Statement (Reg. No. 33-80612) is incorporated by reference herein).

4.1      1995 Employee Stock Option Plan. (Exhibit 4.1 of Company's Form S-8
         Registration No.33-80293 is incorporated by reference herein).

4.2      1995 Non-Employee Director Stock Option Plan. (Exhibit 4.2 of Company's
         Form S-8 Registration No. 80293 is incorporated by reference herein).

4.3      Warrants Agreement (Exhibit 4.4 to Amendment No. 3 to the Company's Form
         SB-1 Registration Statement (Reg. No. 33-80612) is incorporated by reference
         herein).

10.1     Employment Agreement by and between the Company and Curtis L. Alliston
         dated April 4, 1995. (Exhibit 10.1 of Company's Form 10-QSB for the
         period ended March 31, 1995 is incorporated by reference herein).

10.2     Employment Agreement by and between the Company and Jugal K. Taneja
         dated April 4, 1995. (Exhibit 10.2 of Company's Form 10-QSB for the
         period ended March 31, 1995 is incorporated by reference herein).

10.3     Lease Agreement dated April 1, 1995 by and between National Diagnostics/
         Orange Park, Inc. and Sundance Partners.  (Exhibit 10.3 of Company's Form
         10-QSB for the period ended March 31, 1995 is incorporated by reference herein).

10.4     Brandon Diagnostic Center, Ltd.'s Revolving Note dated May 30, 1995.
         (Exhibit 10.1 of Company's Form 10-QSB for the period ended June 30,
         1995 is incorporated by reference herein.)

10.5     Employment Agreement by and between the Company and Curtis L. Alliston
         dated November 10, 1995.(Exhibit 10.1 of Company's Form 10-QSB for the
         period ended September 30, 1995 is incorporated by reference herein).

10.6     Employment Agreement by and between the Company and Jugal K. Taneja
         dated November 10, 1995. (Exhibit 10.2 of Company's Form 10-QSB for
         the period ended September 30, 1995 is incorporated by reference
         herein).
</TABLE>

                                      58


<PAGE>   59



                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                       <C>
10.7     Lease Agreement dated July 12, 1995 between National Diagnostics/Orange
         Park, Inc. and Siemens Medical Systems, Inc. effective September 14, 1995.
         (Exhibit 10.3 of Company's Form 10-QSB for the period ended September 30,
         1995 is incorporated by reference herein).

10.8     Professional services agreement dated December 21, 1995 between
         Brandon Diagnostic Center, Ltd., SunPoint Diagnostic Center, Inc. and
         Robert D. Marshall, M.D., P.A (Exhibit 10.8 of Company's Form 10-KSB
         for the period ended December 31, 1995 filed on April 1, 1996 is
         incorporated by reference herein).

10.9     Purchase agreement dated February 19, 1996 between National
         Diagnostics, Inc., National Diagnostics/Orange Park, Sundance
         Partners, and partners (Exhibit 10.9 of the Company's Form 10-KSB for
         the period ended December 31, 1995 filed on April 1, 1996 is
         incorporated by reference herein).

10.10    Agreement of Partnership of Sundance Partners (a Florida partnership)
         date March 1, 1995. (Exhibit 10.10 of the Company's Form 10-KSB for
         the period ended December 31, 1995 filed on April 1, 1996 is
         incorporated by reference herein).

10.11    Lease Agreement dated September 3, 1991 and modification thereto dated August 8,
         1992 by and between Brandon Diagnostic Center, Ltd. and Bay Land Investment,
         Inc. relating to a portion of the Company's Brandon, Florida facility (Exhibit 10.2 to
         the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is
         incorporated by reference herein).

10.12    Lease Agreement dated February 1, 1992 and modification thereto dated August 8,
         1992 by and between Brandon Diagnostic Center, ltd. and Bay Land Investment,
         Inc. relating to a portion of the Company's Brandon Florida facility (Exhibit 10.3
         to the Company's Form SB-1 Registration Statement Reg. No. 33-80612) is
         incorporated by reference herein).

10.13    Lease Agreement dated January 15, 1993 by and between Brandon Diagnostic
         Center, ltd. and Bay Land Investment, Inc. relating to a portion of the Company's
         Brandon, Florida facility (Exhibit 10.4 to the Company's Form SB-1 Registration
         Statement (Reg. no. 33-80612) is incorporated by reference herein).

10.14    Lease Agreement dated May 4, 1994 by and between Alpha Associates, Inc. and
         Sun Point Associates, Inc. and Sun Point Associates relating to the Company's
         Ruskin, Florida facility (Exhibit 10.5 to the Company's for SB-1 Registration
         Statement (Reg. No. 33-80612) is incorporated by reference herein).
</TABLE>


                                      59


<PAGE>   60




                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                       <C>
10.15    Equipment Lease Agreement dated September 11, 1991 by and between Brandon
         Diagnostic Center, ltd. and Siemens Credit Corporation and supplements
         thereto relating to the Company's magnetic resonance imaging equipment
         (Exhibit 10.6 to the Company's Form SB-1 Registration Statement
         (Reg. No. 33-80612) is incorporated by reference herein).

10.16    Equipment Lease Agreement dated September 11, 1991 by and between
         Brandon Diagnostic Center, ltd. and Siemens Credit Corporation and
         supplement thereto relating to the Company's computer tomography
         equipment (Exhibit 10.7 to the Company's Form SB-1 Registration Statement
         (Reg. No. 33-80612) is incorporated by reference herein).

10.17    Equipment Lease Agreement dated November 18, 1991 by and between Brandon
         Diagnostic Center, ltd. and Siemens Credit Corporation and supplements thereto
         relating to the Company's nuclear medicine equipment (Exhibit 10.9 to the
         Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated
         by reference herein).

10.18    Professional Services Agreement dated June 7, 1993 by and between Brandon
         Diagnostic Center, Ltd. and East Pasco Radiology Associates, P.A. (Exhibit 10.13
         to the Company's Form SB-1 Registration Statement (Reg. No. 33-80612) is
         incorporated by reference herein).

10.19    Lease Agreement dated September 1, 1994 by and between Highland Properties
         of Gulf Coast, Ltd. and Brandon Diagnostic Center, ltd. relating to the
         Company's Brandon, Florida facility (Exhibit 10.21 to Amendment No. 3 to
         the Company's form SB-1 Registration Statement (Reg. No. 33-80612 is
         incorporated by reference herein).

10.20    Asset Purchase Agreement effective November 1, 1993 by and between Alpha
         Acquisitions Corp. and Equipment Company of Brandon, Inc. pertaining to the
         acquisition by Alpha Acquisitions Corp. of the 40% limited partnership interest
         in Brandon Diagnostic Center, Ltd. (Exhibit 10.22 to Amendment No. 3 to the
         company's form SB-1 Registration Statement (Reg. No. 33-80612) is incorporated
         by reference herein).

10.21    Unit Purchase Option dated September 27, 1994 relating to 50,000 Units
         (Exhibit 4.5 to Amendment No. 2 to the Company's Form SB-1 Registration
         Statement (Reg. No. 33-80612) is incorporated by reference herein).
</TABLE>


                                      60


<PAGE>   61




                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                       <C>
10.22    Equipment Lease Agreement dated July 19, 1994 by and between Medical
         Consultants of Middleburg, Inc. and Copelco Capital Corporation
         relating to Orange Park's ultrasound equipment (Exhibit 10.17 to the
         Company's form 10-KSB for December 31, 1994 is incorporated by
         reference herein).

10.23    Master Lease Agreement dated June 27, 1994 by and between Alpha
         Associates, Inc. d/b/a Brandon Diagnostic Center and Copelco Leasing
         Corporation and schedules thereto relating to SunPoint's diagnostic
         imaging equipment (Exhibit 10.18 to the Company's form 10-KSB for
         December 31, 1994 is incorporated by reference herein).

10.24    Equipment Lease Agreement dated August 1, 1994 by and between Brandon
         Diagnostic Center, ltd. and Siemens Credit Corporation relating to
         SunPoint's diagnostic imaging equipment (Exhibit 10.19 to the
         Company's form 10-KSB for December 31, 1994 is incorporated by
         reference herein).

10.25    Asset Purchase Agreement, dated February 6, 1995 and effective as of January
         31, 1995, as amended, by and among Middleburg Medical Imaging Consultants,
         Inc. (renamed National Diagnostics/Orange Park, Inc.), Medical Consultants of
         Middleburg, Inc. and Medical Imaging Consultants, Inc. (Exhibit 10.20 to the
         Company's form 10-KSB for December 31, 1994 is incorporated by reference herein).

10.26    Employment Contract, dated February 6, 1995 and effective as of
         January 31, 1995, by and between Ronald D. Baugh and Middleburg
         Medical Imaging consultants, Inc. (Exhibit 10.21 to the Company's form
         10-KSB for December 31, 1994 is incorporated by reference herein).

10.27    Professional Services Agreement, effective as of November 7, 1994, by and
         between SunPoint Diagnostic Center, Inc. and East Pasco Radiology Associates,
         Inc. (Exhibit 10.22 to the Company's form 10-KSB for December 31, 1994 is
         incorporated by reference herein).

10.28    Professional Services Agreement, dated November 30, 1994, by and
         between the Company and Drs. Hurt, Isaacs, Johnston and Cranford, P.A.
         (Exhibit 10.23 to the Company's form 10-KSB for December 31, 1994 is
         incorporated by reference herein).

10.29    Services Agreement, dated November 17, 1994, by and between Diagnostic
         Cardiology Associates, P.A. and the Company (Exhibit 10.24 to the
         Company's form 10-KSB for December 31, 1994 is incorporated by
         reference herein).
</TABLE>


                                      61


<PAGE>   62




                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                       <C>
10.30    Term Loan Agreement and Revolving Loan Agreement, both dated March 6,
         1994, by and between Brandon Diagnostic Center, Ltd. and SouthTrust
         Bank of West Florida, and related Notes and Security Agreements
         (Exhibit 10.25 to the Company's form 10-KSB for December 31, 1994 is
         incorporated by reference herein).

10.31    Lease Agreement dated August 15, 1995 between National
         Diagnostics/Riverside, Inc. ("Riverside") and Sundance Partners II
         relating to the Company's Riverside fixed site facility. (Exhibit
         10.33 to the Company's 10-QSB for June 30, 1996 is incorporated by
         reference herein).

10.32    Equipment Lease Agreement dated July 15, 1996 between National
         Diagnostics/ Riverside, Inc. and Siemens Credit Corporation relating
         to Riverside's computer tomography equipment. (Exhibit 10.34 to the
         Company's 10-QSB for September 30, 1996 is incorporated by reference
         herein).

10.33    Equipment Lease Agreement dated August 12, 1996 between National
         Diagnostics/Riverside, Inc. and Siemens Credit Corporation relating to
         the Riverside's ultrasound equipment. (Exhibit 10.35 to the Company's
         10-QSB for September 30, 1996 is incorporated by reference herein).

10.34    Promissory Note and Business Loan Agreement dated September 9, 1996
         between Brandon Diagnositc Center, Ltd. and South Hillsborough
         Community Bank related to equipment refinancing. (Exhibit 10.36 to the
         Company's 10-QSB for September 30, 1996 is incorporated by reference
         herein).

10.35    Equipment Lease Agreement dated September 11, 1996 between National
         Diagnostics/Riverside, Inc. ("Riverside") and Siemens Credit
         Corporation relating to Riverside's Sireskop CX. (Exhibit 10.37 to the
         Company's 10-QSB for September 30, 1996 is incorporated by reference
         herein).

10.36    Loan and Security Agreement dated September 13,1996 between National
         Diagnostics, Inc. and DVI Business Credit Corporation relating to the Company's
         line of credit.  (Exhibit 10.38 to the Company's 10-QSB for September 30,
         1996 is incorporated by reference herein).

10.37    Promissory Note and Business Loan Agreement dated December 23, 1996 between                 64
         Brandon Diagnostic Center, Ltd. and South Hillsborough Community Bank related
         to the purchase of  Stereotactic Mammography  equipment.             
</TABLE>




                                      62


<PAGE>   63




                                EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                   Pagination by
                                                                                                     Sequential
Exhibit                                                                                              Numbering
Number                                    Description of Document                                      System
------                                    -----------------------                                  -------------
<S>      <C>                                                                                            <C>
10.38    Equipment Lease Agreement dated January 22, 1997 between Brandon
         Diagnostic Center, Ltd. ("Brandon") and Siemens Credit Corporation relating
         to Brandon's Sireskop CX.                                                                      65

10.39    Professional Service Agreement, effective February 1, 1997, by and between
         SunPoint Diagnostic Center, Inc. and TeleQuest, Inc.                                           66

10.40    Professional Service Agreement, effective February 1, 1997, by and between
         National Diagnostics/Orange Park, Inc. and TeleQuest, Inc.                                     67

10.41    Professional Service Agreement, effective February 1, 1997, by and between
         Brandon Diagnostic Center, Ltd. and TeleQuest, Inc.                                            68

10.42    Promissory Note and Security Agreement dated February 18, 1997 between
         National Diagnostics, Inc. and DVI Business Credit Corporation relating to
         the Company's installment loan.                                                                69

20.1     National Diagnostics, Inc. Offer to Exchange dated July 6, 1995.  (Exhibit
         20.1 to the Company's Form 10-QSB for the period ended June 30, 1995
         is incorporated by reference herein).

21       Subsidiaries of Registrant.                                                                    71

23.1     Consent of Independent Certified Public Accountants-Grant Thornton LLP                         70

27       Financial Data Schedule (for SEC use only).
</TABLE>


  (b)    Reports on Form 8-K.

No Form 8-K was filed by the Company in 1996.

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