HEALTH IMAGES INC, S-3, 1996-10-25

HEALTH IMAGES INC
S-3, 1996-10-25
MEDICAL LABORATORIES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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HEALTH IMAGES, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 58-1485618
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>

8601 DUNWOODY PLACE
BUILDING 200
ATLANTA, GEORGIA 30350
(770) 587-5084
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

ROBIN EUBANKS MURRAY, ESQ.
VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
HEALTH IMAGES, INC.
8601 DUNWOODY PLACE
BUILDING 200
ATLANTA, GEORGIA 30350
(770) 587-5084
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)

COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
GABRIEL DUMITRESCU, ESQ. FREDERICK W. KANNER, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY DEWEY BALLANTINE
SIXTEENTH FLOOR 1301 AVENUE OF THE AMERICAS
191 PEACHTREE STREET, N.E. NEW YORK, NEW YORK 10019
ATLANTA, GEORGIA 30303 (212) 259-8000
(404) 572-6600
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE

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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value.............. 2,875,000 Shares $12.63 $36,311,250 $11,003
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Rights to Purchase Series B Participating
Preferred Stock(3)...................... 2,875,000 Rights
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(1) Includes 375,000 shares of Common Stock that the Underwriters have an option
to purchase to cover over-allotments, if any.
(2) Estimated solely for the purposes of determining the registration fee.
(3) The Rights, which are attached to the shares of Common Stock being
registered, will be issued for no additional consideration and, therefore,
no additional registration fee is required.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996

PROSPECTUS

2,500,000 SHARES

HEALTH IMAGES, INC.

COMMON STOCK
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All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Health Images, Inc. (the "Company").

The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol "HII." On October 24, 1996, the last reported sale price of the
Common Stock on the New York Stock Exchange was $13 1/2 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
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</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $ payable by
the Company.
(3) The Company and a stockholder of the Company (the "Selling Stockholder")
have granted to the Underwriters a 30-day option to purchase up to 375,000
additional shares on the same terms as set forth above solely to cover
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively, and the
Selling Stockholder will receive proceeds of $ . See
"Underwriting."
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The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them, and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the offices of Smith Barney Inc., 333 West 34th Street,
New York, New York, 10001.
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SMITH BARNEY INC.
, 1996
<PAGE> 3

[MAP]

The map above shows the location of the Company's diagnostic imaging
centers and presents information as of October 15, 1996.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

HI Standard(R) and HI STAR(TM) are trademarks of Health Images, Inc.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in connection with, the more detailed information and consolidated financial
statements (including notes thereto) appearing elsewhere in or incorporated by
reference into this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.

THE COMPANY

Health Images, Inc. (the "Company" or "Health Images") is a leading
provider of diagnostic imaging services and one of the largest independent
operators of magnetic resonance imaging ("MRI") centers in the United States.
MRI is considered the premier diagnostic modality for cross-sectional imaging of
human tissue. The Company operates 49 freestanding diagnostic imaging centers in
13 states in the United States and six in England. The Company offers MRI
services at all of its imaging centers. In addition, the Company provides
computerized tomography ("CT") services at 18 of its centers, x-ray services at
19 centers, ultrasound services at 15 centers, mammography services at 13
centers, nuclear medicine at seven centers and fluoroscopy at eight centers.

Medical imaging systems facilitate the diagnosis of diseases and disorders
at an early stage, often minimizing the amount and cost of care needed to
stabilize, treat or cure the patient and frequently obviating the need for more
expensive and invasive diagnostic procedures, such as exploratory surgery.
Diagnostic imaging systems have evolved from conventional x-ray to the advanced
technologies of MRI, CT, nuclear medicine and ultrasound. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing acceptance by physicians of the value of
diagnostic imaging technologies in the early diagnosis of disease, the expanding
applications of MRI and ultrasound and the growing patient base attributable to
an aging population. The Diagnostic Imaging Centers Report & Directory (August
1995), prepared by SMG Marketing Group Inc. (the "SMG Report & Directory"),
estimates the market for diagnostic imaging services in the United States to be
between $56 billion and $70 billion annually, or 5% to 6% of total health care
spending.

The Company believes the industry is experiencing a trend away from
hospital based facilities and toward outpatient delivery of diagnostic imaging
services. Outpatient imaging centers make the necessary imaging services easily
accessible without requiring the patient to undergo the often time-consuming and
tedious hospital admission process. The Company believes that it can offer
patients and physicians more prompt and flexible service than generally
available from hospitals. For hospitals, diagnostic imaging services represent a
minor and ancillary aspect of their operations.

The Company believes that the diagnostic imaging industry, like other
segments of the health care industry, is consolidating, driven by the increasing
role of private insurers and managed care payors in controlling reimbursement
rates and a declining number of self-referral practices. The Company views this
consolidation trend as providing expansion opportunities for large, efficient,
financially sound multi-center operators.

The Company is a vertically integrated diagnostic imaging services provider
which develops, manufactures and maintains its own MRI systems. The Company
recently developed a new MRI system, the HI STAR(TM), which was approved by the
United States Food and Drug Administration ("FDA") in September 1995. The
Company has three HI STAR systems operating in its centers and intends to
install four more during the remainder of 1996. The Company's plans call for the
replacement of 33 MRI systems with the HI STAR over the next 24 months
(including the three MRI systems replaced with the HI STAR to date). The Company
also has in-house construction management expertise that enables it to develop
imaging centers in a timely, cost-effective manner. The Company believes this
vertical integration gives it a unique advantage in the diagnostic imaging
industry by reducing the Company's capital expenditures and operating costs. The
Company believes this advantage should increase in the current health care
environment of lower reimbursements. The Company believes its low cost operating
structure permits it to compete effectively with other providers of diagnostic
imaging services in its regional markets.

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The Company's growth strategy is to expand its business by increasing
volume at existing imaging centers, increasing the range of services provided by
certain of its existing centers, particularly through the addition of pain
management services, developing new centers in selected areas, acquiring other
imaging centers and offering radiology management services.

Increase MRI Scan Volume. The Company intends to increase the scan volume
and revenue of its existing centers. The Company believes that installation of
its HI STAR system will increase the number of studies performed by each imaging
center with the new system. The HI STAR will perform scans more quickly than the
MRI systems which are being replaced, and will therefore increase throughput
capacity. The demand for imaging services is greater during certain times of the
day. A faster scan time increases the number of MRI scans that can be performed
during these peak hours. Also, unlike the MRI systems being replaced, the HI
STAR can perform MR angiography studies. The Company's marketing research
indicates that some neurologists and neurosurgeons (who generally are
significant referers of MRI) are reluctant to refer patients to imaging centers
that lack MR angiography capabilities.

Expand Range of Services. The Company intends selectively to expand the
array of diagnostic imaging services offered by its imaging centers. The
decision to add modalities will primarily be driven by the Company's assessment
of the requirements and expectations of managed care payors and referring
physicians in the particular market. In addition, the Company intends to offer
pain management services at selected centers.

Develop New Centers. The Company intends to develop new imaging centers to
increase its presence in certain markets or to enter new markets that are
underserved. The decision to develop a new center will primarily be based on
whether acquisition candidates which meet the Company's acquisition criteria,
including reasonable purchase price, exist in a particular market. Generally,
the need to expand in a market will be identified by the Company's locally-based
Administrator or Regional Administrator.

Acquire Other Imaging Centers. The Company has an acquisition strategy
designed to enhance its presence in key regional markets in order to meet the
geographical coverage requirements of certain managed care payors. The Company
believes that, particularly in certain metropolitan areas, a more extensive
network of multi-modality services will make the Company more attractive to
certain managed care and commercial insurance payors because the number of
contracts these payors need to maintain with imaging providers can be reduced.

Expand Radiology Management Services. When appropriate opportunities
arise, the Company intends to provide management services for diagnostic imaging
facilities owned by hospitals or other health care providers. In addition, the
Company believes in the future its experience and resources may provide a
natural nexus for managing the physician practices of groups of radiologists,
particularly in markets in which it operates imaging centers.

The Company was incorporated in 1982 as a Florida corporation and changed
its state of incorporation to Delaware in 1989. The Company's executive offices
are located at 8601 Dunwoody Place, Building 200, Atlanta, Georgia 30350, and
its telephone number is (770) 587-5084. Unless the context indicates otherwise,
all references to the Company include the Company's subsidiaries and the limited
partnerships controlled by the Company.

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THE OFFERING

Common Stock being offered by the
Company............................. 2,500,000 shares

Common Stock to be outstanding after
the offering........................ 13,977,364 shares(1)

Use of proceeds..................... To retire a portion of the Company's
outstanding indebtedness and fund
working capital

New York Stock Exchange symbol...... HII
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(1) Based upon the number of shares of Common Stock outstanding as of October
21, 1996. Does not include 1,266,410 shares of Common Stock subject to
options outstanding under the Company's stock option plans and programs and
250,000 shares subject to a warrant. See note 6 of notes to consolidated
financial statements of the Company.

RISK FACTORS

Prospective purchasers of the Common Stock should consider carefully all of
the information set forth in this Prospectus and, in particular, should evaluate
the matters set forth under "Risk Factors" for risks involved with an investment
in the Common Stock.

SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------- ENDED JUNE 30,
PRO FORMA(1) -------------------
1993 1994 1995 1995 1995 1996
------- ------- -------- ------------ ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total Net Revenue.............. $76,089 $77,122 $115,536 $127,049 $50,660 $64,180
Total Operating Expenses....... 67,828 67,114 100,049 109,824 44,084 55,216
Operating Income............... 8,261 10,008 15,487 17,225 6,576 8,965
Net Income from Continuing
Operations................... 4,225 5,393 6,891 7,158 2,955 4,261
Net Income (Loss).............. 3,759 (1,135) 5,729 5,996 1,793 4,261
Net Income from Continuing
Operations Per Share......... 0.36 0.46 0.59 0.62 0.25 0.36
Net Income (Loss) Per Share.... 0.32 (0.10) 0.49 0.52 0.15 0.36
OPERATING AND STATISTICAL DATA
(UNAUDITED):
Number of Imaging Centers at
end of period................ 44 42 53 56 54 54
Average Annual Revenue per
Center(2).................... $ 1,605 $ 1,745 $ 2,166 $ 2,327 $ 1,960 $ 2,342
Number of Procedures:
MRI.......................... 84,225 94,032 121,446(3) 131,452 55,708(3) 65,914(3)
CT........................... 5,722 7,308 24,345(3) 29,574 9,045(3) 15,575(3)
Other........................ 20,378 29,161 139,217(3) 173,804 53,872(3) 92,750(3)
</TABLE>

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<TABLE>
<CAPTION>
JUNE 30, 1996
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ACTUAL AS ADJUSTED(4)
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(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital...................................................... $ (277) $ 7,802
Total Assets......................................................... 178,871 179,549
Long Term Debt....................................................... 43,280 19,884
Stockholders' Equity................................................. 87,453 118,928
</TABLE>

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<TABLE>
<CAPTION>
WEIGHTED AVERAGE
PERIOD NUMBER OF CENTERS
---------------------------------------------------- -----------------
<S> <C>
Year ended December 31, 1993........................ 42.7
Year ended December 31, 1994........................ 41.5
Year ended December 31, 1995........................ 51.4
Pro forma year ended December 31, 1995.............. 52.8
Six months ended June 30, 1995...................... 49.5
Six months ended June 30, 1996...................... 53.2
</TABLE>

(3) Includes procedures performed at imaging centers acquired from MedAlliance,
Inc. subsequent to the April 1, 1995 acquisition date as follows: 30,069
MRI, 15,755 CT and 100,738 Other for the year ended December 31, 1995,
9,907 MRI, 5,046 CT and 34,991 Other for the six months ended June 30, 1995
and 19,928 MRI, 10,683 CT and 62,762 Other for the six months ended June
30, 1996. "Other" includes x-ray, ultrasound, mammography, nuclear medicine
and fluoroscopy procedures.

(4) As adjusted to reflect the sale of the shares of Common Stock offered by the
Company hereby (assuming a public offering price of $13.50 per share) and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."

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RISK FACTORS

In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby.

DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS

The health care environment is undergoing significant changes as third
party payors attempt to control the cost, utilization and delivery of health
care services. Although patients are ultimately responsible for the payment for
services rendered, substantially all of the Company's revenue is derived from
third party payors, including managed care companies, commercial insurers and
Medicare. The growth of managed care has led to increased scrutiny of the
appropriateness of referrals for major diagnostic imaging procedures, such as
MRI and CT, which are the Company's principal sources of revenue. In addition,
most managed care payors typically negotiate with the Company for significant
discounts from standard billing rates. As a result, the Company's average
reimbursements per procedure have declined in recent years.

Medicare allowable fees are substantially less than the Company's standard
billing rates. Medicare reimbursement rates vary from state to state and among
regions within a state. The Company believes that additional reductions in
Medicare rates may be implemented from time to time. During the year ended
December 31, 1995 and the nine months ended September 30, 1996, approximately
11.6% and 14.9%, respectively, of the patients referred to the Company's imaging
centers were Medicare patients. The percentage of Medicare patients varies
greatly among the imaging centers, with the lowest percentage being 4.8% and the
highest percentage being 41.5% during the 1995 fiscal year. Reduction in
Medicare rates may lead to reductions in reimbursement rates by other
third-party payors as well. For example, Pennsylvania, where five of the
Company's imaging centers are located, has legislation that limits reimbursement
of workmen's compensation and automobile injury cases to 113% of the Medicare
reimbursement for the medical service.

The Company's net patient revenue collected depends upon the reimbursement
policies of third-party payors, as well as the ability of the Company to
properly document, file and collect claims for reimbursement in a timely manner.
Successful efforts by third-party payors to contain or reduce payments made to
health care providers further through the continued reduction of reimbursement
amounts and rates, closer scrutiny of reimbursement claims, changes in services
covered (sometimes on a retroactive basis), changes in who may be considered an
eligible provider (sometimes on a retroactive basis), delays or denials of
reimbursement claims, negotiated or discounted pricing and other similar
measures could materially adversely affect the Company's revenues, profitability
and cash flow. As part of the effort to contain the growth in health care costs
in the private sector and in government health care programs such as Medicare
and Medicaid, the Company has experienced denials of claims on grounds that
appear to be arbitrary. The Company believes that federal and state fiscal
pressures may continue to result in denial of reimbursement for services already
provided. The Company has little effective remedy in the case of such denials.

See "Business -- Reimbursement."

COMPETITION

The diagnostic imaging services industry is highly competitive. The Company
and its imaging centers compete with local hospitals, other independent
diagnostic imaging centers or companies and imaging centers owned by local
physician groups. Some of the Company's competitors have greater financial
resources than the Company. Other competitors may have existing relationships
with the local medical community which are superior to those of the Company's
imaging centers. In addition, some hospitals use their control over inpatient
services to extract exclusive arrangements or advantageous pricing from third
party payors for their outpatient services such as diagnostic imaging. Hospitals
have an advantage over the Company in negotiating with certain managed care
payors who prefer to contract with one source for a comprehensive range of
health care services, including imaging services. Some physicians also prefer to
refer patients to imaging facilities that operate high-field strength MRI
systems, and such referral preference may negatively affect the Company's

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ability to compete with other imaging services providers in certain markets
because the Company's MRI systems are mostly mid-field strength. In addition,
certain managed care payors prefer to enter into managed care arrangements with
imaging centers that can provide the entire spectrum of imaging services to
their covered persons. Of the Company's 49 centers operating in the United
States, 27 currently offer only MRI services, which may place the Company at a
disadvantage in certain markets. The Company does not currently operate any
so-called "open" MRI systems. Such open MRI systems emphasize patient comfort
and are generally lower in cost than other MRI systems available from third
party manufacturers. Open MRI systems operate at a relatively low-field
strength, .2 Tesla, and may produce images with less clarity than mid-field and
high-field MRI systems. In response to recent local advertising campaigns by
manufacturers of open systems, certain patients have begun to request open MRI.
The Company believes that its STARVIEW(TM) MRI Patient Entertainment System is
an effective remedy to concerns about claustrophobia among patients. There can
be no assurance, however, that open MRI systems will not be preferred by
patients and therefore become the preferred choice in MRI systems among
referring physicians. There is no assurance that the Company will be able to
maintain or improve its competitive position in the diagnostic imaging industry.
See "Business -- Competition."

GOVERNMENT REGULATION

The diagnostic imaging industry in the United States is subject to various
federal and state laws and regulations and in England is subject to the overview
of the Health and Safety Executive. While the Company believes that its
operations substantially comply with applicable laws and regulations, the
Company has not sought or received interpretive rulings to that effect.
Additionally, there can be no assurance that subsequent laws, subsequent changes
in present laws or interpretations of laws will not materially adversely affect
the Company's operations. Certain applicable laws and regulations are generally
described below:

Fraud and Abuse

All medical providers which accept Medicare or Medicaid reimbursements are
currently subject to the fraud and abuse provisions of the Social Security Act
(the "Act"), which prohibit bribes, kickbacks, and rebates and any direct or
indirect remuneration for the referral of Medicare or Medicaid patients or for
providing Medicare-covered or Medicaid-covered services, items or equipment.
Violation of these provisions may result in civil and criminal penalties and
exclusion from participation in the Medicare and Medicaid programs. The Office
of the Inspector General of the Department of Health and Human Services ("HHS")
issued regulations which provide specific "safe harbors" for certain practices
that will be protected from criminal prosecution or civil sanctioning under the
anti-kickback laws. The Company has five imaging centers that are owned by
limited partnerships. These limited partnerships meet most but not all of the
safe harbor criteria and therefore do not qualify for the safe harbors set forth
in the HHS regulations. Failure to satisfy the conditions of an applicable safe
harbor does not necessarily indicate that the arrangement in question violates
the Act, but means that the arrangement is not protected from criminal or civil
sanctions under that law. If the Company were found to be in violation of the
Act, such a finding could have a material adverse effect on the business of the
Company. The Company has offered to purchase the interests of the limited
partners in each of its affiliated partnerships in order to effect a termination
of the partnerships and avoid any risk that it or the limited partners will be
prosecuted under the Act. While the remaining limited partners have nominal
interests in the limited partnership, they have not been willing to sell their
respective interests to the Company. See "Business -- Government
Regulation -- Fraud and Abuse."

The Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") enacted
restrictions on the practice of physician self-referral; i.e., the practice by
which physicians refer patients to entities with which they have a financial
relationship. With respect to diagnostic imaging services, OBRA '93 makes it
unlawful for a physician, a physician's immediate family member, or an entity in
which either has an ownership interest to refer Medicare or Medicaid patients
for MRI or CT services to an entity with which any one of them has a "financial
relationship," or to bill for such referrals. The statute defines "financial
relationship" to include not only an ownership or other investment interest but
also any economic interest. Any compensation arrangement between a referring
physician and an imaging center is therefore covered by OBRA '93. Although OBRA
'93

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became effective on January 1, 1995, no regulations implementing its provisions
have been proposed and the form on which providers would report their financial
relationships has not been issued. With respect to the five imaging centers that
are limited partnerships, there may have been a very small number of isolated
referrals by physician investors of Medicare patients, however, the Company has
implemented procedures to preclude billing of Medicare or Medicaid referrals in
the future. Moreover, while the Company attempts to structure its contracts with
referring physicians who also provide services to or receive services from the
Company to comply with OBRA '93, there can be no assurance that the Company is
currently in compliance with such statute. See "Business -- Government
Regulation -- Fraud and Abuse."

Certain of the states in which the Company has imaging centers have enacted
provisions concerning fraud and abuse and physician self-referral. For example,
the States of New Jersey, Illinois, Florida, Georgia, Maryland, South Carolina
and Tennessee have all passed legislation that would, in some form, prohibit
physicians from referring patients to entities in which these physicians have a
financial interest, regardless of payment source. Other states may have enacted
or may be considering similar legislation. There can be no assurance that the
Company is currently in compliance with such state statutes or that the Company
will be in compliance with similar state statutes that may be enacted. See
"Business -- Government Regulation -- State Regulation."

Prohibition Against Practice of Medicine

The establishment, marketing and operation of imaging centers are subject
to laws prohibiting the practice of medicine by non-physicians and the rebate or
division of fees between physicians and non-physicians. These laws also limit
the manner in which patients may be solicited. Management believes that its plan
of operations complies with such laws. Under the Company's plan, the employees
of each imaging center provide only technical services relating to the
diagnostic scans. Professional medical services, such as the reading of the
diagnostic studies and related diagnosis and the providing of pain management
medical procedures are separately provided by licensed physicians. There can be
no assurance, however, that governmental authorities or courts will not
determine that these relationships constitute the unauthorized practice of
medicine by the Company. Such determinations could have a materially adverse
effect upon the Company and would prohibit the affected imaging centers from
continuing their current procedures for conducting business.

Certificates of Need

Most states have Certificate of Need ("CON") programs which generally
require that a CON be obtained before constructing a "health care facility" or
acquiring major medical equipment or establishing new institutional services. A
CON is granted on the basis of various criteria relating to need, giving
consideration to the extent to which such facilities, equipment or services are
available to a specified geographical area and the population of such area. To
the extent CONs or other similar approvals are required for expansion of Company
operations, either through facility acquisitions, development of new imaging
centers, offering new services or other changes, such expansion could be
materially adversely affected by a failure or inability to obtain a CON or other
necessary approval, changes in the standards applicable to such approvals and
the expenses associated with obtaining such approvals. See
"Business -- Government Regulation -- Certificates of Need."

Medical Device Regulation

The manufacture and sale of the Company's MRI systems and upgrades are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign agencies. The regulatory process is lengthy,
expensive and uncertain. Prior to commercial sale in the U.S., most medical
devices, including the Company's MRI systems and upgrades, must be cleared by
the FDA. Securing FDA clearance may require the submission of extensive clinical
data and supporting information to the FDA. Current FDA enforcement policy
strictly prohibits the marketing of medical devices for uses other than those
for which the product has been cleared. Product clearances can be withdrawn for
failure to comply with

9
<PAGE> 11

regulatory standards or the occurrence of unforeseen problems following initial
marketing. Foreign governments also have review processes for new products which
present many of the same risks.

The Company's new HI STAR MRI system and its predecessor HI Standard MRI
system have been cleared by the FDA through the 510(k) premarket notification
process. The Company received 510(k) clearance of the HI STAR MRI system in
September 1995. There can be no assurance that the Company will be able to
obtain necessary regulatory clearances on a timely basis, if at all, for any new
products or modifications of existing products and delays in receipt of or
failure to receive such clearances, the loss of previously received clearances,
or failure to comply with existing or future regulatory requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.

The Company is also required to adhere to FDA regulations setting forth
requirements for Good Manufacturing Practices ("GMP") which include testing,
control and documentation requirements. Ongoing compliance with GMP, labeling
and other applicable regulatory requirements is monitored through periodic
inspections by state and federal agencies, including the FDA. Failure to comply
with applicable regulations could result in sanctions being imposed on the
Company, including fines, injunctions, civil penalties, failure of the
government to grant premarket clearance, delays, suspension or withdrawal of
approvals, seizures or recalls of products, operating restrictions and criminal
prosecutions.

See "Business -- Government Regulation -- FDA Regulation of Medical
Devices."

NEW BUSINESSES

The Company is considering developing new imaging centers, adding
modalities to existing centers, expanding into pain management services,
managing imaging centers or facilities for others, and employing radiologists
directly. There can be no assurance that the Company will be able to identify
markets which it considers suitable for new imaging centers or that the Company
will consider the demand for imaging services to be adequate to increase the
range of imaging services it provides at existing centers beyond their present
level. The Company's experience traditionally has been in the field of operating
MRI centers and there can be no assurance that the multi-modality expertise
acquired through the purchase from MedAlliance, Inc. ("MedAlliance") of the
assets and business of 15 multi-modality imaging centers (the "MedAlliance
Centers Acquisition") in April 1995 will be successfully employed at other
imaging centers. In addition, the Company has limited experience in pain
management and has never employed radiologists directly. There can be no
assurance that the Company will be able to operate such businesses profitably.

RISKS RELATED TO GOODWILL

As of June 30, 1996, the Company's total assets were approximately $178.9
million, of which approximately $43.5 million, or approximately 24.3%, was
goodwill. Goodwill is the excess of cost over the fair value of net assets of
businesses acquired. This goodwill is being amortized on a straight-line basis
over varying periods between 10 and 20 years. The Company's growth strategy
contemplates the acquisition of individual groups of imaging centers in selected
markets. If such acquisitions are made in the future, the Company's goodwill is
likely to increase further. The Company evaluates on a regular basis whether
events and circumstances have occurred that indicate all or a portion of the
carrying amount of goodwill may no longer be recoverable, in which case an
additional charge to earnings would become necessary. Although the net
unamortized balance of goodwill at June 30, 1996 is not considered to be
impaired, any future determination requiring the write-off of a significant
portion of unamortized goodwill would materially and adversely affect the
Company's results of operations. There can be no assurance that the value of the
goodwill reflected in the Company's consolidated financial statements will ever
be realized by the Company. See notes 1, 3 and 15 of notes to consolidated
financial statements.

ACQUISITIONS

A significant portion of the Company's recent growth has been achieved
through the MedAlliance Centers Acquisition and the Company's growth strategy
includes acquisitions of individual or groups of imaging centers in selected
markets. There can be no assurance that the Company will be able to identify

10
<PAGE> 12

suitable acquisition candidates in the future or integrate and manage acquired
centers so that such acquisitions will be ultimately profitable. Furthermore,
there can be no assurance that future acquisitions will not have a material
adverse effect upon the Company's operating results, particularly in quarters
immediately following the consummation of such transactions, while the
operations of the acquired business are being integrated into the Company's
operations. To the extent the Company's expansion is dependent upon its ability
to obtain additional financing for acquisitions, there can be no assurance that
the Company will be able to obtain financing on acceptable terms.

SCAN VOLUME

The Company's revenue depends primarily on the number of scanning
procedures performed ("scan volume") and the fee received per scan. Among the
factors which could result in a reduction in scan volume are non-renewal or
cancellation of contracts, malfunctions, equipment downtime due to upgrades or
replacements, and a reduction in demand for the Company's equipment or services.
Most managed care contracts provide for termination without cause following
notice and a stated time period, such as 90 days. The Company's scheduled
replacement of existing MRI systems with HI STAR MRI systems in 30 of its
imaging centers over the next 24 months will require approximately four weeks at
each of the centers affected. During this replacement period, the Company
intends to use mobile MRI units to service patients at those centers. The
Company believes that this replacement period will be brief enough at the
affected centers so as to not disrupt referral patterns. Nonetheless, there can
be no assurance that volume and resulting revenues at the affected centers will
not decline over the replacement period and even thereafter if any change in the
referral patterns becomes permanent.

RELIANCE ON NEW MRI SYSTEM

The Company received 510(k) clearance from the FDA for its new HI STAR MRI
system in September 1995. The Company installed its first HI STAR MRI system for
beta testing at its Atlanta-North center in the fall of 1995. Following beta
testing, the Company completed the installations of its first clinical operating
HI STAR MRI system in June 1996 at the Atlanta-North center, its second at
Lancaster Magnetic Imaging in September 1996 and its third in Darlington
Hospital, England, in October 1996. The senior executive who had been
responsible for the HI STAR development program since its inception in 1993 left
the Company in December 1995. The Company believes that it has addressed
adequately all difficulties inherent in new software systems and the senior
executive's departure has not and will not have a material impact on the
completion of the roll-out of HI STAR MRI systems. There can be no assurance,
however, that additional operational problems in the software or computer
hardware of the HI STAR MRI systems will not be discovered as more systems are
installed and begin to operate or that, if any such problems are discovered,
they can be addressed promptly so as to not disrupt referral patterns.

TECHNOLOGICAL OBSOLESCENCE

Diagnostic imaging technology is continually evolving. The development of
new technologies or refinements of existing technologies might make the
Company's existing equipment technologically or economically obsolete. If such
obsolescence were to occur, the Company might have to develop or purchase new
equipment which could have a material adverse effect on the Company's earnings
and cash flow. Although the Company is not currently aware of any such pending
technological developments, there can be no assurance that such developments
will not occur.

RISK OF PROFESSIONAL AND PRODUCTS LIABILITY

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. In connection with the provision of the
technical component of diagnostic imaging services, the Company does not control
or direct the practice of medicine by physicians who are under contract with the
Company to interpret the procedures. Although the Company requires all of the
physicians to carry medical malpractice insurance, there can be no assurance
that such insurance will always be sufficient to cover claims or that
indemnification by the physicians or their insurers will always be available to
the Company. There can

11
<PAGE> 13

be no assurance that claims, suits or complaints relating to medical services
and products provided by physicians in connection with one of the Company's
diagnostic imaging centers or pain management programs will not be asserted
against the Company in the future. In addition, there cannot be any assurance
that the Company will not become subject to products liability claims in respect
of the MRI systems manufactured by it.

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the management experience and continued
services of Robert D. Carl, III and Anthony T. Prescott. The loss of the
services of one or both of such officers for any reason could have a material
adverse effect on the Company's business.

The ability of the Company to attract and to retain qualified technologists
to operate its MRI and other imaging equipment is crucial to the Company's
operations. The Company to date has been able to attract and retain a sufficient
number of qualified technologists; however, there can be no assurance that this
will continue in the future.

MANAGEMENT STRUCTURE

The Chairman, President and Chief Executive Officer of the Company also
serves as the Company's Chief Financial Officer. Several of the Company's
executive officers hold positions which in other corporations are held by more
than one individual. While the Company believes that management responsibilities
are presently allocated so as to receive appropriate attention from executive
officers, there can be no assurance that this situation can be maintained,
particularly if and to the extent that the Company expands its operations. In
addition, in the event that the Company does expand its operations and requires
new executive officers and/or other managerial personnel, there can be no
assurance that the Company will be able to attract and retain qualified
individuals to fill those positions.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
after the offering or the perception that those sales could occur could
materially adversely affect the market price of the Common Stock and the
Company's ability to raise additional funds in the future in the capital
markets. As of October 21, 1996, the Company had 11,477,364 shares of Common
Stock issued and outstanding. All of these shares were either sold to the public
in transactions registered under the Securities Act of 1933, as amended (the
"Securities Act"), or have been held for more than three years and, therefore,
are tradable without restriction or limitation under the Securities Act, except
for any shares held by "affiliates" of the Company within the meaning of Rule
144 under the Securities Act, which are subject to the volume limitations and
other requirements of Rule 144. In addition, 250,000 shares of Common Stock
subject to an exercisable warrant and 458,000 shares subject to options,
substantially all of which are exercisable, are covered by a Registration
Statement on Form S-3 currently in effect under the Securities Act and,
therefore, may be resold without restriction following the exercise of the
warrant or the options. As of October 21, 1996, the Company had an additional
380,520 shares subject to exercisable options, substantially all of which are
covered by Registration Statements on Form S-8 currently in effect under the
Securities Act and, therefore, may be immediately resold without restriction
following the exercise of the options, unless held by "affiliates" of the
Company, in which case such shares would be subject to the volume limitations
and other requirements of Rule 144. The Company's directors and executive
officers who, in the aggregate beneficially owned, as of October 21, 1996,
1,491,121 shares of Common Stock, have agreed that, for a period of 90 days
after the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., sell or otherwise dispose of shares of Common
Stock or securities convertible into or exercisable or exchangeable for shares
of Common Stock other than pursuant to this offering and, in the case of 5,000
shares of Common Stock, by gift. See "Underwriting."

12
<PAGE> 14

VOLATILITY OF SHARE PRICE

There may be significant volatility in the market price for the Common
Stock. Quarterly operating results of the Company, changes in general conditions
in the economy, the financial markets or the health care industry, or other
developments affecting the Company or its competitors, could cause the market
price of the Common Stock to fluctuate substantially. This volatility has
affected the market prices of securities issued by many companies for reasons
unrelated to their operating performance.

RISKS ASSOCIATED WITH "FORWARD-LOOKING" STATEMENTS

This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Those statements include, among other things, the
discussions of the Company's business strategy and expectations concerning the
Company's market position, future operations, margins, profitability, liquidity
and capital resources. Investors in the Common Stock offered hereby are
cautioned that reliance on any forward-looking statement involves risks and
uncertainties, and that although the Company believes that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of those assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect.
The uncertainties in this regard include, but are not limited to, those
identified in the risk factors discussed above. In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's plans and
objectives will be achieved.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered by the Company hereby are estimated to be $31,475,000
($34,186,250 if the Underwriters' over-allotment option is exercised in full),
after deducting the estimated expenses of the offering and assuming a public
offering price of $13.50 per share. The Company intends to use approximately
$30,797,500 of the net proceeds to retire variable rate bank debt and
approximately $677,500 to fund working capital. The interest rate payable on the
variable rate bank indebtedness intended to be retired ranges from prime rate
minus .50% to prime plus .25% and the stated maturity of such debt ranges from
1998 to 2001. At September 30, 1996, the interest on such bank debt was 8.00%.
The bank indebtedness intended to be retired was incurred in March 1995 to
finance in part the acquisition of 15 imaging centers from MedAlliance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- MedAlliance Centers Acquisition." The bank loan agreement provides
for a prepayment penalty of approximately $575,000. Pending the application by
the Company of the net proceeds as described above, the Company intends to
invest the net proceeds in short-term interest-bearing instruments of investment
grade.

DIVIDEND POLICY

The Company paid cash dividends of $0.02 per share of Common Stock on March
1, June 1, and September 1, 1995 and of $0.025 per share on December 1, 1995,
March 1, June 1 and September 1, 1996. At its third quarter meeting, the Board
of Directors of the Company increased the quarterly cash dividend to $0.03 per
share commencing with the quarterly dividend to be paid in December 1996. Actual
dividends that may be paid by the Company on its Common Stock in the future will
depend, among other things, upon the earnings and financial condition of the
Company and compliance with covenants in the Company's credit agreements.

13
<PAGE> 15

PRICE RANGE OF COMMON STOCK

The following table presents, for the periods indicated, the high and low
sale prices per share of Common Stock as reported by the New York Stock
Exchange.

HIGH LOW
---- ---
<S> <C> <C>
1994
First Quarter........................................... $ 6 1/4 $4 1/2
Second Quarter.......................................... 5 5/8 4 3/4
Third Quarter........................................... 7 3/4 4 3/4
Fourth Quarter.......................................... 7 1/2 5 1/2
1995
First Quarter........................................... $ 6 1/8 $4 7/8
Second Quarter.......................................... 6 1/4 4 3/4
Third Quarter........................................... 7 5/8 5 1/2
Fourth Quarter.......................................... 8 6 3/4
1996
First Quarter........................................... $ 9 1/8 $6 7/8
Second Quarter.......................................... 11 5/8 7 1/4
Third Quarter........................................... 13 5/8 9 1/4
Fourth Quarter (through October 15, 1996)............... 14 1/8 13 1/8
</TABLE>

On October 24, 1996, the closing sale price of the Company's Common Stock
on the New York Stock Exchange was $13 1/2 per share.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the current portion of the long term debt
and the capitalization of the Company at June 30, 1996 and as adjusted to give
effect to the sale of the shares of Common Stock offered hereby (at an assumed
public offering price of $13.50 per share) and the application of the estimated
net proceeds therefrom as described in "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long term debt....................................... $ 16,323 $ 8,922
======== =========
Long Term Debt:
Variable Rate Bank Debt............................................... $ 23,396 $ --
-------- -----------
Other................................................................. $ 19,884 $ 19,884
-------- -----------
Total long term debt, net of current portion.................. 43,280 19,884
-------- -----------
Stockholders' Equity:
Common Stock, $.01 par value, 40,000,000 shares authorized;
13,400,574 shares issued; 15,900,574 shares issued as
adjusted(1)........................................................ 134 159
Additional paid-in capital............................................ 77,808 109,258
Retained earnings..................................................... 24,977 24,977
Accumulated translation adjustment.................................... (514) (514)
Treasury stock, 1,957,000 shares, at cost............................. (14,952) (14,952)
-------- -----------
Total stockholders' equity.................................... 87,453 118,928
-------- -----------
Total Capitalization.................................................... $130,733 $ 138,812
======== =========
</TABLE>

- ---------------

(1) Does not include 1,266,410 shares of Common Stock subject to options
outstanding under the Company's stock option plans and programs and 250,000
shares subject to a warrant. See note 6 to notes to consolidated financial
statements of the Company.

15
<PAGE> 17

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

The selected consolidated financial data presented below for each of the
five fiscal years in the five-year period ended December 31, 1995 and as of the
end of each such fiscal year have been derived from the consolidated financial
statements of the Company audited by Joseph Decosimo and Company, independent
public accountants. The selected consolidated financial data presented below for
the six months ended June 30, 1995 and 1996 and as of June 30, 1996 have been
derived from the unaudited consolidated financial statements of the Company and,
in the opinion of the Company, reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for such periods. The results
of operations for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for a full fiscal year. The
historical consolidated financial data for the year ended December 31, 1995 for
the Company includes the activity of the 15 centers acquired from MedAlliance
from April 1, 1995, the effective date of the MedAlliance Centers Acquisition.
The unaudited pro forma statement of operations for 1995 gives effect to the
MedAlliance Centers Acquisition and the related financings on a consolidated
basis as if they had occurred on January 1, 1995. The pro forma statement of
operations is for informational purposes only, does not purport to represent
what results of operations would have been if the MedAlliance Centers
Acquisition had in fact occurred on January 1, 1995, and is not intended to
project the Company's results of operations for any future period. The selected
consolidated historical and pro forma financial data set forth below should be
read in conjunction with the consolidated historical and pro forma financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------- SIX MONTHS
PRO ENDED JUNE 30,
FORMA(1) -------------------
1991 1992 1993 1994 1995 1995 1995 1996
------- ------- ------- ------- -------- ----------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total Net Revenue....................... $61,151 $69,927 $76,089 $77,122 $115,536 $ 127,049 $50,660 $64,180
------- ------- ------- ------- -------- ----------- ------- -------
Costs and Expenses
Operating Costs....................... 34,967 39,792 46,988 45,949 69,319 75,220 30,039 38,627
Depreciation and Amortization
Expenses............................ 8,433 9,865 11,853 12,171 17,580 19,948 8,125 8,962
------- -------
Provision for Bad Debts............... 1,896 2,202 2,652 2,835 4,646 5,086 2,023 2,477
General and Administrative Expenses... 5,529 6,126 6,335 6,159 8,504 9,570 3,897 5,150
------- ------- ------- ------- -------- ----------- ------- -------
Total Operating Expenses........ 50,825 57,985 67,828 67,114 100,049 109,824 44,084 55,216
------- ------- ------- ------- -------- ----------- ------- -------
Operating Income........................ 10,326 11,942 8,261 10,008 15,487 17,225 6,576 8,965
Interest Income......................... 1,539 1,162 276 271 127 209 71 44
------- ------- ------- ------- -------- ----------- ------- -------
Interest Expense........................ (1,853) (1,927) (1,683) (1,251) (3,727) (4,910) (1,608) (1,861)
------- ------- ------- ------- -------- ----------- ------- -------
Income from Continuing Operations Before
Minority Interest and Provision for
Income Taxes.......................... 10,012 11,177 6,854 9,028 11,887 12,524 5,039 7,148
-------
Minority Interest in Income of
Consolidated Entities................. 621 379 172 196 606 806 221 367
-------
Provision for Income Taxes.............. 3,477 4,071 2,457 3,439 4,390 4,560 1,863 2,520
------- ------- ------- ------- -------- ----------- ------- -------
Net Income from Continuing Operations... 5,914 6,727 4,225 5,393 6,891 7,158 2,955 4,261
Discontinued Operations:
Loss on Discontinued Operations (Net
of Income Taxes)(2)................. -- 240 466 6,528 418 418 418 --
Loss on Disposal of Discontinued
Operations (Net of Income
Taxes)(2)........................... -- -- -- -- 744 744 744 --
------- ------- ------- ------- -------- ----------- ------- -------
Net Income (Loss)....................... $ 5,914 $ 6,487 $ 3,759 $(1,135) $ 5,729 $ 5,996 $ 1,793 $ 4,261
======= ======= ======= ======= ======== =========== ======= =======
Earnings (Loss) Per Common and Common
and Equivalent Share:
Net Income from Continuing Operations
Per Share........................... 0.49 0.55 0.36 0.46 0.59 0.62 0.25 0.36
------- -------
Discontinued Operations Per Share..... -- (0.02) (0.04) (0.56) (0.10) (0.10) (0.10) --
------- ------- ------- ------- -------- ----------- ------- -------
Net Income (Loss) Per Share........... $ 0.49 $ 0.53 $ 0.32 $ (0.10) $ 0.49 $ 0.52 $ 0.15 $ 0.36
======= ======= ======= ======= ======== =========== ======= =======
Weighted Average Common Shares and
Common Share Equivalents.............. 12,133 12,299 11,612 11,728 11,651 11,651 11,650 11,796
</TABLE>

16
<PAGE> 18

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital........................................ $32,091 $16,525 $16,185 $25,874 $(161) $(277)
Total Assets........................................... 115,058 121,100 119,355 125,827 176,312 178,871
Long Term Debt......................................... 18,726 20,376 18,354 23,071 45,001 43,280
Stockholders' Equity................................... 81,467 79,892 81,354 79,578 83,789 87,453
</TABLE>

- ---------------

(1) The pro forma information gives effect to the MedAlliance Centers
Acquisition (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- MedAlliance Centers Acquisition") as
if it had occurred January 1, 1995. See "Pro Forma Condensed Consolidated
Statement of Income."
(2) Relates to the Company's investment in National Diagnostic Systems, Inc. and
the subsequent discontinuance of its operations and write-off of assets.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations."
(3) Includes procedures performed at imaging centers acquired from MedAlliance
subsequent to the April 1, 1995 acquisition date as follows: 30,069 MRI,
15,755 CT and 100,738 Other for the year ended December 31, 1995, 9,907
MRI, 5,046 CT and 34,991 Other for the six months ended June 30, 1995 and
19,928 MRI, 62,762 CT and 10,683 Other for the six months ended June 30,
1996.

17
<PAGE> 19

HEALTH IMAGES, INC. AND SUBSIDIARIES
MEDALLIANCE IMAGING CENTERS ACQUISITION

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
HISTORICAL
HISTORICAL MEDALLIANCE
HEALTH IMAGING PRO FORMA
IMAGES, INC. CENTERS ADJUSTMENTS NOTES PRO FORMA
------------ ----------- ----------- ----- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total Net Revenue.............................. $ 115,536 $11,513 $ 127,049
Cost and Expenses
Operating Costs.............................. 69,319 5,901 75,220
Depreciation and Amortization Expenses....... 17,580 2,070 298 1,2 19,948
Provision for Bad Debts...................... 4,646 440 5,086
General and Administrative Expenses.......... 8,504 1,066 9,570
------------ ------- ------ -----------
Total Operating Expenses....................... 100,049 9,477 298 109,824
------------ ------- ------ -----------
Operating Income............................... 15,487 2,036 (298) 17,225
Other Income................................... 127 82 209
Interest Expense............................... (3,727) (592) (591) 3 (4,910)
Income from Continuing Operations Before
Minority Interest and Provision for Income
Taxes...................................... 11,887 1,526 (889) 12,524
Minority Interest in Income of Consolidated
Entities................................... 606 200 -- 806
Income from Continuing Operations Before
Provision for Income Taxes............... 11,281 1,326 (889) 11,718
Provision for Income Taxes................... 4,390 -- 170 4 4,560
------------ ------- ------ -----------
Net Income from Continuing Operations.......... $ 6,891 $ 1,326 $ 1,059 $ 7,158
------------ ------- ------ -----------
Net Income Per Share from Continuing
Operations................................... $ 0.59 $ 0.62
Weighted Average Common Shares and Common Share
Equivalents Outstanding...................... 11,651,100 11,651,100
</TABLE>

- ---------------

1. To record an additional $363,000 amortization expense for goodwill and loan
acquisition costs associated with acquisition. The amortization period used
for goodwill is 20 years and the amortization period used for loan
acquisition costs is 6 years. Pro forma goodwill amortization expense
includes one month of amortization expense related to goodwill associated
with the $6,241,600 net earnout payment which was determined on December 1,
1995. Including goodwill amortization expense related to the earnout payment,
total amortization expense related to the MedAlliance Center Acquisition will
approximate $143,400 a month or $1,720,500 a year for future periods.
2. To record a $65,000 adjustment to depreciation expense for fair market value
adjustment to assets acquired.
3. To record additional interest expense on borrowings used to finance the
acquisition. The interest rate used is the current rate on the Company's
primary credit facility (prime minus 0.5%).
4. To record additional income taxes at the acquirer's effective tax rate.

18
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

The Company's net revenue is derived primarily from outpatient diagnostic
imaging services to patients. "Net patient service revenue" included in total
net revenue on the Company's consolidated financial statements represents
imaging revenue reduced by contractual adjustments related to discount
arrangements with third party payors. Such discount arrangements are customary
in the health care industry and are, in the opinion of management of the
Company, necessary for competitive reasons. Contractual adjustments are
estimated by the Company at the time the revenue related to a particular
procedure is recognized based on estimated discounts and fee schedules
negotiated with certain payors. These discounts amounted to 25.0%, 25.5% and
29.4%, respectively, of gross imaging revenue for fiscal 1993, 1994 and 1995 and
28.6% and 31.9%, respectively, of such revenue for the six months ended June 30,
1995 and 1996.

MEDALLIANCE CENTERS ACQUISITION

In April 1995, the Company completed the MedAlliance Centers Acquisition in
which it purchased the assets and business of 15 multi-modality imaging centers
from MedAlliance. The MedAlliance Centers Acquisition was a significant event
for the Company. Net of interest costs, this acquisition was additive to
earnings for the year ended December 31, 1995 (see note 15 of notes to
consolidated financial statements). The extent of any future earnings increase
will ultimately depend on the Company's ability to reduce certain overhead and
operating costs as well as successfully maintain patient procedure volume
levels.

RECENT DEVELOPMENTS

On October 22, 1996, the Company announced preliminary results for the
three and nine month periods ended September 30, 1996. Net income from
continuing operations for the quarter ended September 30, 1996 was $2,726,700,
or $0.23 per share, compared to net income from continuing operations of
$1,946,400, or $0.17 per share, in the same quarter of the prior year. Net
income for the third quarter of 1996, after charges related to discontinued
operations, was $2,436,000, or $0.21 per share, compared to $1,945,300, or $0.17
per share, in the prior year period. The charges relate to litigation expenses
incurred in connection with the Company's lawsuit against the former
shareholders of a discontinued subsidiary. The arbitration hearings in this
dispute commenced in September 1996. See "Business -- Legal Proceedings." Net
revenue for the third quarter of 1996 period was $34,798,600 compared to prior
year period net revenue of $32,770,600. Compared to the prior year third
quarter, same center MRI studies increased by 6.4%, while same center net
revenue increased by 5.5%. ("Same center" means centers owned and operated by
the Company for both periods under review.) Total MRI studies increased by 3.1%
in the third quarter of 1996 compared to the prior year quarter.

For the nine months ended September 30, 1996, net income from continuing
operations was $6,987,500, or $0.59 per share, compared to net income from
continuing operations of $4,901,200, or $0.42 per share, for the prior year
period. Net income, after charges related to discontinued operations, was
$6,696,800, or $0.56 per share, for the nine months ended September 30, 1996.
Net revenue for the nine months ended September 30, 1996 was $98,978,800
compared to prior year period net revenue of $83,315,100. Compared to the prior
year nine months period, same center MRI studies increased by 4.9%, while same
center net revenue increased by 5.0%. Total MRI studies increased by 14.5%
during the 1996 period compared to the 1995 period.

19
<PAGE> 21

RESULTS OF OPERATIONS

The following table sets forth the percentage of total net revenue
represented by certain line items in the Consolidated Statements of Operations
for the periods indicated.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
REVENUE
Net Patient Service Revenue..................... 90.0% 93.9% 96.4% 95.8% 97.1%
Engineering Revenue............................. 6.2% 4.8% 2.6% 3.1% 1.4%
Other Revenue and Income........................ 3.8% 1.3% 1.0% 1.1% 1.5%
Total Net Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES
Operating Costs................................. 61.8% 59.6% 60.0% 59.3% 60.2%
Depreciation and Amortization Expenses.......... 15.6% 15.8% 15.2% 16.0% 14.0%
Provision for Bad Debts......................... 3.5% 3.7% 4.0% 4.0% 3.9%
General and Administrative Expenses............. 8.3% 8.0% 7.4% 7.7% 8.0%
OPERATING INCOME.................................. 10.9% 13.0% 13.4% 13.0% 13.9%
</TABLE>

Comparison of six months ended June 30, 1996 to six months ended June 30, 1995

Net patient service revenue increased $13,782,600, or 28.4%, primarily due
to the MedAlliance Centers Acquisition effective April 1, 1995, and an increase
in same center revenue of $2,222,000, or 4.7%, partially offset by the
disposition of three imaging centers.

Engineering revenue decreased $685,900, or 43.5%, primarily due to
decreased service revenue. Other revenue and income increased $423,400, or
74.1%.

Operating costs increased by $8,587,800, or 28.6%, primarily due to
increased expenses associated with the MedAlliance Centers Acquisition and
higher patient volumes, partially offset by the elimination of costs associated
with the three disposed centers. Depreciation and amortization expenses
increased $836,900, or 10.3%, due primarily to the MedAlliance Centers
Acquisition. The Company's provision for bad debts was $2,476,200, or 4.0% of
net patient service revenue in the 1996 period, as compared to $2,022,600, or
4.2% of net patient service revenue in the prior year period. General and
administrative expenses increased $1,252,900, or 32.2%, primarily due to the
centralized billing and collections operation acquired from MedAlliance and
increased cost related to the Company's expanded volume of business. General and
administrative expenses as a percentage of net revenue were 8.0% in the 1996
period as compared to 7.7% in the 1995 period.

Interest income decreased by $27,300, or 38.3%, due to lower cash balances.
Interest expense increased by $252,900, or 15.7%, due to debt incurred in
conjunction with the MedAlliance Centers Acquisition, partially offset by
principal repayments, negotiation of favorable interest rates on the Company's
primary bank facilities, and increased capitalized interest associated with the
manufacture of the Company's HI STAR MRI system. Minority interest in income of
consolidated entities increased by $146,300, or 66.1%, primarily due to minority
interest acquired from MedAlliance and increased profitability at the Company's
partnership centers. Income taxes increased by $656,400, or 35.2%, primarily due
to higher pretax income. Income taxes as a percentage of pretax income decreased
to 37.2% in the 1996 period as compared to 38.7% in the 1995 period due to
capital loss carryforwards available in 1996. Management expects the Company's
tax rate to approximate 37.2% for the remainder of 1996.

Net income from continuing operations increased $1,306,000 or 44.2% to
$4,260,800 in the 1996 period from $2,954,800 in the 1995 period. Primary
earnings from continuing operations increased $0.12 per share, or 48.0%, to
$0.37 in the 1996 period as compared to $0.25 in the 1995 period. Fully diluted
earnings from continuing operations increased $0.11 per share, or 44.0%, to
$0.36 in the 1996 period as compared to $0.25 in the 1995 period. Primary net
income increased $0.22, or 146.7%, to $0.37 in the 1996 period as compared to
$0.15 in the 1995 period. Fully diluted net income increased $0.21, or 140.0%,
to $0.36 in the 1996 period as

20
<PAGE> 22

compared to $0.15 in the 1995 period. Earnings per share were calculated using
11,669,300 primary and 11,795,700 fully diluted weighted average common share
equivalents for the 1996 period as compared to 11,610,700 primary and 11,649,800
fully diluted share equivalents in the 1995 period.

Comparison of the year ended December 31, 1995 to the year ended December 31,
1994

Net patient service revenue increased $38,925,500, or 53.8%, primarily due
to $41,783,800 in patient revenue from the Company's acquisition of 15 imaging
centers from MedAlliance and an increase in same center revenue of $825,200, or
1.3%, partially offset by the sale of three imaging centers during 1995.

Engineering revenue decreased $595,200, or 16.2%, due to decreases in
demand for the Company's third party upgrade and maintenance services. Other
revenue and income increased $83,200, or 8.1%.

Operating costs increased $23,370,500 primarily due to expenses associated
with the MedAlliance Centers Acquisition and increased patient volumes at the
Company's same center facilities, partially offset by the elimination of costs
at the sold centers and continued cost control efforts. Operating costs as a
percentage of revenue were 60.0% in 1995 and 59.6% in 1994. The consistency of
operating costs as a percentage of revenue reflects the Company's success in
reducing expenses at its facilities and acquired properties while experiencing
declining patient service reimbursements. Depreciation and amortization expenses
increased $5,408,100, or 44.4%, due to increased depreciation charges and
additional goodwill amortization related to the MedAlliance Centers Acquisition.
The Company's provision for bad debts was $4,646,000, or 4.2%, of patient
revenue compared to $2,835,500, or 3.9%, in 1994. Provision for bad debts
results from required write-offs of accounts management deems to be
uncollectible. General and administrative expenses increased $2,345,600, or
38.1%, primarily due to increased expenses related to the Company's increased
volume of business. General and administrative expense as a percentage of net
revenue was 7.4% in 1995 compared to 8.0% in 1994. The reduction in general and
administrative expenses as a percentage of revenue reflects the economies gained
in the MedAlliance Centers Acquisition and the Company's continued cost control
efforts.

Interest income decreased by $143,900 due primarily to lower cash balances.
Interest expense increased by $2,475,700, due to higher amounts of debt
outstanding resulting from the MedAlliance Centers Acquisition. Minority
interest in income of consolidated entities increased by $409,600 primarily due
to minority interest expense associated with the centers acquired from
MedAlliance. Income taxes increased $951,600, or 27.7%, due to higher pretax
income.

Net income from continuing operations increased $1,498,000, or 27.8%, to
$6,890,800 in the 1995 period from $5,392,800 in 1994. Primary and fully diluted
earnings from continuing operations increased $0.13 per share, or 28.3%, to
$0.59 in 1995 as compared to $0.46 in 1994.

During the quarter ended March 31, 1995, the Company discontinued the
operations of Interactive Diagnostic Services, Inc., a wholly-owned subsidiary
("IDSI"), and IDSI's financial results are treated as discontinued operations.
During 1995, the Company recognized $1,161,900 in after tax losses from this
operation compared to $6,528,300 in after tax losses in 1994. Substantially all
costs related to IDSI, including estimated future expenditures, have been
accounted for in the 1995 loss from discontinued operations. After giving effect
to these losses, the Company reported net income of $5,728,900, or $0.49 per
share, in 1995 compared to a net loss of $1,135,500, or $0.10 per share, in
1994.

Comparison of the year ended December 31, 1994 to the year ended December 31,
1993

Net patient service revenue increased $3,910,000, or 5.7%, primarily due to
increases of $3,891,000 in same center revenue. The increase in same center
revenue was due to an increase of 8.8% in same center MRI studies and an
increase in revenue from other imaging modalities, principally CT and x-ray,
partially offset by a 6.2% decline in average reimbursement per MRI study and a
decrease in revenue from the Company's radiation oncology center.

Engineering revenue decreased $1,041,400, or 22.1%, primarily due to
decreases of $974,500, or 23.8%, in service revenue and $66,900, or 10.9%, in
upgrade revenue.

21
<PAGE> 23

Other revenue and income decreased by $1,835,500, or 64.1%, primarily due
to a decrease of $328,700, or 43.2%, in revenue from leasing mobile MRI systems
to third parties and a decrease of $1,539,400, or 97.9%, in the Company's
revenue from medical construction services provided to third parties, offsetting
an increase of $31,200 in other revenue and income and gains on sale of
securities.

Operating costs decreased by $1,039,100, or 2.2%, primarily due to
decreases in expenses related to the decline in engineering revenue and the
Company's efforts to reduce center operating costs. Operating costs as a
percentage of net revenue decreased to 59.6% in 1994 from 61.8% in 1993 due
primarily to center cost control and reduced revenue contribution from the
Company's lower margin medical construction business. Depreciation and
amortization expenses increased $317,800, or 2.7%. The Company's provision for
bad debts was $2,835,500, or 3.9%, of net patient service revenue, in 1994 as
compared to $2,651,500, or 3.9%, in 1993. General and administrative expenses
decreased $176,700, or 2.8%, primarily due to decreased legal and professional
fees, offset by slightly higher costs associated with the Company's increased
patient volumes. General and administrative expenses decreased as a percentage
of net revenue from 8.3% in 1993 to 8.0% in 1994.

On August 4, 1994, the Company purchased 100% of its former equity
affiliate, National Diagnostic Systems, Inc. ("NDS"), a start-up enterprise that
specialized in the development and operation of proprietary systems for
prospective review and outcomes analysis of diagnostic imaging (subsequently
merged into IDSI). For the period of 1994 prior to the acquisition of NDS, the
Company recognized its share of the net loss of NDS of $364,700 as compared to
$466,300 for the full year 1993.

Subsequent to its purchase of the remaining NDS equity, the Company
determined that the financial statements of NDS did not fairly reflect NDS's
financial position or business prospects. After consultation with independent
legal counsel, the Company brought suit against the selling shareholders of NDS
seeking rescission of the Company's purchase of NDS, and alleging, among other
things, breach of contract, intentional misrepresentation, negligent
misrepresentation, and suppression of fact. The Company cannot predict the
outcome of this litigation. The Company has concluded that its investment in NDS
became substantially impaired and the Company determined to discontinue the
operation of this subsidiary in March of 1995 and closed down its operations in
May of 1995. The financial results are reported as discontinued operations on
the Company's financial statements.

Interest income decreased by $5,100, or 1.9%, due to lower cash balances
and lower interest rates. Interest expense decreased by $432,000 due to lower
amounts of debt outstanding. Minority interest in income of consolidated
entities increased by $24,400, or 14.2%, primarily due to higher operating
income at imaging centers with minority partners. The Company's tax rate on
continuing operations for 1994 was 38.9% as compared to 36.8% in 1993.

Net income from continuing operations increased $1,167,600, or 27.6%, to
$5,392,800 in 1994 from $4,225,200 in 1993. Loss on discontinued operations
related to IDSI totaled $6,528,300 in 1994 compared to $466,300 in 1993. After
giving effect to these losses from discontinued operations, the net loss for
1994 was $1,135,500 compared to net income of $3,758,900 in 1993. The primary
and fully diluted loss per share was $0.10 in 1994 as compared to net income per
share of $0.32 in 1993. Earnings per share were calculated using 11,725,600
primary and 11,727,900 fully diluted weighted average common share equivalents
as compared to 11,611,700 primary and fully diluted weighted average common
share equivalents in 1993. The higher number of primary and fully diluted
weighted average common share equivalents in 1994 as compared to 1993 reflects
the Company's issuing 559,811 shares of its Common Stock in connection with the
NDS acquisition, a higher Common Stock price which increases the dilutive effect
of outstanding stock options, partially offset by the purchase of 500,000 shares
of treasury stock in 1994 for $3,433,100, and 239,900 shares of treasury stock
for $1,540,800 in 1993.

INFLATION

The impact of inflation and changing prices on the Company has, to date,
been primarily limited to salary increases and has not been material to the
Company's operation. In the event of increased inflation,

22
<PAGE> 24

management believes that the Company may not be able to raise the prices for its
goods and services by an amount sufficient to offset cost inflation.

Management believes that reimbursements for its services will continue to
decline in the future, even in an otherwise inflationary environment. The rate
of decline in reimbursement levels, however, has slowed recently, which the
Company believes may indicate some pricing stabilization. While the Company has
historically responded to reimbursement declines by lowering its capital costs
and by increasing the volume of its business, there can be no assurance that the
Company will be able to do so in the future.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $28,611,700 in 1995, an
increase of $10,710,200, or 59.8%, from $17,901,500 in 1994. Net trade
receivables increased $6,883,500 primarily due to the MedAlliance Centers
Acquisition, partially offset by a decrease of $274,000 in trade receivables
from continuing operations. As of December 31, 1995, the Company's average age
of patient accounts receivable outstanding was 74 days, compared to 81 days at
December 31, 1994, and 76 days as of December 31, 1993. The decrease in average
age of patient accounts receivable during the 1995 period is primarily due to
the collection patterns at the centers acquired from MedAlliance. These centers
benefit from a centralized billing and collection system and perform fewer
procedures relating to personal injury litigation than the existing Health
Images centers. Receivables relating to litigation can remain outstanding for
over one year and, while generally collectible, increase the average age of
patient receivables. Management intends to improve collections for all centers
by utilizing this central billing and collection methodology, potentially
reducing days outstanding. Management may attempt to increase the volume of
procedures relating to litigation at certain centers where capacity and market
conditions allow, which would increase average age.

Net cash provided by operating activities was $13,169,600 for the six
months ended June 30, 1996, an increase of $1,002,900 or 8.2% from $12,166,700
in the prior year period. This increase is primarily due to an increase in net
income and higher depreciation and amortization charges (non-cash expenses)
resulting from the MedAlliance Centers Acquisition, partially offset by changes
in working capital accounts. Net trade receivables increased by $47,900 to
$24,585,500 during the six months ended June 30, 1996, primarily due to
increased patient revenue. As of June 30, 1996, the Company's average age of
patient receivables was 73 days as compared to 71 days as of March 31, 1996, 74
days as of December 31, 1995 and 73 days as of June 31, 1995. Management
believes this average age of patient receivables to be within industry norms and
significantly better than many of its competitors.

The Company's total debt outstanding increased by $36,304,800 from
$25,048,200 at December 31, 1994 to $61,353,000 at December 31, 1995, primarily
due to increased borrowings related to the MedAlliance Centers Acquisition. The
Company funded the $23,859,200 in cash paid in 1995 related to the MedAlliance
Centers Acquisition from a term loan issued by its primary bank. (See note 4 to
the consolidated financial statements for detailed information on notes
payable). As of December 31, 1995, the Company had available $4,459,900 in
unused credit under its $5,000,000 bank line. This line, as well as the
Company's primary term loan, bear interest on a leveraged adjustment to prime
which varies from prime plus .25% to prime minus .50% depending upon certain
financial ratios. At December 31, 1995, the Company had met the requirements
necessary to reduce the interest rate to prime minus .50%. At December 31, 1995,
the Company was in technical violation of the term loan covenant that limits the
Company's capital expenditure to $11,500,000 a year and the covenant requiring
the Company to maintain a 2.25 to 1 ratio of consolidated liabilities to
consolidated tangible net worth. These violations were subsequently waived by
the lender.

The Company intends to retire all outstanding indebtedness under the term
loan with its primary bank with a portion of the proceeds of this offering. See
"Use of Proceeds." The term loan agreement provides for a pre-payment penalty of
approximately $575,000. The Company intends to increase the amount available for
borrowing under its existing line of credit with its primary lender or replace
the existing line of credit with an appropriate revolving facility with another
lender.

23
<PAGE> 25

The Company reduced net outstanding debt by $1,750,000 during the six
months ended June 30, 1996, to $59,603,000. Cash and cash equivalents decreased
by $317,900 for the six months ended June 30, 1996, to $2,886,800.

The Company had available $9,366,700 under its $12,000,000 bank line at
June 30, 1996. During the six months ended June 30, 1996, the Company borrowed
$1,690,500 to finance the purchase of medical equipment used in the expansion of
its center business and $1,688,000 to finance the ongoing construction of its
new corporate offices.

Capital expenditures in 1995 were $11,694,700 as compared to $6,600,200 in
1994 primarily due to increased levels of expenditures related to the
MedAlliance Centers Acquisition, addition of equipment to expand services at
certain of the Company's existing facilities, and costs incurred in connection
with the Company's HI STAR project. Capital expenditures for the six months
ended June 30, 1996, were $10,019,600. The principal capital expenditures for
the remainder of 1996 will be purchases and construction of imaging equipment,
upgrades and enhancements for the Company's HI Standard and HI STAR MRI systems,
the expansion and upgrading of certain of the Company's existing imaging
facilities, and the construction of a new corporate headquarters. The Company
plans to relocate its corporate headquarters in December 1996 to a
newly-constructed facility expected to cost approximately $4,700,000.

Management considers current cash and liquidity together with cash flows
from operating activities adequate to fund the Company's existing business
operations. The Company may need to restructure its current debt maturities or
borrow additional amounts to fund all of its intended capital expenditures and
expansion of its business. Management believes such financing is readily
available from several sources.

At December 31, 1995, the Company had outstanding commitments on equipment
contracts totaling $4,345,200 primarily related to the Company's HI STAR MRI
development project and the expansion of imaging services. At June 30, 1996, the
Company had commitments of $5,381,900 on equipment and construction contracts.

24
<PAGE> 26

BUSINESS

GENERAL

The Company is a leading provider of diagnostic imaging services and one of
the largest independent operators of magnetic resonance imaging ("MRI") centers
in the United States. MRI is considered the premier diagnostic modality for
cross-sectional imaging of human tissue. The Company operates 49 freestanding
diagnostic imaging centers in 13 states in the United States and six in England.
The Company offers MRI services at all of its imaging centers. In addition, the
Company provides computerized tomography ("CT") services at 18 of its centers,
x-ray services at 19 centers, ultrasound services at 15 centers, mammography
services at 13 centers, nuclear medicine at seven centers and fluoroscopy at
eight centers.

OVERVIEW OF DIAGNOSTIC IMAGING INDUSTRY

Medical diagnostic imaging systems facilitate the diagnosis of diseases and
disorders at an early stage, often minimizing the amount and cost of care needed
to stabilize, treat or cure the patient and frequently obviating the need for
invasive diagnostic procedures, such as exploratory surgery. 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-ray to the advanced
technologies of MRI, CT, nuclear medicine and ultrasound. The use of these
technologies has grown significantly in the United States during the last
several years due to increasing acceptance by physicians of the value of
diagnostic imaging technologies in the early diagnosis of disease, the expanding
applications of MRI and ultrasound and the growing patient base attributable to
an aging population. While conventional x-ray continues to be the most widely
used imaging modality, MRI, CT and nuclear medicine provide more sophisticated
imaging capabilities that frequently justify their greater costs. Physicians
increasingly use MRI, CT and nuclear medicine to visualize structures inside the
human body because these modalities provide images in digital form with a tissue
resolution that approaches what could previously be seen only through surgery.
In addition, dedicated computer systems can enhance and manipulate the images
provided by these modalities to create three-dimensional images. These images
allow physicians to contemplate various medical scenarios in real time.

The Diagnostic Imaging Centers Report & Directory (August 1995), prepared
by SMG Marketing Group Inc. (the "SMG Report & Directory"), estimates the market
for diagnostic imaging services in the United States to be between $56 billion
and $70 billion annually, or 5% to 6% of total health care spending.

The diagnostic imaging industry is highly fragmented. Diagnostic imaging
services are provided by facilities located in hospitals ("inpatient services")
and by freestanding fixed-site centers and mobile imaging systems ("outpatient
services").

Inpatient facilities generally provide multiple diagnostic imaging
services. According to the Hospital Market Database (July 1995) prepared by SMG
Marketing Group Inc., as of the end of 1994, 44.1% of hospitals in the United
States offered MRI services, 75.5% offered CT services and 91.7% offered
ultrasound services. According to the SMG Report & Directory, at the end of 1994
there were 2,151 freestanding imaging centers in operation in the United States,
owned and managed by multi-center corporations (42%), privately held,
independent entities (24%), radiology groups (14%), hospitals (9%), physician
partnerships (6%) and hospital joint ventures (5%). MRI, x-ray, ultrasound and
mammography imaging services are offered by 50% to 60% of these centers and CT
is offered by 38% of these centers. Mobile imaging systems are installed on
trucks or vans and may be moved from site to site to provide imaging services.
According to the SMG Report & Directory, at the end of 1994, there were 53
mobile imaging operators in existence, operating 142 MRI systems and 44 CT
scanners.

Outpatient vs. Inpatient Delivery of Services

The Company believes the diagnostic imaging industry is experiencing a
trend toward outpatient delivery of imaging services, particularly with respect
to more sophisticated, capital intensive modalities such as MRI and CT. The
Company believes this trend is the result of the continuing search for more cost
effective and

25
<PAGE> 27

convenient delivery of services in the health care industry. Outpatient imaging
centers generally are more cost-effective than inpatient facilities because they
do not have to incur the high overhead cost associated with full-service medical
institutions and can be more selective with respect to the services provided.
The Company has found, however, that some hospitals that have invested in
imaging equipment may be more willing to accept lower reimbursement rates from
managed care payors than outpatient centers to increase volume to cover some of
their fixed overhead.

Given an alternative, the Company believes that physicians and patients
prefer outpatient care to inpatient imaging services for the following reasons:

- Physicians frequently rely on MRI or CT to aid in diagnosing individuals
whose symptoms and complaints do not yet merit hospitalization.

- Outpatient imaging centers provide the necessary imaging services without
requiring the patient to undergo the often time-consuming and tedious
hospital admission process. Outpatient delivery allows the patient to
obtain the procedure at his or her convenience by providing more
convenient access and more flexible and dependable hours than hospitals.

- A scheduled appointment time at an outpatient facility is generally more
reliable than that of an inpatient imaging facility because of less
likelihood of preemption from emergency care.

In addition, in the current climate of declining reimbursements and cost
containment in the health care industry, hospitals are looking for areas to cut
back. The Company believes that hospitals are more likely to reduce capital
budgets rather than cut back on services that must be provided on-site to
hospitalized patients. These cutbacks may result in increased reliance by
hospitals on outpatient services to meet certain needs of their patients. In the
Company's experience, hospitals often prefer to contract out overflow of
diagnostic imaging procedures rather than purchase additional equipment.

The Imaging Selection Process

The Company and its imaging centers compete with local hospitals, other
multi-center imaging companies, local independent diagnostic imaging centers and
imaging centers owned by local physician groups. The Company believes that the
principal competitive factors in the diagnostic imaging market are price,
quality of service, ability to establish and maintain relationships with managed
care payors and referring physicians, reputation of interpreting physicians,
facility location and convenience of scheduling.

The patient's physician, most frequently an orthopedic or neurology
specialist, determines the imaging modality necessary or appropriate for the
patient. The physician also determines the facility or imaging center to which
the patient should be referred, based primarily on the requirements of the
patient's insurance carrier or managed care provider, reputation of the
radiologist or radiology group providing interpretation services at available
facilities and the quality and convenience of service both to the patient and to
the physician and his office staff.

Impact of Managed Care and Medicare/Medicaid Programs on Reimbursements

Diagnostic imaging services, like most other health care services, are
generally paid for, directly or indirectly, by commercial insurance carriers,
managed care organizations, Medicare, Medicaid or another government
instrumentality or, in some limited instances, by patients directly. Prices for
imaging services vary by region and locality and are determined by competitive
conditions in the local market. Diagnostic imaging services providers often
enter into contracts with private insurance and managed care payors that provide
for contractual discounts from list price. An unwillingness to discount on the
part of a diagnostic imaging services provider would result in its exclusion
from the managed care networks in which many patients now participate. Managed
care payors differ in policy and practice on whether they contract with many
diagnostic imaging providers or only a few in a given market. Some managed care
payors emphasize the breadth of their networks while others emphasize tight
control over a limited number of providers. The Company believes many managed
care payors prefer to contract with imaging services providers that can offer
competitive pricing, multiple imaging modalities and convenient locations in a
particular geographical area. In addition, Medicare

26
<PAGE> 28

and Medicaid have specific reimbursement rates that are significantly lower than
list prices for imaging procedures. Medicare and Medicaid reimbursement rates
also vary among states and regions.

Industry Consolidation

The Company believes that the diagnostic imaging industry, like other
segments of the health care industry, is consolidating. The Company believes
that this consolidation is driven primarily by the increasing role of private
insurers and managed care payors in controlling reimbursement rates in the
diagnostic imaging industry. Also, the number of self-referral practices is
declining as investment and other economic relationships between referring
physicians and imaging centers are reduced or eliminated. The current federal
and state legislative environments and managed care payors all create pressures
that discourage imaging centers that rely on physician self-referral. Another
consolidation factor results when private insurance payors and managed care
payors increasingly seek adequate market coverage from a single source providing
multiple procedures. These trends are likely to encourage multi-center companies
to seek to strengthen their respective networks of centers in regional markets
to offer full geographic coverage without reliance on self-referrals. The
Company believes that these trends threaten the long-term viability of any
imaging center that relies on physician self-referral as well as the viability
of less efficient and higher cost imaging centers. The Company also believes
that single site competitors, in particular, will likely become acquisition
candidates in many markets in the future. The Company believes this
consolidation trend will provide expansion opportunities for large, efficient,
financially sound multi-center operators.

IMAGING MODALITIES

The following table sets forth certain information concerning the principal
diagnostic imaging modalities used in the diagnostic imaging industry:

<TABLE>
<CAPTION>
LIST(1)
PRICE RANGES
PER
MODALITY MOST FREQUENT USES ADVANTAGES DISADVANTAGES PROCEDURE
- --------------------- --------------------- --------------------- --------------------- ------------
<S> <C> <C> <C> <C>
Magnetic Resonance Lumbar (lower back), Does not use ionizing More expensive than $695-$1,660
Imaging (MRI) spine, cervical radiation other procedures
spine, brain Three-dimensional (principally CT) that
Can image cross- may be used to
sections and various investigate the same
planes of area being or similar symptoms
examined
Computerized Sinus, abdomen, brain Less expensive than Uses ionizing $225-$850
Tomography (CT) MRI radiation
Higher resolution Lower resolution
images than MRI for images than MRI for
bones and cartilage soft tissue
Ultrasound Pelvic, abdomen, Does not use ionizing Limited three- $78-$593
breast radiation dimensional imaging
Relatively capabilities
inexpensive procedure
providing "real time"
images
Mammography Breast Relatively Uses ionizing $85-$135
inexpensive radiation
High spatial Results less certain
resolution than for other
imaging procedures
</TABLE>

27
<PAGE> 29

<TABLE>
<CAPTION>
LIST(1)
PRICE RANGES
PER
MODALITY MOST FREQUENT USES ADVANTAGES DISADVANTAGES PROCEDURE
- --------------------- --------------------- --------------------- --------------------- ------------
<S> <C> <C> <C> <C>
Nuclear Medicine Bone marrow scan, Evaluates organ Inferior spatial $223-$1,069
thyroid scan, bone functions resolution
scan Relatively low cost Difficult to
Total body evaluation determine the medical
Provides detailed causes of specific
information diseases by results
of procedure
General Radiology Chest, lumbar (lower Less expensive than Uses ionizing $50-$190
back) spine other imaging radiation
procedures Two-dimensional,
Non-invasive static images
Less time consuming Very limited soft
than all other tissue detail
imaging procedures
Fluoroscopy Gastrointestinal Relatively Uses ionizing $141-$443
tract, barium enema, inexpensive procedure radiation
lumbar myelogram providing "real time" Invasive
images
Generally no
preparation necessary
</TABLE>

- ---------------

(1) Price quoted by the Company, not taking into account any contractual
discounts or allowances or any statutory or regulatory restrictions on
reimbursements. The Company believes that contractual discounts and
allowances are customary in the health care industry. The amount of
contractual discounts varies depending upon the market in which the imaging
center operates, the ability of the managed care payor to channel patients,
the number of beneficiaries covered and the effective date of the contract.

Magnetic Resonance Imaging (MRI)

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. MRI can be used to diagnose various cancers, tumors, vascular
aneurysms and stenosis (blood vessel occlusions that can lead to strokes),
muscle/ligament and tendon injury, spinal and disc problems, neurological
deformities and general anatomical problems. A principal advantage of MRI is
that it allows the differentiation of internal organs and normal and diseased
tissue without using ionizing radiation like conventional x-ray and CT. Ionizing
radiation can cause tissue damage in high doses or after repeated screenings.
MRI relies on the fact that atoms in various kinds of body tissue behave
differently in response to a magnetic field.

During an MRI procedure, a patient is placed in a large, cylindrical
magnet. Multiple images in three-dimensional 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. As with most other diagnostic imaging
technologies, MRI is generally non-invasive. Due to the contrast and detail
available from an MRI scan, the use of MRI equipment frequently facilitates the
identification of disease and disorders of a patient without using invasive
procedures, such as exploratory surgery.

The number of MRI units in operation has increased from fewer than 200 in
1984 to more than 3,600 in 1994. This rapid growth resulted from increasing
acceptance by physicians, patients and payors of MRI, an increasing need for MRI
usage in imaging different body organ systems and disease conditions and a focus
of managed care payors on reduction of the amount and cost of care needed to
treat the patients by avoiding expensive exploratory surgery. New software
programs and hardware capabilities, coupled with new contrast

28
<PAGE> 30

agents (chemicals administered to the patient that enhance the signal generated
by body tissues), are anticipated to expand the usage of MRI technology by
physicians.

Computerized Tomography (CT)

CT (also known as "CAT") uses x-rays to produce images of body tissue. CT,
like conventional x-ray, uses ionizing radiation. CT can be used to detect
tumors and other conditions affecting the skeleton and internal organs. CT
provides higher resolution images than conventional x-rays, but generally less
well defined images than those produced by MRI. CT procedures produce higher
resolution images of bone and cartilage structures and are less expensive than
MRI scans. During a CT procedure, a patient is placed inside a large 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. CT can be used to perform examinations of
any part of the human anatomy and provides delineation of tissue not possible
with conventional x-ray. CT eliminates the problem of overlapping structures
such as bone and soft tissue inherent in images produced by conventional x-ray.
The most commonly performed CT examinations are of the brain, abdomen, and
lumbo-sacral spine, although examinations of the chest, pelvis and extremities
are also performed. The Company believes that recently there has been an
increase in CT procedures because some managed care payors stipulate that a CT
examination rather than MRI be used for certain types of complaints and symptoms
due to CT's lower cost.

Ultrasound

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 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. Like MRI, ultrasound does not utilize ionizing radiation.
Ultrasound has widespread application, particularly for procedures in
obstetrics, gynecology, gastroenterology and cardiology because it is a low
medical risk procedure that is noninvasive, versatile and relatively
inexpensive.

Mammography

Mammography uses low dosage x-rays to visualize breast tissue. Mammography
equipment is used primarily for screening and diagnosis of breast cancer but can
also be used to monitor treatment and recovery. During an initial screening
mammography, a baseline x-ray is taken of the breast. In subsequent years, the
mammogram's x-rays are compared to those taken during previous examinations in
an attempt to identify any anatomical changes which may have occurred.
Mammography provides high contrast images with high spatial resolution. In
addition, the low cost of x-rays makes screen-film mammograms the preferred
modality for screening for breast cancer. Mammography equipment allows
radiologists to detect between 85% and 90% of all breast cancers.

Nuclear Medicine

Nuclear medicine is used primarily to study anatomy and metabolic
functions. Nuclear medicine utilizes short-lived radioactive isotopes
administered to the patient by ingestion or injection to provide images of
various anatomical structures. 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. Nuclear medicine provides anatomic images and functional information
crucial to the understanding of the cause, nature and extent of diseases such as
heart disease, skeletal disease, degenerative joint disease, sports related
injuries, and complications resulting from diabetes. The spatial resolution of
nuclear medicine images is generally inferior to other modalities. However,
nuclear medicine is more versatile and effective in defining the structure and
function of organ systems, which aids physicians to diagnose and treat diseases.

29
<PAGE> 31

General Radiology and Fluoroscopy

General radiology and fluoroscopy are the most frequently used types of
imaging equipment. X-rays are a quick and relatively inexpensive method of
obtaining diagnostic information. General x-rays use ionizing radiation to
penetrate the body and record the resulting two-dimensional images of the body's
internal structures on film. It is usually necessary to take at least two or
more views to gain information about the third dimension. Fluoroscopy is a more
versatile form of x-ray that uses a video viewing system for real-time
monitoring of the organs being visualized. Fluoroscopy differs from general
x-ray in that the x-rays that pass through the body are captured by an image
intensifier tube which sends an image to a television monitor for viewing rather
than simply recording the image on film. Accordingly, fluoroscopy allows the
examining physician to view organs in motion during the exam, evaluate their
functional activities, isolate anatomical structures and "record" an image onto
film for later evaluation. The imaging of the gastrointestinal tract,
angiography and interventional radiology are the three circumstances in which
fluoroscopy is most widely used. In the Company's experience, either a C-arm
x-ray machine or a fluoroscope is the imaging equipment most likely to be used
during pain management procedures.

COMPANY'S POSITION IN THE INDUSTRY

The Company is a leading provider of diagnostic imaging services and one of
the largest independent operators of MRI centers in the United States. The
Company operates 49 freestanding imaging centers in 13 states in the United
States and six in England. The Company offers MRI services at all of its imaging
centers. In addition, the Company provides CT services at 18 of its centers,
x-ray services at 19 centers, ultrasound services at 15 centers, mammography
services at 13 centers, nuclear medicine at seven centers and fluoroscopy at
eight centers. The Company currently has 33 centers that offer only MRI, 27 of
which are located in the United States.

The Company is a vertically integrated diagnostic imaging services provider
which develops, manufactures and maintains its own MRI systems and services
certain MRI and CT systems of other manufacturers that it uses at its centers.
The Company also has in-house imaging center development expertise consisting of
a licensed architect experienced in designing and managing the construction of
imaging centers and his staff. This expertise enhances the ability of the
Company to control its costs and decreases the time necessary to establish an
imaging center. Since 1989, the Company has manufactured the HI Standard MRI
system, a midfield .6 Tesla system currently used in all of the 33 imaging
centers established by the Company since the development of the system. The
Company recently developed a new MRI system, the HI STAR, which was cleared by
the FDA in September 1995. The HI STAR will allow the Company to offer a broader
array of applications and to increase throughput capacity at its centers. The
Company's vertical integration gives the Company a competitive advantage in its
markets by reducing the Company's capital expenditures and operating costs.

The Company has three HI STAR systems operating in its centers and intends
to install four more during the remainder of 1996. The Company's plans call for
the ultimate replacement of 33 of the Company's MRI systems, all mid-field
strength MRI systems, over the next 24 months (including the three MRI systems
replaced with HI STAR to date). The HI STAR allows the Company to increase
throughput capacity at its centers as the more powerful computer hardware and
software of the HI STAR reduce the necessary scan time. The demand for imaging
services is greater during certain times of the day. A faster scan time
increases the number of MRI scans that can be performed during these peak hours.
The Company will not replace MRI systems at imaging centers where it is not
economically justifiable to make the capital expenditure necessary to install
the HI STAR system. The HI STAR system operates at .6 Tesla field strength,
features powerful shielded gradients with fast rise time and incorporates
powerful and up-to-date computer technology. The HI STAR also provides increased
flexibility to add applications that may be developed in the future.

The HI STAR system can also perform MR angiography studies -- a
non-invasive procedure for highlighting the flow inside blood vessels without
the use of contrast agents. Neurologists and neurosurgeons are the primary
sources for MR angiography referrals. The Company's marketing research indicates
that some of these physicians will not use an imaging center that lacks MR
angiography capability. This MR

30
<PAGE> 32

angiography capability should allow the Company to market effectively to an
important source of referrals that in some cases had previously been
unreceptive.

In addition to its vertical integration, the Company believes that the size
of its imaging business is a distinct advantage which enables it to negotiate
for the purchase of necessary products and services such as film, contrast
agents and liability insurance at favorable prices. The Company's policy is to
purchase goods and services, where possible, on a Company-wide basis to maximize
its negotiating leverage with suppliers. The Company's lower operating costs
give the Company price flexibility as compared with other providers of
diagnostic services in its regional markets. The Company believes that the
competitive advantages derived from vertical integration and from economies of
scale will become more pronounced if, as expected, health care reimbursements
continue to decline.

The Company is able to compete with hospitals and other operators of
imaging centers by providing high quality services in a patient friendly,
non-institutional environment. The Company believes its specialization in
diagnostic imaging gives it a service advantage over hospitals because, for
hospitals, diagnostic imaging services represent a relatively minor and
ancillary aspect of their operations. The Company's imaging centers maintain
flexible hours appropriate for the local medical community. The Company seeks to
accommodate patients within 24 to 48 hours of referral and generally offers
report turn-around within 24 hours. The Company's marketing research indicates
that this quick turnaround and prompt service is appreciated by patients and
referring physicians and compares favorably with turnaround and service provided
by hospitals. The Company's multi-modality imaging centers are well-positioned
to meet a growing preference by managed care payors to contract with imaging
centers that offer the whole spectrum of diagnostic imaging services. The
Company plans to add modalities to imaging centers where demand is sufficient to
justify the costs of adding the modality.

GROWTH STRATEGY

The Company believes its vertically integrated, low cost operating
structure has enabled it to compete effectively in a rapidly changing health
care environment that has included declining reimbursement rates. Based on the
Company's experience, the Company believes that during the last two years the
rate of decline in reimbursement rates has moderated. Between 1992 and 1994,
before the Company detected a moderation in the rate of decline of
reimbursements, the Company had been reluctant to expand its business. The
Company acquired 15 imaging centers from MedAlliance in April 1995, after its
internal data indicated that the decline in reimbursement rates was slowing. The
Company believes that a slower rate of price decline will enable it to continue
to expand profitably in the future, both through internally generated growth and
through acquisitions.

The Company has instituted a top-line growth strategy to expand its
business by increasing volume at existing imaging centers, the range of services
provided by certain of its existing centers, particularly through the addition
of pain management services, developing new centers in selected areas, acquiring
other imaging centers and offering radiology management services.

Increase MRI Scan Volume

A key component of the Company's growth strategy is to expand the scan
volume and revenues of its existing imaging centers. The Company believes that
the installation of its HI STAR system will have a significant impact on the
number of studies performed by each imaging center utilizing the HI STAR. The HI
STAR allows substantially faster scanning enabling each center equipped with the
HI STAR to perform more scans per day. Also, the HI STAR can perform MR
angiography studies which could not be conducted by the MRI systems being
replaced by HI STAR systems on the HI Standard. Because of the high fixed costs
and operating leverage of the Company's facilities, a small increase in volume
would have a significantly larger effect on a facility's profitability.

Expand Range of Services

The Company intends selectively to expand the array of diagnostic imaging
services offered by its imaging centers. Of the Company's 49 imaging centers
located in the United States, 27 currently offer only MRI. The

31
<PAGE> 33

Company believes that there are opportunities to expand the range of services
offered at many of its imaging centers by adding modalities such as CT,
ultrasound and nuclear medicine. See "Imaging Modalities" above. The Company
reviews each center on an individual basis to determine whether to add imaging
modalities in addition to MRI. The decision to add modalities will be driven
primarily by the Company's assessment of the requirements and expectations of
managed care payors and referring physicians in the particular market. The
Company has recently expanded its Jacksonville, Florida and Houston (Shamrock)
imaging centers and is currently expanding its Arlington, Texas imaging center
to add imaging modalities. Each of these centers is increasing in size from
approximately 3,500 square feet to approximately 10,000 to 11,000 square feet.
The Company uses its in-house expertise to design and manage expansion of
imaging centers. In addition, because the Company owns the real estate at most
of its imaging centers, the space expansion necessary to accommodate additional
modalities at a particular center may be accomplished at a relatively low cost.

The Company recently began offering pain management services at its Houston
(Shamrock) imaging center. Pain management is provided by the Company through
anesthesiologists or radiologists under contract with the Company. Pain
management involves a variety of procedures designed to tailor appropriate pain
reduction strategies for individuals suffering from chronic pain, especially
back pain. One or a therapeutic series of blocks, in conjunction with
appropriate therapy, often provide sufficient relief to allow proper
rehabilitation. The Company believes there is a strategic fit between diagnostic
imaging services and pain management services. A chronic pain patient must have
an initial imaging procedure, usually an MRI, to diagnose the source of the
chronic pain. An imaging procedure may also determine which pain management
procedures are appropriate. Imaging procedures are frequently used after the
pain management procedure to evaluate the prognosis and recovery. In addition,
the pain management procedure frequently requires the use of a C-arm x-ray or
fluoroscope. The necessary equipment already is available or can be easily added
at many of the Company's imaging centers which makes it convenient and
economically feasible to establish a pain management facility at the centers.
Pain management may require, however, that the facility in which procedures are
performed be licensed as an outpatient surgical suite. Another key aspect of the
nexus between pain management and imaging is that both procedures serve an
overlapping patient and referring physician base. The Company plans to offer
pain management services at other of its imaging centers and is conducting
feasibility studies to examine demand for such services in certain markets. The
Company contemplates adding pain management services to at least three
additional imaging centers in 1997.

Develop New Centers

The Company intends to develop new imaging centers to increase its presence
in certain markets or to enter new markets that are underserved as identified by
the Company's locally-based Administrators or Regional Administrators. The
Company would generally prefer to buy an existing facility at a reasonable price
than to develop a new center. However, if suitable acquisition candidates are
not available, then the Company will consider the development at facilities in
strategically important locations. Since 1985, the Company has developed 37
imaging centers and has acquired significant expertise and in-house imaging
center development capabilities. This expertise and the comparatively low cost
of its HI STAR MRI system relative to MRI systems of other manufacturers allows
the Company to establish cost effective centers in certain markets. The Company
opened an imaging center in York, England in July 1996. In addition, the Company
opened another center, equipped with the HI STAR MRI system, at Darlington
Hospital in England in October 1996. While the Company has not developed any
other imaging centers in the past two years, improving diagnostic imaging
industry conditions and the development of the HI STAR MRI system makes it more
attractive for the Company to develop new imaging centers in the foreseeable
future.

Acquire Other Imaging Centers

The Company's acquisition strategy is designed to enhance its presence in
key regional markets in order to meet the coverage requirements of certain
managed care payors as well as to increase the Company's leverage with such
payors. The Company believes that managed care payors prefer to offer their
customers imaging services close to their home or workplace. In addition, the
Company believes that in certain metropolitan areas, a more extensive network of
multi-modality services will make the Company more

32
<PAGE> 34

attractive to managed care and commercial insurance payors because the number of
contracts these payors need to maintain with imaging providers can be reduced.
This reduction decreases such payors' administrative overhead and may therefore
in turn give the payors more pricing flexibility. The Company's acquisition
strategy is, therefore, based on identifying single centers or groups of centers
in geographic areas in which the Company operates or in contiguous areas.
Generally, it is the Company's locally based Administrator or Regional
Administrator who identifies and quantifies a need for expansion in a particular
market, and brings the acquisition candidates who might fulfill their needs to
the attention of the Company's Senior Management. Centers which offer modalities
which the Company does not offer in a particular geographic region are also
attractive acquisition candidates for the Company. The Company prefers to make
acquisitions of centers in which the Company would have full ownership and
control of the acquired assets without any remaining interest by referring
physicians to avoid financial or business relationships that may be construed as
physician self-referral practices. The Company is not currently engaged in any
negotiations for the acquisition of imaging centers.

Expand Radiology Management Services

When appropriate opportunities arise, the Company intends to provide
management services for diagnostic imaging facilities owned by hospitals or
other health care providers. The Company currently manages an imaging center in
Williamsport, Pennsylvania on a management fee basis. Also, the Company manages
the radiology needs of the Department of Orthopedics for the Baylor College of
Medicine in Houston, Texas.

In addition, as reimbursement rates for diagnostic imaging services decline
and the earnings potential of radiologists is affected, radiologists are
increasingly forming physician practice groups, offering teleradiology services
(interpretation of studies transmitted electronically off-site) and creating
networks of radiologists in order to capture market share and maximize potential
income. The Company believes its experience and resources will provide a natural
nexus for managing the physician practices of groups of radiologists,
particularly in markets in which it operates imaging centers.

OPERATIONS

Imaging Center Operations

The Company provides its diagnostic imaging services through 49 imaging
centers located in 13 states in the United States and six in England. The number
of imaging centers operated by the Company has increased approximately 65% in
the last five years from 33 at the end of 1991 to 55 as of October 15, 1996. The
following table sets forth information regarding the number of imaging centers
operated by the Company during the periods indicated:

<TABLE>
<CAPTION>
CENTERS
AT END
CENTERS CENTERS CENTERS OF
YEAR ACQUIRED DEVELOPED SOLD OR MERGED PERIOD
----------------------------------------------- -------- --------- -------------- -------
<S> <C> <C> <C> <C>
1991........................................... 1 4 0 33
1992........................................... 4 3 0 40
1993........................................... 1 3 0 44
1994........................................... 0 0 2 42
1995........................................... 15 0 4* 53
1996 (through October 15)...................... 0 2 0 55
</TABLE>

- ---------------

* Of these centers, three were sold and one was merged with another center.
Three of these centers had been acquired from MedAlliance and their sale or
closure was contemplated by the Company at the time of the acquisition.

The Company's imaging centers provide high-quality services in a patient
friendly, non-institutional environment. Each imaging center is staffed by
administrative and technical personnel, employs a scheduling clerk and offers
free transportation to patients upon request. Patients are scheduled for an
appointment,

33
<PAGE> 35

informed of any medications needed for the test and pre-qualified with respect
to their medical requirements and insurance coverage by Company personnel.
Procedures at the Company's imaging centers are designed to avoid the admission
and administration complexities of inpatient diagnostic imaging services. In
addition, a physician or a physician group, generally board certified
radiologists, provides professional services and interprets studies for each
imaging center under a contract with the Company. Such physicians are
independent contractors and are not employees of the Company. Following the
diagnostic procedures, the images are reviewed by the interpreting physicians
who prepare reports of these tests and their findings. These reports are
transcribed by Company personnel and then delivered to the referring physicians
usually within 24 hours of the procedure. The imaging centers are open at such
hours as are appropriate for the local medical community. Many are open from
7:30 a.m. to 9:00 p.m. each weekday, and in order to provide scheduling
flexibility approximately one-third of the imaging centers routinely maintain
hours on Saturdays, while others will open on Saturdays as needed.

Each imaging center is locally managed. An Administrator or Regional
Administrator is responsible for the operations of an imaging center or groups
of centers located in a particular market or in contiguous markets. The
Administrators and Regional Administrators have direct profit and loss
responsibility and a portion of their compensation is based on the operating
income generated by centers under their supervision.

Each imaging center generally charges patients a fee for providing
diagnostic studies on a per procedure or per study basis. The physician or
physician group that provides diagnostic readings of the studies generally
receives a contractually specified percentage of such fee when and if collected
by the Company. At certain imaging centers, the physician or physician group
which provides the diagnostic readings bills the patient or third-party payor
directly for such services.

Although the majority of the MRI systems operated by the Company are HI
Standard or Diasonics systems operating at mid-field strength, the Company also
has MRI systems of other manufacturers (General Electric, Siemens, Hitachi,
Fonar, Philips and Picker). Most of these systems operate at high-field strength
and were acquired by the Company in the MedAlliance Centers Acquisition.

Manufacturing Operations

The Company began service and manufacturing operations in an effort to
maintain its systems technology. In 1986, in response to the decision of Johnson
& Johnson to discontinue the MRI system manufacturing business of its
wholly-owned subsidiary, Technicare Corporation ("Technicare"), the Company's
management established an Engineering Services Division to service Technicare
MRI systems owned by the Company. The Company hired a number of MRI field
service technicians experienced in servicing Technicare CT and MRI systems and
purchased parts inventories in order to conduct its own engineering and service
functions. As a result of the expertise acquired in repairing and improving
Company MRI systems and pursuant to the licenses described below, the Company,
through its Engineering Services Division, developed its own MRI system, the HI
Standard, and began to manufacture this system in August 1988 for use in the
Company's imaging centers.

To enable the Company to manufacture MRI systems using the Technicare
technology, the Company entered into a Master Patent License Agreement (the
"Patent Agreement") with The National Research Development Corporation, an
English corporation d/b/a British Technology Group ("BTG"), as of October 1,
1987, and a license agreement (the "J&J Agreement") with Johnson & Johnson as of
April 1, 1988. Pursuant to the Patent Agreement, the Company obtained
non-exclusive perpetual licenses under certain patents and patent applications
of which BTG is the proprietor. The licenses allow the Company to develop,
manufacture and market MRI systems and upgrade packages for MRI systems in the
United States. The Patent Agreement was amended as of January 1, 1989 to allow
the Company to develop, manufacture and market MRI systems and upgrade packages
for MRI systems worldwide. Under the J&J Agreement, the Company obtained
non-exclusive perpetual licenses to create, copy, use, license and sell certain
Johnson & Johnson MRI software, hardware and derivative works relating to the
Teslacon II MRI system anywhere in the world. Johnson & Johnson is the assignee
of its wholly-owned subsidiary, Technicare.

34
<PAGE> 36

In June 1993, the Board of Directors approved a major technology program to
develop a state-of-the-art MRI system. The Company then hired computer
programmers and physicists experienced in MRI technology to develop and
integrate the new system. The MRI system developed under this program, the HI
STAR, is not based on Technicare technology, although it uses fundamental MRI
patented technology which the Company licenses from BTG. The HI STAR is a high
performance MRI system that operates at .6 Tesla field strength. The HI STAR
systems use existing magnets, which have a virtually unlimited operating life.
Using existing magnets increases the cost advantage of the HI STAR system
relative to purchasing a comparable MRI system. The HI STAR system features
powerful shielded gradients (15 mTesla/m) and a rise time of 550 microseconds,
with reconstruction time of a half-second for a 256 x 256 pixel image as
compared with reconstruction time of seven seconds for the HI Standard. The HI
STAR runs on i860 Intel-based array processor, with dual Pentium host computers
running Windows NT. The HI STAR's capabilities include high resolution imaging,
snapshot imaging (the ability to produce an image in a breath-hold, an important
new technique for abdominal imaging) and MR angiography (a non-invasive
technique for highlighting the flow inside blood vessels without the use of
contrast agents). In September 1995, the HI STAR MRI system was cleared by the
FDA through the 510(k) notification process. Since June 1996, the Company has
installed fixed-site HI STAR MRI systems at its Atlanta-North location, its
Darlington Hospital site in England, and at its Lancaster, Pennsylvania imaging
center.

The 33 imaging centers opened from the beginning of 1989 until the
installation of the first fixed site HI STAR system were equipped with the HI
Standard MRI system. The Company intends to replace most of its HI Standard and
Diasonics MRI systems with HI STAR systems within the next 24 months. Because
the Company's own MRI systems cost the Company less than MRI systems purchased
from other manufacturers, the operating break even point is significantly lower
at the imaging centers which use the HI Standard or HI STAR MRI system than the
operating break even point at centers that purchase MRI systems from other
manufacturers.

The Company also owns and operates seven mobile MRI systems. Two mobiles
are currently leased to third parties. The remaining mobiles are used at the
Company's imaging centers when an upgrade will result in downtime of the fixed
site MRI system. The Company plans to use the mobiles when it installs the HI
STAR MRI systems to prevent any loss of MRI capability during the installation.

Service Operations

The Engineering Services Division services and maintains the Company's HI
STAR and HI Standard MRI systems and five MRI and six CT systems acquired from
other manufacturers. In addition, the Engineering Services Division services the
magnets on eight of the Company's General Electric MRI systems. The cost of
servicing and maintaining the Company's equipment is significantly lower than
the service and maintenance fees that would be charged by manufacturers or other
third party providers. The Engineering Services Division services MRI systems
operated by parties other than the Company. As of September 30, 1996, the
Engineering Services Division serviced and maintained 35 MRI systems owned and
operated by third parties. However, certain equipment manufactured by third
parties and used by this Company continues to be serviced under contracts with
the manufacturers. The Engineering Services Division also sells MRI system
upgrades, such as surface coils, and is engaged in research and development
relating to enhancing and upgrading MRI systems.

35
<PAGE> 37

PROPERTIES

The following table sets forth certain information concerning the imaging
centers owned and operated by the Company as of October 15, 1996 and the
diagnostic modalities provided by each center.

<TABLE>
<CAPTION>
DEVELOPED DATE DEVELOPED
OR OR
LOCATION ACQUIRED ACQUIRED MODALITIES(1)
- ----------------------------------------- ---------- --------------- --------------------
<S> <C> <C> <C>
ALABAMA
Birmingham............................. Acquired April 1995 MRI, CT, X-Ray, MM,
US
Huntsville............................. Acquired April 1995 MRI, CT, X-Ray, MM,
US
COLORADO
Aurora (North)......................... Acquired April 1995 MRI
Aurora (South)......................... Acquired April 1995 MRI
Colorado Springs....................... Acquired June 1992 MRI, CT, X-Ray, MM,
Fluoro
Denver................................. Acquired April 1995 MRI, CT, X-Ray, MM,
US
FLORIDA
Cape Coral............................. Developed July 1993 MRI
Fort Myers............................. Developed November 1990 MRI
Jacksonville(2)........................ Developed July 1986 MRI, X-Ray, MM, CT,
US, Fluoro, Nuc.
Med.
Orange Park............................ Developed June 1988 MRI, X-Ray

GEORGIA
Athens................................. Developed December 1987 MRI
Atlanta................................ Developed November 1984 MRI, CT, US
Augusta................................ Developed December 1989 MRI
Columbus............................... Developed August 1989 MRI
Riverdale.............................. Developed September 1987 MRI
Savannah............................... Developed July 1989 MRI
Warner Robins.......................... Developed February 1990 MRI, X-Ray

ILLINOIS
Belleville............................. Acquired April 1992 MRI
Effingham.............................. Developed December 1990 MRI
Wheaton................................ Developed March 1990 MRI

LOUISIANA
Baton Rouge............................ Acquired April 1995 MRI, CT, X-Ray, MM,
US, Fluoro, Nuc.
Med.
Baton Rouge............................ Acquired April 1995 MRI, CT, X-Ray, MM,
US, Fluoro, Nuc.
Med.
MARYLAND
Frederick.............................. Developed December 1985 MRI

NEW JERSEY
Stratford.............................. Developed April 1989 MRI

OKLAHOMA
Tulsa.................................. Developed October 1991 MRI
</TABLE>

36
<PAGE> 38

SOUTH CAROLINA
Anderson............................... Developed May 1988 MRI
Columbia............................... Developed June 1990 MRI
Greenville............................. Acquired April 1995 MRI, CT, X-Ray, MM,
US, Fluoro, Nuc.
Med.
Hilton Head............................ Developed April 1991 MRI
N. Charleston.......................... Developed February 1989 MRI

TENNESSEE
Knoxville.............................. Acquired April 1995 MRI, CT, X-Ray, MM,
US, Fluoro, Nuc.
Med.
Memphis................................ Developed July 1990 MRI
Nashville.............................. Acquired April 1995 MRI, CT, X-Ray, MM,
US
TEXAS
Arlington(3)........................... Acquired September 1992 MRI, CT, X-Ray, MM,
US, Fluoro
Austin................................. Developed September 1991 MRI
Beaumont............................... Acquired April 1995 MRI, CT, X-Ray, MM,
US, Nuc. Med.
Clear Lake (Galveston)................. Developed February 1990 MRI
Fort Worth............................. Developed June 1990 MRI
Grove.................................. Acquired April 1995 MRI, CT
Houston(4)............................. Developed August 1988 MRI, CT, X-Ray, MM,
US, Fluoro, Nuc.
Med.
Hurst (NE Fort Worth).................. Developed November 1991 MRI, CT, X-Ray
South Dallas........................... Developed May 1992 MRI, CT, X-Ray
Tyler.................................. Developed March 1991 MRI
Waco................................... Developed August 1992 MRI

ENGLAND
Darlington............................. Developed April 1992 MRI
Darlington Hospital.................... Developed October 1996 MRI
Guildford.............................. Developed November 1990 MRI
Somerset............................... Acquired November 1992 MRI
York................................... Developed July 1996 MRI
Welwyn Garden City..................... Developed August 1993 MRI
</TABLE>

- ---------------

(1) "MRI" means magnetic resonance imaging; "CT" means computerized tomography;
"X-Ray" means conventional x-ray; "MM" means mammography; "US" means
ultrasound; "Fluoro" means fluoroscopy; and "Nuc. Med." means nuclear
medicine.
(2) The Jacksonville, Florida imaging center expanded into a new 11,000 square
foot multi-modality facility in August of 1996 to offer CT, ultrasound,
mammography, nuclear medicine and fluoroscopy in addition to MRI.
(3) The Arlington, Texas imaging center is relocating to a new 10,000 square
foot facility in 1996 that will offer a fixed site MRI system (rather than
a mobile) and will add nuclear medicine.

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<PAGE> 39

(4) The Houston (Shamrock), Texas imaging center has changed its name to Health
Images -- Medical Center and added a 6,000 square foot expansion in
September 1996 to include a second MRI system operating at a higher field
strength (1.5 Tesla) (due to repeated requests from referring physicians
with practices concentrating on sports-related injuries), fluoroscopy, and
nuclear medicine services. Health Images -- Medical Center is the first of
the Company's imaging centers to offer pain management services. The Health
Images -- Medical Center's pain management operation is in the process of
being licensed by the Texas Department of Health as an ambulatory surgical
center.

In 1990, the Company opened a radiation oncology center in Williamsport,
Pennsylvania (the "Oncology Center") which provides radiation treatment therapy
to cancer patients in the Williamsport area on an outpatient basis. Radiation
therapy uses high energy x-rays produced by a machine called a linear
accelerator designed to stop cancer cells from growing and multiplying. The
Oncology Center's medical equipment is used by its board certified oncologists
and professional staff to assess, plan and provide treatment to cancer patients.
The Company does not contemplate opening any other radiation oncology centers.

The Company owns the land and building at 39 of the Company's imaging
centers, leases the land or building at 15 imaging centers and manages one
imaging center on a fee basis. The real property at Company-owned imaging
centers and improvements thereon may be collateralized under real estate
mortgages or security deeds. The real property and improvements for the other
existing centers are subject to leases expiring between 1996 and 2010.

The existing single modality imaging centers occupy an average of 3,642
square feet. Multi-modality centers occupy an average of 10,500 square feet. The
Company owns most of the diagnostic modalities utilized by the Company at the
imaging centers existing prior to the MedAlliance Centers Acquisition. Most of
the diagnostic modalities at the centers acquired from MedAlliance were leased
and the Company assumed the leases. The Company's equipment is used from time to
time as collateral for loans obtained by the Company.

The Company's headquarters are located in Atlanta, Georgia and occupy
approximately 52,600 square feet under an 84-month lease that expires December
31, 1999. The annual rental rate for this lease is $473,791. Management believes
that its corporate headquarters and the facilities in which each of the imaging
centers is located are suitable for the purposes for which they are used but
plans to move its headquarters and manufacturing facility in December 1996 to a
business park north of Atlanta. The Company believes that the new location will
better suit the manufacturing needs of the Company, provide expansion capability
no longer available at the current site and will be more cost effective than its
current location. The Company owns the land and will own the building for its
new headquarters and manufacturing facility. The Company does not anticipate any
difficulties with either subleasing or relinquishing the current corporate
headquarters space on reasonable terms.

MARKETING

The Company's marketing program focuses on developing relationships with
physicians and their office staff, patients, hospitals, community and civic
organizations, managed care organizations, private insurance carriers and the
general public. In order to cultivate these relationships, the Company employs
marketing personnel who explain the Company's services to existing and potential
customers in individual meetings, group presentations and seminars and through
advertising. The Company's marketing personnel are trained and given corporate
assistance with research and analysis, planning, and the production of support
materials to develop customized plans to suit each customer's needs.

The Company targets individual physicians and physician groups who may
require the Company's services for their patients. Company marketing executives
meet with and provide literature to physicians and their staff in an attempt to
inform them about the availability and capabilities of various imaging
modalities at the Company's imaging centers, and to update them on advances,
improvements and other recent developments in diagnostic imaging technology.

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<PAGE> 40

The Company also markets to the public in general by providing information
concerning the availability of imaging technology, especially mammography, for
the early diagnosis of disorders by giving presentations at and participating in
community service clubs, charity events and health fairs.

INFORMATION SYSTEMS

The Company has developed and maintains its own management information
system which operates on a local area network located at the Company's Atlanta
headquarters. The system receives data from two primary billing and collections
packages (one of which was in use at the centers acquired from MedAlliance)
installed at the Company's imaging centers. The system tracks and reports
critical center operating data on a daily basis and includes details on number
of procedures, gross revenues, contractual discounts, same center comparisons
and collections. This information is presented in summary form and detailed by
center and modality. This daily information allows management to detect trends
and difficulties at each of its imaging centers and to take appropriate and
timely remedial measures. The Company believes this system also enables it to
identify industry trends sooner than its competitors. The Company's reporting
system enables management to monitor billing practices and compliance with
current revenue recognition policies.

The Company is currently developing a new Windows NT-based center software
package with a third party supplier to replace the two independent systems that
provide information to the central management information system. This new
system will provide conformity at all centers and provide the Company with the
ability to integrate a new center, whether developed internally or acquired,
quickly and efficiently. This client-server technology will support a
Company-wide solution for billing, collection and financial management while
allowing flexibility in conducting centralized and local operations. The package
will also allow each imaging center to better manage scheduling. The Company
believes that its center management package will further reduce the number of
days it takes to bill and collect for its services. This system will also allow
for the integration of other types of entities, such as physician practices,
into the Company system.

The Company's accounting and engineering applications are third party
software systems which operate within a token ring network on an IBM RISC
platform at the Company's Atlanta headquarters. These systems have been in place
since late 1991 and handle all aspects of the Company's accounting, payroll,
accounts payable, purchasing, inventory, manufacturing and field service
processes. The MedAlliance Centers Acquisition and the contemplated level of
near term expansion of the Company's business has prompted management to begin
the process of selecting a new general ledger, payroll and human resources
software package.

REIMBURSEMENT

Because most procedures are paid for by third-party or government payors,
the amount and availability of third-party and government reimbursement for
imaging services directly impact the use and revenues of the Company's imaging
centers. Private third-party insurance carriers generally pay for medically
necessary MRI and other imaging procedures. The Company's imaging centers accept
Medicare patients and, for competitive reasons, enter from time to time into
contractual reimbursement arrangements with various third parties, including
HMOs, Blue Cross/Blue Shield and other insurers. For 1995, the Company derived
30% of its net patient service revenue from managed care/HMO, 25% of such
revenue from private insurance, 15% from Medicare/Medicaid, 6% from private pay,
and 24% from other sources.

Pricing of diagnostic imaging services varies by region and locality. The
imaging centers maintain a competitive billing strategy based upon evaluation of
available pricing data with respect to each location. Each imaging center adopts
standard pricing procedures which may be modified under certain circumstances.
In most cases, however, contracted prices are discounted and the average
realizable charge per MRI is substantially less than the list price. The Company
seeks to participate in as many managed care plans as is financially prudent.
The Company evaluates the number of beneficiaries covered in a particular plan
and the plan's ability to channel patients in determining what is an acceptable
reimbursement per procedure. The Company will not accept a managed care contract
if it regards the reimbursement rates as too low and the

39
<PAGE> 41

channeling capabilities as too limited. Each imaging center maintains sufficient
price flexibility to enable it to compete with other diagnostic imaging services
provided in the local community.

The Company's reimbursements have declined in recent years due to a number
of factors, although the rate of decline has diminished recently. The reasons
for this decline arise from cost containment efforts at federal and state levels
and from efforts of insurers and businesses to control health care costs. For
example, beginning in January 1992, the Health Care Financing Administration
("HCFA"), at the direction of Congress, changed the way it paid for many health
care services reimbursed under Medicare, including MRI services. In addition,
Pennsylvania, where five of the Company's imaging centers are located, adopted
legislation that limits reimbursement in workmen's compensation and automobile
injury cases. Effective August 31, 1993, it limits reimbursement to 113% of the
Medicare reimbursement for the medical service. The Company's average
reimbursements per scan from Medicare, Medicaid and Blue Cross/Blue Shield
(which has a particularly strong presence in the Company's Pennsylvania market)
have all declined in recent years. The Company's increased number of
reimbursement arrangements with managed care providers has also resulted in
fewer patients paying list prices for MRI scans because an increasing percentage
of patients are covered under managed care agreements which stipulate a
discount. The Company anticipates that this trend of discounting prices under
managed care contracts with health maintenance organization ("HMOs"), preferred
provider organizations ("PPOs"), independent practice associations ("IPAs"),
third-party administrators ("TPAs") and directly with businesses for their own
employees will continue. However, the Company believes that the value realized
by its arrangements with managed care providers, both in adding new patients and
protecting its current patient base, more than offsets the effect of the lower
prices provided for in such arrangements.

COMPETITION

The diagnostic imaging industry is highly competitive. The Company and its
imaging centers compete with local hospitals, other multi-center imaging
companies, local independent imaging diagnostic centers and imaging centers
owned by local physician groups. The Company believes that the principal
competitive factors in the diagnostic imaging services market are price, quality
of service, ability to establish and maintain relationships with managed care
payors and referring physicians, reputation of interpreting physicians, facility
location and convenience of scheduling. In addition, certain physicians are
reluctant to refer patients to an imaging center that uses equipment that does
not have a high-field strength MRI system or does not offer MR angiography
capabilities. The Company believes the upgrade of its facilities to the HI STAR
MRI system will encourage these physicians to use the Company's centers for all
of their imaging requirements, thereby increasing volume at these centers. Also,
in certain markets, a single-modality imaging center may be at a disadvantage
compared to a multi-modality imaging center in marketing to and negotiating with
certain managed care payors and physicians who prefer to contract with or refer
patients to imaging centers that supply all the imaging services required by
patients.

The Company's most significant competitors are local hospitals that offer
imaging services on an inpatient basis or on an outpatient basis through owned
imaging centers or centers operated as joint ventures with hospital
participation. Some hospitals use their control over inpatient services to
extract exclusive arrangements or advantageous pricing from third party payors
for their outpatient services such as diagnostic imaging.

Most of the Company's MRI systems are "mid-range" in terms of Tesla
ratings, which measure the strength of the magnetic field. The Company believes
that mid-range MRI systems are sufficient for most diagnostic purposes in the
imaging industry and are less expensive to acquire and operate than high-field
systems. The quality and reliability of MRI scans performed by mid-range systems
are comparable with most types of scans produced by high-field systems. In the
Company's experience, managed care payors are indifferent to field strength and
do not pay a premium for MRI scans performed by high-field systems. A lower
operating break even point gives imaging centers operating mid-range MRI systems
more flexibility on pricing for their services when negotiating with managed
care payors and may allow a center to be profitable despite declining
reimbursements from most payors. However, some referring physicians, especially
those practicing in highly specialized orthopedic or neurologic areas and those
affiliated with research facilities, prefer high-field MRI equipment and will
refer patients only to facilities that operate such systems.

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<PAGE> 42

The Company does not currently operate any so-called "open" MRI systems,
although the Company plans to open an MRI center in Denver, Colorado in 1997
that will feature an open MRI system. The open MRI system will accommodate
certain patients who cannot tolerate a closed bore MRI system and should
complement the Company's existing operations in the Denver area. The Denver
medical complex where this new center will be located does not currently have
any open MRI systems. The Company does not have any further current plans to add
open MRI systems because the Company believes that open MRI systems are not as
cost effective as the Company's HI STAR MRI system.

In general, open MRI systems emphasize patient comfort and are generally
lower in cost than other MRI systems available from third party manufacturers.
Open MRI systems operate at a relatively low-field strength, .2 Tesla, and may
produce images with less clarity than mid-field and high-field MRI systems. Open
MRI systems have recently been the subject of local advertising campaigns
supported by manufacturers of such systems, some of whom have greater financial
resources than the Company. In response to such advertising, certain patients
have begun to request open MRI. The Company believes that its STARVIEW MRI
Patient Entertainment System is an effective remedy to concerns about
claustrophobia among patients. There can be no assurance, however, that open MRI
systems will not be preferred by patients and therefore become the preferred
choice in MRI systems among referring physicians. In such a case, the Company
may consider adding open MRI systems purchased from third party vendors.

Some hospitals and other competitors of the Company have greater financial
resources than the Company. Other competitors may have existing relationships
with the medical community which may be superior to those of the Company's
imaging centers.

MRI competes with less expensive imaging diagnostic devices and procedures
which may provide similar information to the physician. Alternative imaging
diagnostic technology includes CT scans, nuclear medicine,
radiography/fluoroscopy, ultrasound, x-ray mammography, and conventional x-ray.
The cost of a particular study depends upon the complexity of the procedure, the
length of time of equipment utilization and whether the procedure requires
introduction of contrast agents into the body. Management believes that MRI's
significant benefits generally justify a payor paying the pricing differential
between MRI and other modalities.

As a provider of maintenance services to facilities operating major medical
diagnostic equipment, the Company's Engineering Services Division competes with
other companies that have significantly more capital, parts inventory, personnel
and office locations with which to provide such services.

GOVERNMENT REGULATION

The diagnostic imaging industry in the United States is subject to federal
and state laws and regulations and in England the overview of the Health and
Safety Executive. While the Company believes that its operations substantially
comply with applicable laws and regulations, the Company has not sought or
received interpretive rulings to that effect. Additionally, there can be no
assurance that subsequent laws, subsequent changes in present laws or
interpretations of laws will not adversely affect the Company's operations.
Certain applicable laws and regulations are generally described below:

FDA Regulation of Medical Devices

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<PAGE> 43

Under the Federal Food, Drug and Cosmetic Act, as amended, medical devices
are classified into one of three classes (i.e., Class I, II, or III) on the
basis of the controls necessary to reasonably ensure their safety and
effectiveness. Safety and effectiveness can reasonably be assured for Class I
devices through general controls (e.g., labeling, premarket notification and
adherence to GMPs) and for Class II devices through the use of general and
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices).

Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval. A 510(k) clearance will be granted if the
submitted data establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device, or to a
Class III medical device for which the FDA has not called for premarket
approval. Modifications or enhancements to the Company's products that are
cleared through the 510(k) process that could significantly affect safety or
effectiveness will require new submissions. On June 23, 1989, the FDA
reclassified the HI Standard MRI system from a Class III to a Class II Medical
Device, which reduces the level of FDA regulation applicable to new
technological developments. The Company received clearance of the HI STAR MRI
system from the FDA in September 1995 through the 510(k) premarket notification
process.

FDA Regulation of Mammography

Diagnostic imaging centers performing mammography services must meet
federal, and in some jurisdictions, state standards for quality as well as
certification requirements. Under FDA regulations which became effective on
October 1, 1994, all mammography facilities must be accredited, undergo an
annual inspection and physics survey, meet qualification standards for
interpreting physicians, mammography technologists, and medical physicists, meet
certification requirements for adequacy, training and experience of personnel,
meet quality standards for equipment and practices, and meet various
requirements governing recordkeeping of patient files. Although all of the
Company's imaging centers which provide mammography services are currently
accredited by the Mammography Accreditation Program of the American College of
Radiology, and the Company anticipates continuing to meet the requirements for
accreditation, the withdrawal of such accreditation could result in the
revocation of certification, if the FDA so determines. All of the Company's
imaging centers that provide mammography services have received their FDA
certifications.

Certificates of Need

Most states have Certificate of Need ("CON") programs which control and
regulate the construction of health care facilities and the acquisition by
health care facilities of major medical equipment. Although such programs vary
from state to state, generally a CON is required before constructing a "health
care facility," and

42
<PAGE> 44

a health care facility must obtain a CON before acquiring major medical
equipment or establishing new institutional services. A CON is granted on the
basis of various criteria relating to need, giving consideration to the extent
to which such facilities, equipment or services are available to a specified
geographical area and the population of such area. The term "health care
facility," as defined by many states, does not include facilities that provide
service only to outpatients. Accordingly, in those jurisdictions, an outpatient
clinic need not obtain a CON.

Some states, however, require that any person acquiring major medical
equipment, such as an MRI system, first obtain a CON regardless of whether or
not the MRI system is acquired by or placed in a health care facility. In those
states, even if an imaging center may be constructed without a CON, the purchase
of an MRI system at a cost comparable to that paid by the imaging centers will
require a CON.

The Company has CONs for its Memphis and Nashville, Tennessee, imaging
centers, its Philadelphia, Lancaster and Lebanon, Pennsylvania, imaging centers
and its centers in Greenville, Charleston and Hilton Head, South Carolina. The
Company's Knoxville, Tennessee imaging center was grandfathered by the State of
Tennessee when it adopted its current CON laws.

Prohibition Against Practice of Medicine

The establishment, marketing and operation of the imaging centers are
subject to laws prohibiting the practice of medicine by non-physicians and the
rebate or division of fees between physicians and non-physicians. They also
limit the manner in which patients may be solicited. Management believes that
its plan of operations complies with such laws. Under the Company's plan, the
employees of each imaging center provide only technical services relating to the
diagnostic scans. Professional medical services, such as the reading of the
diagnostic studies and related diagnosis and the providing of pain management
medical procedures, are separately provided by licensed physicians. These
physicians are independent contractors who retain all control over the medical
component of providing imaging and pain management services. There can be no
assurance, however, that state authorities or courts will not determine that
these relationships constitute the unauthorized practice of medicine by the
Company. Such determinations could have a materially adverse effect upon the
Company and would prohibit the affected imaging centers from continuing their
current procedures for conducting business.

Fraud and Abuse

All medical providers that accept Medicare or Medicaid reimbursements are
currently subject to the fraud and abuse provisions of the Act, which
essentially prohibit bribes, kickbacks, and rebates and any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for providing
Medicare-covered or Medicaid-covered services, items or equipment. As written,
the statute technically prohibits many common arrangements between medical
service providers and physicians. A violation of these provisions may result in
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. The Department of Justice gives health care fraud a high
priority and has made more personnel available to investigate instances of
alleged health care fraud in recent years.

In July 1991, the Office of the Inspector General at the Department of
Health and Human Services ("OIG") issued regulations (the "HHS Regulations")
which provide specific "safe harbors" for certain practices that would not
violate the provisions of the Act. These regulations specify limited
circumstances under which a "safe harbor" will be available when physician
investors refer Medicare patients to entities in which they maintain a passive
investment interest (i.e., either as a shareholder or a limited partnership
interest). Under the safe harbor rules, payments constituting a return on
investment (e.g., dividends, interest) will not constitute proscribed
remuneration under the Act in certain circumstances. Failure to satisfy the
conditions of an applicable safe harbor does not necessarily indicate that the
arrangement in question violates the Act, but means that the arrangement is not
protected from criminal or civil sanctions under the Act.

The Company has five imaging centers that are not 100% owned by the
Company. These centers are located in Athens, Georgia, Frederick, Maryland,
Lancaster, Pennsylvania, Philadelphia, Pennsylvania, and Anderson, South
Carolina. These centers are owned by limited partnerships in which the Company
is sole

43
<PAGE> 45

general partner, except Lancaster and Philadelphia where it is a co-general
partner. The Company has a 93% to 98% limited partnership interest in each of
the Partnerships. None of the Company's affiliated partnerships (the
"Partnerships") meet all of the criteria to satisfy any of the safe harbors set
forth in the HHS Regulations because one of the safe harbor criteria states that
no more than 40% of the investments in an entity (such as one of the
Partnerships) can be held by investors who do business with the entity. Doing
business with the entity is defined more broadly than simply making or
influencing referrals. It also includes furnishing items or services to the
partnership. Therefore, although far less than 40% of the ownership interests in
each of the Partnerships is held by limited partners who refer or can influence
referrals to the center owned by the Partnership, the Partnerships nevertheless
fail to meet this criteria because the Company is the managing general partner
of each of the Partnerships. As managing general partner, the Company provides
services to each of the Partnerships for which it receives compensation in the
form of its management fee. The Company's ownership interest as majority limited
partner coupled with the services provided as general partner prevents each of
the Partnerships from meeting one of the criteria for satisfying the safe
harbor. The Company believes it meets the other criteria for the safe harbors.

The fact that a given business relationship does not meet the criteria to
fall within the safe harbor does not render the conduct illegal. It is currently
impossible to predict the risk of prosecution although the Company believes it
to be very slight because of the minor ownership interest of these limited
partners and the small percentage of such limited partners referrals relative to
the aggregate referrals to the center. In addition, any examination of the
pattern of distributions to the limited partners of the Partnerships would show
that all limited partners are treated equally, regardless of referrals, based
solely on their respective ownership interests and distributions are made only
when merited by the operating income of the Partnerships. The Company has
offered to purchase the interests of the limited partners in each of the
Partnerships to effect a termination of the Partnerships and avoid any risk that
the Company or the limited partners will be prosecuted under the Act. Although
none of the remaining limited partners wishes to sell, none of such limited
partners has more than a nominal interest in the limited partnership. The
Company does not believe that the ownership interest of these limited partners
creates the potential for abuse.

In November 1995, the OIG adopted a second set of safe harbors that would
protect certain managed care activities from the reach of the Act. In some
instances, the safe harbor would cover price reductions offered by providers to
health plans.

The OIG also periodically issues "Fraud Alerts," which identify specific
practices within the health care industry that the OIG believes could raise
questions under the federal fraud and abuse laws. The following areas have been
the subject of Fraud Alerts by the OIG: joint venture arrangements; routine
waiver of Medicare Part B copayments and deductibles; hospital incentives to
referring physicians; prescription drug marketing practices; arrangements for
the provision of clinical laboratory services; arrangements for home health
services; and arrangements involving nursing homes. The Company monitors these
Fraud Alerts to determine what action, if any, is necessary to comply with their
requirements.

In addition, many states in which the Company conducts business (e.g.,
Texas) also have their own anti-kickback laws which are similar in scope and
purpose to the Act. The Company continuously monitors these laws to determine
what action, if any, is necessary to comply with their requirements.

OBRA '93 enacted restrictions on the practice of physician self-referral;
i.e., the practice by which physicians refer to entities with which they have a
financial relationship. With respect to diagnostic imaging services, OBRA '93
makes it unlawful for a physician, a physician's immediate family, or an entity
in which either has an ownership interest to refer Medicare or Medicaid patients
for MRI or CT, to an entity with which any one of them has a "financial
relationship." The statute defines "financial relationship" to include not only
an ownership or other investment interest but also any economic interest. Any
compensation arrangement between a referring physician and an imaging center is
therefore covered by OBRA '93. Although OBRA '93 became effective on January 1,
1995, no regulations implementing OBRA '93 provisions have been proposed and the
form on which providers would report their financial relationships has not been
issued. With respect to the five imaging centers that are limited partnerships,
there may have been a very small number of isolated referrals by physician
investors of Medicare patients. The Company has imple-

44
<PAGE> 46

mented procedures to preclude billing of such referrals in the future. Moreover,
while the Company attempts to structure its contracts with referring physicians
who also provide services to or receive services from the Company to comply with
OBRA '93, there is no assurance that the Company is currently in compliance with
such statute.

OBRA '93 also modified several of the exceptions to the self-referral
prohibition that were in existence prior to its enactment. With respect to MRI,
these exceptions also became effective in January 1995. The Company does not
believe that the provisions of OBRA '93 will impact its business directly, but
there may be an indirect effect over time if some competitors of the Company who
rely on physician self-referral and have a high volume of Medicare or Medicaid
business cease operations or direct their Medicare and Medicaid patients
elsewhere. The Company has not yet seen any material impact from the statutes.

On August 21, 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 ("HIPPA"). The HIPPA contained a
number of provisions relating to health care fraud and abuse, including (i) the
establishment of a national fraud and abuse control program involving federal
and state agencies; (ii) a requirement that the federal Department of Health and
Human Services ("DHHS") issue advisory opinions regarding the applicability of
certain aspects of the anti-kickback statute to specific or proposed
arrangements that would be binding on the Department and the party requesting
the opinion; (iii) new authority for the DHHS to exclude from participation in
the Medicare and Medicaid programs an officer or managing employee of an entity
convicted of criminal offenses related to the delivery of services under the
Medicare and Medicaid programs; (iv) the establishment a new criminal offense of
health care fraud; (v) clarification of the level of knowledge required for the
imposition of civil monetary penalties; and (vi) increases in monetary penalties
for violations of fraud and abuse laws. To date, no regulations have been issued
implementing these new provisions. Other proposals for curtailing fraud and
abuse by health care providers have been proposed and may be adopted in the
future.

State Regulation

Many states are implementing their own health care reform plans, which may
include provisions that could affect the structure of health care and the manner
in which health care services are delivered in a particular state. The Company's
management monitors such legislation to determine what action, if any, is
necessary as a result of such provisions.

Also, certain of the states in which the Company has imaging centers have
enacted provisions concerning physician self-referral. The State of New Jersey
has a law that prohibits physicians from referring any patient to a health care
entity in which they have a financial interest. This law, however, exempted
those entities that like the Company's Stratford, New Jersey imaging center,
were in existence on the effective date of the law, August 1, 1991. The State of
Illinois has also enacted prohibitions on self-referral of diagnostic imaging.
In addition, the States of Florida, Georgia, Maryland, South Carolina and
Tennessee have all passed legislation that does, in some form, prohibit
physicians from referring patients to entities in which they have a financial
interest. Other states have enacted or may be considering similar legislation.
The Company is studying the proposed regulations and monitoring legislative
activity with respect to limiting physician investments in MRI centers to
determine what action, if any, may be necessary to comply with pending
legislation or new interpretations of existing laws applicable to the Company's
business.

Hazardous Wastes

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

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QUALITY ASSURANCE

The Company has a quality assurance program under which it monitors
performance at both the corporate and the imaging center level to ensure that
the Company's high quality standards are maintained. At the corporate level, the
Company's Operations Department requests and reviews files from each center on a
monthly basis to ensure that each center maintains the standards set by the
Company, including image quality, quality of interpretation, and quality of
service to patients and referring physicians. This review also allows an
objective party to monitor images over an extended period to detect any gradual
deterioration of image quality. At the imaging center level, each imaging center
manger randomly selects and surveys three patients and two referring physicians
per week, to ensure that standards of services set by the Company, including
service to the referring physicians as well as patients, are maintained.

Although the Joint Commission of Accreditation of Healthcare Organization
("JCAHO") is best known for hospital accreditation, JCAHO also accredits
diagnostic imaging centers. Managed care payors frequently request JCAHO
accreditation. Although JCAHO accreditation has not yet become a general
requirement for managed care payors reviewing diagnostic imaging centers, the
Company believes this is likely to occur in the future, especially in
metropolitan areas. The Company has hired a specialist in JCAHO accreditation
and plans to begin applying for JCAHO accreditation of its centers within one
year. The Company has reviewed JCAHO guidelines and believes that its policies
and procedures often exceed the JCAHO accreditation standards. Some of the
Company's centers acquired in the MedAlliance Centers Acquisition have already
been reviewed by JCAHO as providers of services for hospitals as part of such
hospitals' accreditation process. Several of the centers acquired from
MedAlliance were also preparing to apply for JCAHO accreditation at the time of
the acquisition.

INSURANCE

The Company carries workers' compensation insurance and maintains
comprehensive and general liability and fire insurance in amounts deemed
adequate by management with respect to each imaging center. The Company is
self-insured with respect to its health and dental insurance risk. The Company
provides MRI technical services and has professional liability insurance. The
Company is not engaged in the practice of medicine, and requires that physicians
reading the diagnostic scans maintain medical malpractice insurance. In
addition, the Company maintains liability insurance coverage. There can be no
assurance that claims will not exceed the amounts of insurance coverage, that
the cost for such coverage will not increase to such an extent that the Company
will be forced to self-insure a substantial portion of this risk, or that such
coverage will not be reduced or become unavailable. The Company does not
maintain product liability insurance coverage with respect to MRI systems and
upgrades it manufactures. The Company carries officers' and directors' liability
insurance.

EMPLOYEES

At September 30, 1996, the Company had 1,056 employees (865 full-time and
191 part-time). An MRI imaging center typically has a full-time staff of
approximately ten employees, generally consisting of three MRI technicians, one
marketing representative, two billing clerks, one transcriptionist, two
receptionists and one office manager. A multi-modality imaging center requires
more personnel and typically has a staff of 30 employees. The Company attracts
and maintains qualified personnel by paying competitive salaries and offering
opportunities for rapid advancement.

LEGAL PROCEEDINGS

The Company acquired the 51.5% interest in NDS it did not already own from
shareholders of NDS in an August 4, 1994, acquisition. On February 21, 1995, the
Company filed a lawsuit in the Superior Court of the State of California, San
Mateo County, against each of the selling shareholders of NDS. The Company's
complaint is for rescission and restitution, breach of contract, intentional
misrepresentation, negligent misrepresentation, suppression of act, and
indemnification. The Company's complaint was instituted after the selling
shareholders failed to respond adequately to a February 13, 1995 demand letter
for rescission of the

46
<PAGE> 48

transaction. On February 17, 1995, one of the selling shareholders, James J.
Fitzsimmons, the former President and Chief Executive Officer of IDSI (the
successor entity to NDS), filed a complaint against the Company and IDSI in the
Superior Court of the State of California, San Mateo County. Mr. Fitzsimmons'
complaint alleges breach of his employment agreement with IDSI and the Company
and a breach of implied covenant of good faith and fair dealing and seeks
declaratory relief. Mr. Fitzsimmons' employment with IDSI terminated as of
January 20, 1995. On March 21, 1995, Mr. Fitzsimmons amended his complaint to
substitute attorneys, add the remaining selling shareholders as plaintiffs, and
change the causes of action. The amended complaint sets forth causes of action,
including a breach of fiduciary duty by the Company, fraud by the Company, and a
breach of implied covenant of good faith and fair dealing by the Company and
IDSI, in addition to the previous causes of action asserted by Mr. Fitzsimmons.
In August 1995, the California Superior Court judge ruled that the Company's
complaint and the selling shareholders' complaint be consolidated into a single
binding arbitration proceeding to be heard by an arbitrator appointed through
the American Arbitration Association ("AAA"). The AAA selected an arbitrator in
February 1996. The arbitrator began hearing evidence in September 1996 and has
scheduled the continuation of the arbitration for November 1996. The Company
intends to defend itself vigorously against this lawsuit by the selling
shareholders, and will continue to pursue its claims against the selling
shareholders. Management believes that its claims against the selling
shareholders are meritorious. Management regards the claims asserted in the
amended complaint as without merit. It is nevertheless impossible to predict the
outcome of the arbitration. In the event the arbitration were to be decided in a
manner adverse to the Company, such determination could have an adverse effect
on the Company's financial results for a particular period. The Company does not
anticipate any ruling until at least late in the first quarter of 1997.

On April 12, 1995, Paul W. Harris, who was involved in the acquisition of
NDS and served as an Executive Vice President of IDSI, sued the Company alleging
breach of his employment agreement because he received no severance following
his December 9, 1994, termination. The Company is vigorously defending Mr.
Harris' lawsuit.

47
<PAGE> 49

MANAGEMENT

The following table sets forth certain information as to the executive
officers and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -------------------------------------------------
<S> <C> <C>
Robert D. Carl, III.................. 42 Chairman of the Board, President and Chief
Executive Officer
Anthony T. Prescott.................. 64 Director, Senior Executive Vice President and
Chief Operating Officer
Richard J. Kampa..................... 49 Executive Vice President -- Operations
Michael R. Scott..................... 38 Executive Vice President -- Engineering
Sandra K. Brum....................... 52 Executive Vice President -- Marketing
Robin Eubanks Murray................. 37 Vice President, Secretary and General Counsel
Ron L. Clark, Jr..................... 30 Treasurer and Controller
Marc I. Raphaelson, M.D.............. 44 Director
William E. Whitesell, Ph.D........... 58 Director
Robert L. Taylor..................... 56 Director
Stuart B. Strasner, Sr............... 65 Director
Jack O. Greenberg, M.D............... 63 Director
</TABLE>

Robert D. Carl, III, was engaged in the private practice of law in Decatur,
Georgia, and served as President of Carl Investment Associates, Inc., a
registered investment advisor, for three years before joining Cardio-Tech, Inc.
in 1981 as a shareholder, officer, director and corporate counsel. In September
1982, the Company acquired the business of Cardio-Tech, Inc. Mr. Carl has been a
shareholder, officer and director of the Company since its organization in
September 1982. In March 1985, he was elected to the positions of President,
Chief Executive Officer and Chairman of the Board of the Company. Mr. Carl
resigned from the offices of President and Chief Executive Officer effective
June 19, 1993. Effective September 9, 1994, Mr. Carl resumed the position of
Chief Executive Officer. Mr. Carl resumed the position of President in July
1995. The Company has obtained "key man" life insurance on Mr. Carl, payable to
the Company in the amount of $2 million.

Anthony T. Prescott was named Senior Executive Vice President and Chief
Operating Officer of the Company in May 1995. He was elected to the Company's
Board of Directors in December 1995. From 1990 to May 1995, Mr. Prescott served
as Managing Director, Health Images U.K. plc. Mr. Prescott was responsible for
establishing and managing the Company's operations in the United Kingdom. Mr.
Prescott was Director of Medical User Services at The Cromwell Hospital, London,
England from 1988 to 1990, Hospital Director of The Lister Hospital, London,
England from 1985 to 1988 and Chief Executive Officer of the Royal Masonic
Hospital in London, England from 1982 to 1985. Mr. Prescott began his career in
hospital management in 1958 while still serving in the Royal Navy and left the
Royal Navy in 1972 after serving as RAF Institute of Aviation Medicine,
Aeromedical Project Officer and Naval Administrator, Naval Medical Unit from
1966 to 1972.

Richard ("Dick") J. Kampa joined the Company as a Vice
President -- Operations effective April 14, 1995, at the time of the acquisition
by the Company of the 15 multi-modality imaging centers from MedAlliance, Inc.,
a publicly-held Nashville, Tennessee company. Mr. Kampa was elected Executive
Vice President -- Operations on May 31, 1996. Mr. Kampa joined MedAlliance
(which was then operating under the name ImageAmerica, Inc.) in March 1991, as
an area vice president responsible for the general management of the MedAlliance
ImageAmerica imaging centers, and was promoted to corporate vice president of
MedAlliance in 1992, with responsibility for the general management of all the
imaging centers, including sales and managed care development. From 1986 through
1991, Mr. Kampa served as director of sales and director of national accounts of
Dornier Medical Systems in Marietta, Georgia, a subsidiary of Daimler Benz of
Germany. Prior to that, Mr. Kampa was district sales manager and manager of
national accounts for over six years with Physio-Control, which was then a
Redmond, Washington based division of Eli

48
<PAGE> 50

Lilly Corporation, involved in the acute cardiac care/defibrillator industry.
Mr. Kampa is responsible for overseeing the operations of the imaging centers.

Michael R. Scott was employed from August 1982 to June 1986 by Technicare
Corporation, a wholly-owned subsidiary of Johnson & Johnson, in Solon, Ohio
("Technicare"). Technicare manufactured medical imaging equipment. During that
time, Mr. Scott was involved with Technicare's introduction of its MRI
equipment. Mr. Scott joined Health Images Engineering Services Division in 1986.
Effective June 18, 1993, he became Executive Vice President -- Engineering. He
had been a Vice President of the Company since June 1988. His responsibilities
include managing the Company's medical imaging equipment maintenance department,
and third-party services and sales.

Sandra K. Brum worked in the medical field in clinical and academic nursing
for 15 years before joining the Company. She served as a health instructor for
the Henry County (Georgia) School System from July 1983 until July 1986, and as
Department Chairperson for Vocational Education from July 1985 until July 1986.
In August 1986, she became the marketing representative for the Company's
Atlanta Magnetic Imaging-North center. She served as the Clinic Manager for the
Atlanta Magnetic Imaging-North center from January 1987 to July 1987. Ms. Brum
also became the Company's Director of Center Marketing for all of the Company's
imaging centers in January 1987 and served in this position until her election
in November 1990 to Vice President -- Marketing. In November, 1994, Ms. Brum was
elected Executive Vice-President -- Marketing. Ms. Brum's responsibilities
include administration of the marketing and managed care programs for each of
the Company's imaging centers.

Robin Eubanks Murray joined the Company as Corporate Counsel in March 1988,
became Senior Staff Counsel in 1989 and was elected Secretary and named as
General Counsel in December 1993. In November 1994, she was elected a Vice
President of the Company. Prior to joining the Company, she was an associate at
the law firm of Sutherland, Asbill & Brennan, Atlanta, Georgia. Ms. Murray is
responsible for administering the Company's legal affairs, shareholder relations
and human resources.

Ron L. Clark, Jr., joined the Company in June 1988 as a staff accountant.
He was named Accounting Manager in September 1988, became the Controller of the
Engineering Services division in March 1989, and has served as Controller of the
Company since March 1990. He was elected to the office of Treasurer in December
1993. Prior to joining the Company, Mr. Clark was a staff accountant at MATSCO,
Inc., a highway and residential construction company in Atlanta, Georgia. Mr.
Clark is responsible for administering the Company's accounting systems.

Marc I. Raphaelson, M.D., conducted his residency in neurology at Stanford
University Medical Center from 1979 to 1981, and continued and completed his
residency in 1982 at the National Institutes of Health. From 1982 until July
1984, Dr. Raphaelson was a staff neurologist with the Bon Secours Hospital,
Baltimore, Maryland. Since January 1984, he has been a staff neurologist with
Frederick Memorial Hospital. In 1984, Dr. Raphaelson became board certified by
the American Board of Psychiatry and Neurology. In 1987, Dr. Raphaelson became
board certified by the American Board of Electro-Diagnostic Medicine. He is a
member of the American Society for Neuroimaging. He was first elected a Director
of the Company in May 1985.

William E. Whitesell, Ph.D., served as Secretary of Banking for the
Commonwealth of Pennsylvania from 1976 through 1979. He is the Mary E. and Henry
P. Stager Professor of Economics at Franklin and Marshall College in Lancaster,
Pennsylvania. He has been a professor in the Department of Economics at Franklin
and Marshall College since 1979, and served as Department Chairman from 1979 to
1981 and from 1985 to 1988. In July 1985, Dr. Whitesell was elected to the Board
of Directors of the Company.

Robert L. Taylor is the President, Chairman, and Chief Executive Officer of
Isolyser Co., Inc. Isolyser Co., Inc., located in Norcross, Georgia, develops
and manufacturers products and services for workplace and environmental safety,
specifically for the management of medical waste. He has held these positions
since 1988. Mr. Taylor was President and Chief Executive Officer of Spirotech,
Inc., a small micro-processor based medical instrument manufacturer (1983-1986),
and President and Chief Executive Officer of Unilab Corp. (1986-1988), a
publicly owned manufacturer of state-of-the-art wound care products. Mr. Taylor
received his

49
<PAGE> 51

B.A. degree in Economics from Pfeiffer College in 1961 and his M.A. in
Management from California State University in 1982. He was first elected to the
Board of Directors of the Company in June 1993.

Stuart B. Strasner, Sr. is a professor of business law at Oklahoma City
University. From 1984 to 1991, Mr. Strasner was Dean of the law school at
Oklahoma City University and prior thereto was an attorney in private practice
in Oklahoma City, Oklahoma. From 1978 to 1981, Mr. Strasner served as Executive
Director of the Oklahoma Bar Association. Mr. Strasner holds an A.B. degree from
Panhandle A&M College and a J.D. from the University of Oklahoma. He is a member
of the fellows of the American Bar Foundation. Mr. Strasner serves on the Board
of Directors of Enex Resources Corporation, a Houston, Texas oil and gas company
listed on NASDAQ. He was first elected to the Board of Directors of the Company
in March 1995.

Jack O. Greenberg, M.D., is the medical director and medical general
partner of the Company's Health Images of Philadelphia imaging center. Dr.
Greenberg holds a B.A. from Washington & Jefferson College and a M.D. from the
University of Pittsburgh. Since 1978, Dr. Greenberg has been Professor of
Neurology at the Medical College of Pennsylvania. Dr. Greenberg retired from his
neurology practice in Philadelphia, Pennsylvania in 1993. Dr. Greenberg was a
founder and past President (1982) of the American Society of Neuroimaging where
he serves as a member of its Executive Committee. He is a member of the Society
of Magnetic Resonance in Imaging (1985). He is Associate Editor of the Journal
of Neuroimaging (1990). He was first elected to the Board of Directors in June
1995.

SECTION 16 MATTERS

On January 4, 1996, the Securities and Exchange Commission (the
"Commission") filed a complaint in the United States District Court for the
District of Columbia against Robert D. Carl, III, Chairman, President and Chief
Executive Officer of the Company. The Commission alleged that Mr. Carl violated
Section 16(a) of the Exchange Act, and Rules 16a-2 and 16a-3 (and former Rule
16a-1) thereunder, by failing to timely file thirty-eight reports of transaction
in his mother's brokerage accounts involving shares of the Common Stock of the
Company in which he had a beneficial ownership interest. The Commission
requested that the court impose a $10,000 civil penalty against Mr. Carl
pursuant to Section 21(d)(3) of the Exchange Act. Without admitting or denying
the allegations in the complaint, Mr. Carl consented to the entry of a final
judgment imposing a $10,000 penalty. On January 12, 1996, a federal judge
entered the final judgment in this matter. Mr. Carl has filed amended reports on
Forms 4 and 5 related to these transactions in his mother's accounts.

In a related matter, the Commission issued an administrative order pursuant
to Section 31C of the Exchange Act against Mr. Carl. The order found that he
violated Section 16(a) and the rules thereunder and required him to cease and
desist from committing or causing any violation or future violation of those
provisions. The order also noted that Mr. Carl recently disgorged to the Company
approximately $92,400 in short-swing profits resulting from the trading in his
mother's account, plus interest of approximately $52,600. Without admitting or
denying allegations in the Commission's order, Mr. Carl consented to its entry.

50
<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock of the Company as of October 21, 1996,
by (i) each person known by the Company to be the beneficial owner of more than
5% of such outstanding shares and (ii) all directors and executive officers of
the Company as a group. Under the rules and regulations of the Commission, one
is a "beneficial owner" of securities if one has or shares the power to vote
them or direct their investment. No directors or executive officers of the
Company other than Mr. Carl beneficially own 1% or more of the outstanding
shares of Common Stock of the Company.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
-------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
- ----------------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Robert D. Carl, III........................................ 1,015,546(2) 8.5% 7.0%
8601 Dunwoody Place, Bldg. 200
Atlanta, Georgia 30350
Lindner Fund, Inc.......................................... 1,071,200 9.3% 7.7%
7711 Carondelet Avenue
Box 16900
St. Louis, Missouri 63105
All Executive Officers and Directors of Company as a 1,491,121(3) 12.1% 10.0%
Group......................................................
(12 persons)
</TABLE>

- ---------------

(1) Unless otherwise specified in the footnotes, the shareholder has sole
voting and dispositive power.
(2) Includes 545,900 shares of Common Stock owned individually by Mr. Carl.
Includes options for 216,250 shares of Common Stock which are or will
become exercisable by Mr. Carl within the 60 day period following October
21, 1996 and a currently exercisable warrant to purchase 250,000 shares of
Common Stock. Includes 1,621 shares held in the Company's 401(k) Plan.
Includes 1,775 shares of Common Stock owned by Mr. Carl's mother for which
shares Mr. Carl disclaims any beneficial ownership. Excludes 4,600 shares
of Common Stock owned by Mr. Carl's spouse.
(3) Includes options for 625,759 shares of Common Stock and a warrant for
250,000 shares of Common Stock which are or will become exercisable by the
executive officers and directors within the 60 day period following October
21, 1996.

SELLING STOCKHOLDER

Robert D. Carl, III, has granted to the Underwriters an option, exercisable
for 30 days after the date of this Prospectus, to purchase up to 250,000 shares
of Common Stock at the public offering price set forth on the cover page of this
Prospectus, less underwriting discounts and commissions, solely to cover over-
allotments, if any. If this option is exercised in full, following the
consummation of the sale of such shares, Mr. Carl will beneficially own 765,546
shares of Common Stock, representing 5.3% of the issued and outstanding shares
of Common Stock, Lindner Fund, Inc. will beneficially own 1,071,200 shares of
Common Stock, representing 7.5% of the issued and outstanding Common Stock, and
all executive officers and directors of the Company as a group will beneficially
own 1,241,121 shares of Common Stock, representing 8.3% of the issued and
outstanding Common Stock.

DESCRIPTION OF CAPITAL STOCK

The Company is authorized by its Certificate of Incorporation to issue up
to 42,000,000 shares of capital stock, consisting of 40,000,000 shares Common
Stock, par value $.01 per share, and 2,000,000 shares of preferred stock, par
value $.01 per share ("Preferred Stock").

51
<PAGE> 53

As of October 21, 1996, there were 11,477,364 shares of Common Stock issued
and outstanding. Each share of Common Stock entitles the holder to one vote on
all matters on which holders are permitted to vote. Subject to preferences that
may be applicable if Preferred Stock were subsequently issued, the holders of
Common Stock are entitled to dividends when, as and if declared by the Board of
Directors out of funds legally available therefor and, upon liquidation, to a
pro rata share in any distribution to stockholders. See "Dividend Policy." The
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock.

PREFERRED STOCK

Of the Company's 2,000,000 authorized shares of Preferred Stock, 200,000
shares have been designated as Series B Participating Preferred Stock in
connection with the Company's adoption of a Stockholder Rights Plan on May 10,
1989. No shares of Preferred Stock have been issued. The terms of the
Stockholder Rights Plan are summarized below under "Stockholder Rights Plan."

The Board of Directors has the authority to issue Preferred Stock in one or
more series and to fix the rights, designations and powers, preferences,
qualifications, limitations and restrictions thereof, including dividend rights,
conversion rights, voting rights, rights and terms of redemption, and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the holders of Common Stock and the likelihood that
such holders will receive dividends and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.

TRANSFER AGENT

The Transfer Agent and Registrar for the Company's Common Stock is First
Union National Bank of North Carolina, Charlotte, North Carolina.

STOCKHOLDER RIGHTS PLAN

The Board of Directors of the Company adopted, on May 10, 1989, a
Stockholder Rights Plan (the "Stockholder Rights Plan") pursuant to which the
Company distributed to stockholders of record at the close of business on May
22, 1989 certain share purchase rights ("Rights") governed by a Rights Agreement
dated May 22, 1989 between the Company and The Provident Bank, as Rights Agent.

The Rights presently are not exercisable and do not trade separately from
the Common Stock of the Company. If another party becomes the beneficial owner
of securities having 20% or more of the voting power of all the then outstanding
voting securities of the Company or announces a tender offer for securities
having 20% or more of the voting power of the then outstanding voting securities
of the Company, however, then the Rights detach and are initially exercisable to
purchase one one-hundredth of a share of Series B Participating Preferred Stock,
$1.00 stated value per share ("Series B Preferred Stock"), of the Company, at a
price of $56.00 per Right, subject to certain adjustments.

In the event that a person becomes the beneficial owner of securities
having 20% or more of the voting power of all of the then outstanding voting
securities of the Company (unless pursuant to a tender offer or exchange offer
for all outstanding shares of Common Stock at a price and on terms determined by
at least a majority of the members of the Board of Directors who are not
officers of the Company to be both adequate and otherwise in the best interests
of the Company and its stockholders (a "Permitted Offer")) (such person being
called an "Acquiring Person"), each holder of a Right (other than the Acquiring
Person) will for a 60-day period thereafter have the right to receive, upon
exercise, that number of shares of Common Stock having a market value of two
times the exercise price of the Right, to the extent available, and then (after
all authorized and unreserved shares of Common Stock have been issued) a common
stock equivalent (such as Preferred Stock or another equity security with at
least the same economic value as the Common Stock) having a market value of two
times the exercise price of the Right, with Common Stock to the extent available

52
<PAGE> 54

being issued first (such right being called the "Subscription Right"). After a
person or entity has become an Acquiring Person, if the Company is involved in a
merger or other business combination transaction in which the Common Stock is
exchanged or changed, or 50% or more of the Company's assets or earning power is
sold (in one transaction or a series of transactions), each holder of a Right
(other than the Acquiring Person) will have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring Company which at the time of such
transaction would have a market value of two times the exercise price of the
Right (such right being called the "Merger Right"). The holder of a Right will
continue to have the Merger Right whether or not such holder exercises the
Subscription Rights.

The Board of Directors may, at its option, at any time after a person
becomes an Acquiring Person, exchange all or part of the outstanding Rights
(except those owned by the Acquiring Person) for shares of the Common Stock at
an exchange ratio of one share of Common Stock per Right. However, the Board is
not empowered to effect any such exchange after a person acquires 50% or more of
the Common Stock outstanding. Under certain circumstances, the Company may
redeem the Rights at a price of $.01 per Right.

The Series B Preferred Stock purchasable upon exercise of the Rights will
be nonredeemable and junior to any other series of Preferred Stock of the
Company may issue (unless otherwise provided in the terms of such other series
of Preferred Stock). Each share of Series B Preferred Stock will have a
preferential quarterly dividend and preference in liquidation. Each one
one-hundredth of a share of Series B Preferred Stock will, for a period of 90
days after issuance, be convertible into one share of Common Stock of the
Company. Each share of Series B Preferred Stock will generally have 100 votes,
voting together with the shares of Common Stock.

The Rights will cause substantial dilution to an Acquiring Person unless
the Rights are redeemed. However, the Rights should not interfere with any
merger or other business combination pursuant to a Permitted Offer. The Rights
expire on May 21, 1999 unless extended or earlier redeemed by the Company.

The Stockholder Rights Plan could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company, and could adversely affect the price of the
Common Stock. The Stockholder Rights Plan may also have the effect of
discouraging or preventing transactions involving an actual or threatened change
of control of the Company (including unsolicited takeover attempts), even though
such a transaction may offer the Company's stockholders the opportunity to sell
their stock at a price above the prevailing market price.

CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND DELAWARE LAW

Delaware Takeover Statute

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date that the
person became an interested stockholder unless (with certain exceptions) the
business combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior to such transaction, did own) 15% or more of the
corporation's voting stock.

Certificate of Incorporation and Bylaws

The Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to ensure
the election of one or more directors. The absence of cumulative voting may have
the effect of limiting the ability of minority stockholders to effect changes in
the Board of Directors and, as a

53
<PAGE> 55

result, may have the effect of deterring a hostile takeover or delaying or
preventing changes in control or management of the Company.

The Company's Bylaws provide that the authorized number of directors may be
changed only by resolution of the Board of Directors. In addition, any vacancies
on the Board of Directors, including any newly created directorships resulting
from any increase in the number of directors, shall be filled only by
affirmative vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors. Accordingly, the Board of Directors may
be able to prevent any stockholder from obtaining majority representation on the
Board of Directors by increasing the size of the Board of Directors and filling
newly created directorships with its own nominees. Such provision may have the
effect of deterring a hostile takeover or delaying or preventing changes in
control or management of the Company.

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<PAGE> 56

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Smith Barney Inc..................................................................
---------
Total................................................................... 2,500,000
========
</TABLE>

The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Underwriters, for whom Smith Barney Inc. is acting as Representative,
propose initially to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page hereof and part
to certain dealers at a price that represents a concession not in excess of $.
per share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $. per share to other
Underwriters or to certain other dealers. After the public offering of the
shares of Common Stock offered hereby, the public offering price and such
concessions may be changed by the Underwriters.

The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable for 30 days after the date of this Prospectus, to purchase
up to an additional 375,000 shares of Common Stock at the public offering price
set forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares in
such table. To the extent such option is not exercised in full, shares of Common
Stock will be purchased first from Mr. Carl.

The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.

The Company and the Company's directors and executive officers have agreed
that, for a period of 90 days after the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., sell, offer to sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for any shares of
Common Stock other than, in the case of Robert D. Carl, III, 250,000 shares of
Common Stock issuable upon the exercise of a warrant to the extent purchased by
the Underwriters upon the exercise of the over-allotment option and 5,000 shares
that may be disposed of as bona fide gifts.

LEGAL MATTERS

Certain legal matters with respect to the issuance of the shares of Common
Stock offered hereby will be passed upon for the Company by Powell, Goldstein,
Frazer & Murphy, Atlanta, Georgia and for the Underwriters by Dewey Ballantine,
New York, New York.

EXPERTS

The consolidated financial statements and schedules of the Company included
or incorporated by reference in this Prospectus and the Registration Statement
have been audited by Joseph Decosimo and Company, LLP, Atlanta, Georgia,
independent auditors, as indicated in their reports with respect thereto, and

55
<PAGE> 57

are so included and incorporated by reference in reliance upon and authority of
said firm as experts in accounting and auditing.

The financial statements of MedAlliance Imaging Centers (a division of
MedAlliance, Inc.) included in the Company's Amendment No. 1 on Form 8-K/A dated
June 30, 1995 to Current Report on Form 8-K, incorporated by reference herein,
have been audited by Deloitte & Touche LLP, independent auditors, and are so
incorporated by reference in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company and the Registration Statement of which this
Prospectus is a part and exhibits and schedules thereto can be inspected and
copied (at prescribed rates) at the Public Reference section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Citicorp Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661-2511. The Company's Common Stock is listed
on the New York Stock Exchange and certain reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
New York Stock Exchange at 20 Broad Street, New York, New York 10005.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Common Stock. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or incorporated herein by reference. Each such statement is qualified in its
entirety by such reference.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents or portions thereof, filed by the Company with the
Commission under the Exchange Act (File No. 1-11654), are incorporated herein by
reference.

(a) Annual Report on Form 10-K for the year ended December 31, 1995;

(b) Quarterly Report on Form 10-Q for the quarter ended March 31,
1996;

(d) Proxy Statement for the Annual Meeting of Stockholders held on May
31, 1996; and

(e) The financial statements of MedAlliance Imaging Centers (a
division of MedAlliance, Inc.) contained in Form 8-K/A dated June 30, 1995.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the termination of
the offering of the Common Stock offered herein shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of filing thereof. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statements so modified or superseded shall not be deemed, except as so modified
or superseded to constitute a part of this Prospectus.

56
<PAGE> 58

Health Images hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any or all of the documents referred to above
which have been or may be incorporated by reference in this Prospectus (other
than exhibits). Requests for such copies should be directed to Health Images,
Inc., 8601 Dunwoody Place, Building 200, Atlanta, Georgia 30350, telephone (770)
587-5084, Attention: Director of Shareholder Relations.

57
<PAGE> 59

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 and 1996 (unaudited)................ F-4
Consolidated Statement of Changes in Stockholders' Equity for the years ended December
31, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996
(unaudited)......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 and 1996 (unaudited)................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 60

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders
Health Images, Inc.
Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of Health
Images, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. The
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Images, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

JOSEPH DECOSIMO AND COMPANY, LLP

Atlanta, Georgia
February 23, 1996

F-2
<PAGE> 61

HEALTH IMAGES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents.................................... $ 3,804,100 $ 3,204,700 $ 2,886,800
Marketable Securities........................................ 264,500 267,400 --
Investment in Nonmarketable Preferred Stock (At Cost)........ 11,254,400 -- --
Trade Receivables (Less Allowances for Doubtful Accounts of
$5,244,100, $8,956,800, and $9,136,300 and Reserve for
Contractual Discounts of $190,900, $1,608,400, and
$1,463,900 in 1994, 1995 and 1996 Respectively)............ 17,654,100 24,537,600 24,585,500
Other Receivables............................................ 393,600 806,700 1,232,800
Inventories.................................................. 599,100 316,500 309,600
Deferred Income Taxes........................................ 2,041,700 2,826,800 2,881,100
Other........................................................ 1,598,900 2,689,400 2,806,000
------------ ------------ ------------
Total Current Assets.................................. 37,610,400 34,649,100 34,701,800
------------ ------------ ------------
Property And Equipment
Total Property and Equipment................................. 123,747,100 155,103,800 163,268,100
Accumulated Depreciation..................................... 50,075,300 60,647,700 65,996,000
------------ ------------ ------------
Cost Less Accumulated Depreciation........................... 73,671,800 94,456,100 97,272,100
------------ ------------ ------------
Other Assets
Intangible Assets............................................ 14,074,100 47,058,700 46,397,400
Unclassified................................................. 470,600 148,500 500,000
------------ ------------ ------------
Total Other Assets.................................... 14,544,700 47,207,200 46,897,400
------------ ------------ ------------
Total Assets................................................... $125,826,900 $176,312,400 $178,871,300
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Portion of Long Term Debt............................ $ 1,977,000 $ 16,352,500 $ 16,323,200
Accounts Payable............................................. 4,248,500 9,369,400 8,247,100
Accrued Expenses............................................. 5,281,300 8,450,700 9,893,400
Unearned Revenue............................................. 228,800 135,500 515,500
------------ ------------ ------------
Total Current Liabilities............................. 11,735,600 34,308,100 34,979,200
------------ ------------ ------------
Long Term Debt................................................. 23,071,200 45,000,500 43,279,800
------------ ------------ ------------
Deferred Income Taxes.......................................... 10,910,300 11,711,300 11,373,000
------------ ------------ ------------
Other Long Term Liabilities.................................... 220,600 245,700 255,300
------------ ------------ ------------
Minority Interest.............................................. 311,700 1,258,100 1,531,100
------------ ------------ ------------
Commitments And Contingencies
Stockholders' Equity
Common Stock -- $.01 Par Value -- 40,000,000 Shares
Authorized -- 13,340,856 as of December 31, 1994,
13,380,052 as of December 31, 1995, and 13,400,574 as of
June 30, 1996.............................................. 133,400 133,800 134,000
Additional Paid-In Capital................................... 77,314,400 77,674,400 77,807,600
Retained Earnings............................................ 16,537,200 21,288,000 24,977,300
Accumulated Translation Adjustment........................... (755,700) (508,700) (513,800)
Treasury Stock -- 1,752,400 shares at cost as of December 31,
1994, 1,957,300 as of December 31, 1995, and 1,979,512 as
of June 30, 1996........................................... (13,651,800) (14,798,800) (14,952,200)
------------ ------------ ------------
Total Stockholders' Equity............................ 79,577,500 83,788,700 87,452,900
------------ ------------ ------------
Total Liabilities And Stockholders' Equity..................... $125,826,900 $176,312,400 $178,871,300
============= ============= =============
</TABLE>

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

F-3
<PAGE> 62

HEALTH IMAGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Net Patient Service Revenue......... $68,511,400 $72,421,400 $111,346,900 $48,509,900 $62,292,500
Engineering Revenue................. 4,714,600 3,673,200 3,078,000 1,578,400 892,500
Other Revenue and Income............ 2,862,800 1,027,300 1,110,500 571,800 995,200
------------ ------------ ------------- ----------- -----------
Total Net Revenue............ 76,088,800 77,121,900 115,535,400 50,660,100 64,180,200
Costs and Expenses
Operating Costs..................... 46,987,900 45,948,800 69,319,300 30,039,400 38,627,200
Depreciation and Amortization
Expense........................... 11,853,500 12,171,300 17,579,400 8,125,200 8,962,100
Provision for Bad Debts............. 2,651,500 2,835,500 4,646,000 2,022,600 2,476,200
General and Administrative
Expenses.......................... 6,335,200 6,158,500 8,504,100 3,897,200 5,150,100
------------ ------------ ------------- ----------- -----------
Total Operating Expenses..... 67,828,100 67,114,100 100,048,800 44,084,400 55,215,600
------------ ------------ ------------- ----------- -----------
Operating Income...................... 8,260,700 10,007,800 15,486,600 6,575,700 8,964,600
Interest Income..................... 276,300 271,200 127,300 71,200 43,900
Interest Expense.................... (1,683,500) (1,251,500) (3,727,200) (1,607,700) (1,860,600)
------------ ------------ ------------- ----------- -----------
Income from Continuing Operations
before Minority Interest and
Provision for Income Taxes.......... 6,853,500 9,027,500 11,886,700 5,039,200 7,147,900
Minority Interest in Income of
Consolidated Entities............... 171,700 196,100 605,700 221,200 367,500
------------ ------------ ------------- ----------- -----------
Income from Continuing Operations
before Provision for Income Taxes... 6,681,800 8,831,400 11,281,000 4,818,000 6,780,400
Provision for Income Taxes.......... 2,456,600 3,438,600 4,390,200 1,863,200 2,519,600
------------ ------------ ------------- ----------- -----------
Net Income from Continuing
Operations.......................... 4,225,200 5,392,800 6,890,800 2,954,800 4,260,800
Discontinued Operations
Loss on Discontinued Operations (Net
of Income Taxes).................. 466,300 6,528,300 417,900 418,000 --
Loss on Disposal of Discontinued
Operations (Net of Income
Taxes)............................ -- -- 744,000 744,000 --
------------ ------------ ------------- ----------- -----------
Net Income (Loss)............ $ 3,758,900 $ (1,135,500) $ 5,728,900 $ 1,792,800 $ 4,260,800
============= ============= ============== ============ ============
Earnings (Loss) per Common and Common
Equivalent Share
Primary Earnings Per Share
Net Income from Continuing
Operations per Share.............. $ 0.36 $ 0.46 $ 0.59 $ 0.25 $0.37
Discontinued Operations per Share... (0.04) (0.56) (0.10) (0.10) --
------------ ------------ ------------- ----------- -----------
Net Income (Loss) per Share......... $ 0.32 $(0.10) $ 0.49 $ 0.15 $0.37
============= ============= ============== ============ ============
Fully Diluted Earnings Per Share
Net Income from Continuing
Operations per Share.............. $ 0.36 $ 0.46 $ 0.59 $ 0.25 $0.36
Discontinued Operations per Share... (0.04) (0.56) (0.10) (0.10) --
------------ ------------ ------------- ----------- -----------
Net Income (Loss) per Share......... $ 0.32 $(0.10) $ 0.49 $ 0.15 $0.36
============= ============= ============== ============ ============
Weighted Average Common Share and
Common Share Equivalents
Primary............................. 11,611,700 11,725,600 11,582,700 11,610,700 11,669,300
Fully Diluted....................... 11,611,700 11,727,900 11,651,100 11,649,800 11,795,700
</TABLE>

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

F-4
<PAGE> 63

HEALTH IMAGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK
--------------------- PAID-IN RETAINED TRANSLATION ------------------------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SHARES AMOUNT
---------- -------- ----------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE --
DECEMBER 31, 1992................. 12,740,357 $127,400 $74,122,700 $15,413,300 $(1,093,700) 1,012,500 $ (8,677,900)
Purchase of Treasury Stock...... 239,900 (1,540,800)
Exercise of Stock Options....... 7,920 100 47,900
Tax Effect of Stock Options
Exercised..................... 10,000
Issuance of Common Stock in
Acquisition of Imaging
Facilities.................... 10,000 100 59,900
Dividends on Common Stock....... (690,800)
Translation Adjustment.......... (197,600 )
Net Income...................... 3,758,900
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE --
DECEMBER 31, 1993................. 12,758,277 127,600 74,240,500 18,481,400 (1,291,300 ) 1,252,400 (10,218,700)
Purchase of Treasury Stock...... 500,000 (3,433,100)
Exercise of Stock Options....... 22,768 200 140,500
Issuance of Common Stock in NDS
Acquisition................... 559,811 5,600 2,933,400
Dividends on Common Stock....... (808,700)
Translation Adjustment.......... 535,600
Net (Loss)...................... (1,135,500)
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE --
DECEMBER 31, 1994................. 13,340,856 133,400 77,314,400 16,537,200 (755,700 ) 1,752,400 (13,651,800)
Purchase of Treasury Stock...... 204,900 (1,147,000)
Exercise of Stock Options....... 39,196 400 215,000
Dividends on Common Stock....... (978,100)
Translation Adjustment.......... 247,000
Net Income...................... 5,728,900
Other Equity Transactions....... 145,000
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE --
DECEMBER 31, 1995................. 13,380,052 $133,800 $77,674,400 $21,288,000 $ (508,700 ) 1,957,300 $(14,798,800)
Purchase of Treasury Stock*..... 73,300 (539,300)
Exercise of Stock Options*...... 20,522 200 121,700 (571,500)
Dividends on Common Stock*......
Translation Adjustment*......... (5,100 )
Net Income*..................... 4,260,800
Other Equity Transactions*...... 11,500
---------- -------- ----------- ----------- ----------- --------- ------------
BALANCE --
June 30, 1996*.................... 13,400,574 134,000 77,807,600 24,977,300 (513,800 ) 1,979,512 (14,952,200)
========= ======== ========== ========== =========== ======== ===========
</TABLE>

- ---------------

* Unaudited.

F-5
<PAGE> 64

HEALTH IMAGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flow from Operating Activities
Net Income (Loss)...................................... $ 3,758,900 ($ 1,135,500) $ 5,728,900 $ 1,792,800 $ 4,260,800
Adjustments to Reconcile Net Income (Loss) to Net Cash
Depreciation......................................... 9,721,400 10,273,400 14,952,400 6,104,400 7,348,800
Amortization......................................... 2,132,100 1,897,900 2,627,000 2,021,000 1,613,200
Provision for Bad Debts.............................. 2,651,500 2,835,500 4,646,000 2,022,600 2,476,200
Minority Interest.................................... 171,700 196,100 605,700 221,200 367,500
Deferred Income Taxes................................ 1,605,300 1,224,000 15,800 107,400 (392,600)
Increase in Receivables.............................. (5,120,000) (3,973,900) (4,372,000) (2,204,900) (2,950,200)
(Increase) Decrease in Inventories................... 138,300 84,400 282,600 65,700 6,900
Increase (Decrease) in Accounts Payable and Accrued
Expenses........................................... (244,700) 1,149,000 4,453,800 2,235,500 677,400
Equity in Loss of Affiliate.......................... 466,300 364,700 -- -- --
Currency Exchange Loss............................... -- -- 257,300 257,300 --
Gain on Sale of Property and Equipment............... -- -- (549,200) (329,600) --
Asset Impairment -- NDS.............................. -- 5,579,500 -- -- --
Other -- Net......................................... 231,100 (593,600) (36,600) (126,700) (238,400)
------------ ------------ ------------ ------------ ------------
Net Cash Provided by Operating Activities.............. 15,511,900 17,901,500 28,611,700 12,166,700 13,169,600
------------ ------------ ------------ ------------ ------------
Cash Flow from Investing Activities
Cash Used to Acquire Investments..................... -- (12,266,800) (378,200) (56,700) (773,500)
Proceeds from Investments............................ 2,788,000 909,400 352,300 281,000 1,040,900
Capital Expenditures................................. (14,721,300) (6,600,200) (11,694,700) (4,183,500) (10,019,600)
Acquisitions (Net of Cash Received).................. (1,350,000) (372,500) (23,859,200) (22,752,600) --
Proceeds from Sale of Assets......................... -- -- 2,034,100 989,200 --
Payments for Intangibles............................. (129,200) (1,096,800) (347,900) (1,308,400) (951,900)
Other -- Net......................................... (356,200) -- -- (8,500) (39,000)
------------ ------------ ------------ ------------ ------------
Net Cash Used by Investing Activities.................. (13,768,700) (19,426,900) (33,893,600) (27,039,500) (10,743,100)
------------ ------------ ------------ ------------ ------------
Cash Flow from Financing Activities
Proceeds from Issuing Notes Payable.................. 5,900,000 11,500,000 36,540,000 30,000,000 5,471,700
Cash Used to Retire Debt............................. (10,690,900) (6,632,300) (29,491,200) (15,559,400) (7,221,700)
Cash Paid for Debt Acquisition Costs................. -- -- (383,400) --
Cash Distributions to Minority Investors in Limited
Partnerships....................................... (157,800) (285,900) (207,900) (95,000) (55,500)
Proceeds from Exercise of Stock Options.............. 48,000 140,700 215,400 8,800 121,900
Cash Used to Pay Dividends........................... (690,800) (808,700) (978,100) (463,600) (571,500)
Cash Used to Purchase Treasury Shares................ (1,540,800) (3,433,100) (1,147,000) (488,000) (593,300)
Other -- Net......................................... -- -- 145,000 -- 50,000
------------ ------------ ------------ ------------ ------------
Net Cash (Used) Provided by Financing Activities....... (7,132,300) 480,700 4,692,800 13,402,800 (2,744,400)
------------ ------------ ------------ ------------ ------------
Effect of Exchange Rate Changes on Cash................ (59,600) 145,600 (10,300) 41,400 --
Decrease in Cash and Cash Equivalents.................. (5,448,700) (899,100) (599,400) (1,428,600) (317,900)
Cash and Cash Equivalents -- Beginning of Year......... 10,151,900 4,703,200 3,804,100 3,804,100 3,204,700
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents -- End of Year............... $ 4,703,200 $ 3,804,100 $ 3,204,700 $ 2,375,500 $ 2,886,800
=========== =========== =========== =========== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities
Redemption of Preferred Stock in Conjunction with
Acquisition........................................ -- -- $ 11,569,300 $ 11,569,300 --
Assumption of Liabilities in Conjunction with
Acquisition........................................ -- -- $ 28,991,800 $ 28,991,800 --
Note Payable Issued in Conjunction with
Acquisition........................................ -- -- $ 6,241,600 $ 6,241,600 --
Investment Purchases in Accounts Payable............. -- $ 91,700 -- -- --
Common Stock Issued in Conjunction with
Acquisition........................................ $ 60,000 $ 2,939,000 -- -- --
Cancellation of Note Receivable in Conjunction with
Acquisition........................................ -- $ 1,010,000 -- -- --
Treasury Stock Reissued in Conjunction with Employee
Benefit Plans...................................... -- -- -- -- $ 347,000
Supplemental Schedule of Cash Flows
Cash Paid for Interest............................... $ 2,381,000 $ 1,685,600 $ 3,604,300 $ 1,858,500 $ 2,552,600
Cash Paid for Income Taxes........................... $ 1,404,700 $ 856,100 $ 2,654,700 $ 501,400 $ 2,816,900
</TABLE>

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

F-6
<PAGE> 65

HEALTH IMAGES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

A majority of the Company's revenue is derived from out-patient medical
diagnostic imaging services. The Company operates forty nine domestic imaging
centers and five imaging centers in the United Kingdom, and one domestic
radiation oncology center. Health Images also manufactures MRI scanners and
provides MRI and CT equipment maintenance, medical construction services and
mobile MRI leasing to third-party clients. The Company's services are not
concentrated in any one geographical area of the United States or United
Kingdom.

The significant accounting policies and practices followed by the Company
and its subsidiaries are as follows:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and investments in limited partnerships in which
the Company or a corporate subsidiary acts as a general partner and owns a
majority interest in the limited units of the partnership.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with maturity of
three months or less to be cash equivalents. At December 31, 1994, December 31,
1995, and June 30, 1996, cash equivalents consisted primarily of short-term
commercial paper and money market accounts. The Company, at times, maintains
cash balances which exceed federally insured limits.

Inventories

Inventories, consisting principally of parts, are stated at the lower of
cost or market value. Cost is determined on a weighted average basis.

Marketable Equity Securities

Effective January 1, 1994, the Company adopted Statement of Financial
Standards No. 115," Accounting for Certain Investments in Debt and Equity
Securities". As of December 31, 1994, December 31, 1995, and June 30, 1996, all
marketable equity securities were considered held for trading purposes and
recorded at fair value.

Property and Equipment

Property and equipment is stated at cost. Depreciation is calculated on a
straight line basis over the estimated useful lives of the assets as follows:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and Improvements..................................................... 5-40
Office Furniture and Equipment................................................ 3-7
Medical Equipment............................................................. 3-15
</TABLE>

F-7
<PAGE> 66

Intangible Assets

The cost of intangible assets are amortized on a straight line basis over
the period expected to receive benefits therefrom as follows:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Organization and Start-Up Costs.............................................. 2-5
Goodwill..................................................................... 10-20
Deferred Debt Costs.......................................................... 1-10
Licenses and Patents......................................................... 3-14
Management Contracts......................................................... 17
</TABLE>

Organizational and start-up costs include the direct cost of organizing and
initiating the operations of the Company's medical facilities.

The Company reviews recoverability of the carrying value of goodwill using
projections of future cash flows and future earnings. The Company's basis for
write-offs of the carrying value of goodwill is based on management's best
estimates of future performance of the affected entity. It is reasonably
possible that these estimates could change materially in the near term.

Revenue Recognition

Revenue is recognized from medical services when services are rendered.
Medical services revenue is presented net of contractual adjustments related to
discount arrangements with third party providers. These discounts amounted to
25.0% of medical services gross revenue for 1993, 25.5% for 1994, and 29.4% for
1995. Amounts paid in advance on engineering service contracts are recognized as
revenue when earned. Revenue on medical construction building contracts are
recognized using the percentage of completion method. The Company maintains a
policy of providing charity care to indigent patients. These services amounted
to 1.7% of conducted studies for 1993, 3.9% for 1994, and 6.5% for 1995.

Income Taxes

Deferred income taxes arise from temporary differences between the income
tax and financial reporting basis of assets and liabilities. If it is more
likely than not that some portion or all of a deferred tax asset will be not
realized, a valuation allowance is recognized.

Development Costs

Development costs related to enhancements of imaging equipment are expensed
as incurred. Total expenditures on development totaled $741,300 for 1993,
$896,200 for 1994, and $146,000 for 1995.

Foreign Currency Translations

Assets and liabilities of foreign subsidiaries are translated at the rate
of exchange in effect on the balance sheet date; income and expenses are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected in the accumulated translation
adjustment section of the consolidated balance sheet. Foreign currency gains and
losses resulting from transactions are included in results of operations.

Estimates and Uncertainties

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Management's estimate
of the allowance for doubtful accounts and contractual adjustments is

F-8
<PAGE> 67

based on historical experience and an evaluation of the balance of accounts
receivable. It is reasonably possible that these estimates could change
materially in the near term.

Reclassifications

Certain amounts in the presented financial statements have been
reclassified to conform to the current year presentation.

Interim Financial Data (Unaudited)

The balance sheet as of June 30, 1996, the statements of operations and
cash flows for each of the six month periods ended June 30, 1995 and June 30,
1996, and the statement of stockholder's equity for the six month period ended
June 30, 1996 have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
which are necessary for a fair presentation of results of operations for such
period, have been made. Results for interim periods are not necessarily
indicative of the results to be expected for a full year.

NOTE 2 -- PROPERTY AND EQUIPMENT

Property and Equipment consist of the following major classifications:

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------------- --------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Land.............................. $ 6,444,800 $ -- $ 9,333,800 $ --
Building and Improvements......... 25,618,800 4,326,700 32,248,100 5,287,500
Office Furniture and Equipment.... 9,790,400 6,185,300 11,349,100 7,642,500
Medical Equipment................. 71,528,800 39,563,300 76,020,400 45,429,200
Equipment Under Capital Leases.... -- -- 9,402,400 2,288,500
Buildings under Construction...... 386,200 -- 478,300 --
Equipment under
Construction.................... 9,978,100 -- 16,271,700 --
------------ ----------- ------------ -----------
$123,747,100 $50,075,300 $155,103,800 60,647,700
=========== ========== =========== ==========
</TABLE>

Equipment under capital leases is amortized on a straight line basis over
the lease term and amortization is included in depreciation expense.
Amortization of capital leases totaled $2,414,700 during 1995 and $1,491,800
during the six months ended June 30, 1996.

NOTE 3 -- INTANGIBLE ASSETS

Intangible Assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
-------------------------- --------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Organization and Start-Up Costs............... $ 219,000 $ 42,100 $ 19,200 $ 5,400
Goodwill...................................... 15,460,400 2,940,200 49,251,300 3,673,100
Deferred Debt Costs........................... 870,600 702,800 558,000 146,300
Other......................................... 2,610,400 1,401,200 1,950,700 895,700
----------- ------------ ----------- ------------
$19,160,400 $ 5,086,300 $51,779,200 $ 4,720,500
========== ========= ========== =========
</TABLE>

Net goodwill increased $33,058,000 primarily due to the acquisition of 15
imaging centers from MedAlliance. (See Note 15).

F-9
<PAGE> 68

NOTE 4 -- NOTES PAYABLE

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
6.67% to 14.87% Equipment Loans -- maturing on
various dates through 2001; payable $490,300
per month including interest (as of
6-30-96)...................................... $ 7,328,500 $12,302,200 $ 9,975,000
8.03% to 10.5% Real Estate Mortgage Loans --
maturing 2001; payable $42,200 per month
including interest (as of 6-30-96)............ 1,703,100 3,780,900 5,363,100
Prime plus 1/2% Real Estate Mortgage Loan --
maturing 2010; payable $5,400 per month
including interest (as of 12-31-94)........... 546,600 0 0
10% Senior Extendible Notes -- due June 15,
2000.......................................... 5,470,000 3,705,000 3,704,000
Prime Plus or Minus Leveraged Adjustment Term
Loans -- maturing in 1998 and 2001; $811,200
per month including interest (as of 6-30-96).
Rate at June 30, 1996 is 8.00%................ 0 32,141,000 28,164,200
Prime Minus .6% Line of Credit -- expiring
August 1996................................... 10,000,000 0 0
Prime Plus or Minus Leveraged Adjustment
$5,000,000 Line of Credit -- expiring March
2001. Rate at June 30, 1996 is 8.00%.......... 0 540,100 2,633,300
Capital Lease Obligations -- imputed interest
rates from 7.12% to 9.25% ending various dates
through 1999; payable $314,200 per month (as
of 6-30-96)................................... 0 6,817,200 7,668,200
7% to 10% Other Loans -- expiring in 1999....... 0 2,066,600 2,095,200
----------- ----------- -----------
25,048,200 61,353,000 59,603,000
Less: Current Portion........................... 1,977,000 16,352,500 16,323,200
----------- ----------- -----------
$23,071,200 $45,000,500 $43,279,800
========== ========== ==========
</TABLE>

Substantially all notes, other than the 10% Senior Extendible Notes, are
collateralized by accounts receivable, inventory, property, plant and equipment.

The Company is required to maintain certain financial ratios related to
liquidity, tangible capital, and debt service, and is limited to a yearly fixed
amount of capital expenditures under the terms of its primary bank debt.

The Company obtained a waiver from its primary lender for violations of the
tangible capital and capital expenditure covenants of its primary debt. The
waiver is for 1995 only and does not extend to future periods. The Company was
in compliance with all relevant covenants at June 30, 1996.

The Company's primary bank debt interest is based on a leveraged adjustment
to prime, ranging from prime plus .25% to prime minus .50% dependant upon
certain funded debt and cash flow criteria.

F-10
<PAGE> 69

Long-term debt and capital lease obligation maturities during the years
subsequent to December 31, 1995, are set forth below:

<TABLE>
<CAPTION>
YEAR ENDING
------------------------------------------------------------------------
<S> <C>
December 31, 1996....................................................... $16,352,500
December 31, 1997....................................................... 17,253,200
December 31, 1998....................................................... 10,341,500
December 31, 1999....................................................... 6,078,100
December 31, 2000....................................................... 10,159,400
Later Years............................................................. 1,168,300
-----------
$61,353,000
==========
</TABLE>

Interest expense totaled $1,683,500 for 1993, $1,251,500 for 1994,
$3,727,200 for 1995, and $2,511,900 for the six months ended June 30, 1996.
Interest costs totaled $2,047,600 for 1993, $1,726,700 for 1994, $4,651,300 for
1995, $3,163,200 for the six months ended June 30, 1996, of which $364,100,
$475,200, $924,100, and $651,300, respectively, were capitalized as construction
period interest.

The prime rate of interest at the Company's primary lender as of June 30,
1996, was 8.25%.

NOTE 5 -- ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Interpretation Fees................................................. $2,080,900 $3,798,200
Interest............................................................ 89,500 212,900
Income Taxes........................................................ 371,400 839,600
Group Insurance..................................................... 344,200 390,200
Salaries and Wages.................................................. 1,135,000 1,330,700
Other............................................................... 1,260,300 1,879,100
---------- ----------
$5,281,300 $8,450,700
========= =========
</TABLE>

NOTE 6 -- STOCK OPTION PLANS AND COMMON STOCK PURCHASE WARRANTS

The Company has a qualified employee incentive stock option plan which
provides for granting options to employees, including officers, to purchase up
to 900,000 shares of Common Stock. Options must be granted within ten years from
the date of adoption of the plan, and options granted under the plan must be
exercised within ten years from the date of grant. The exercise price of the
option must be at least 100% of the fair market value of the shares on the
effective date of grant. The right to exercise options thus far granted under
this plan vest over a three-year term of employment.

In addition, the Company grants non-qualified options from time to time to
certain officers and directors of the Company at prices approximating the fair
value of shares on the effective date of grant. Non-qualified options for a
total of 463,700 shares are outstanding as of December 31, 1995.

At December 31, 1995, a Common Stock warrant for 250,000 shares at $4.50
per share held by the president of the Company was outstanding and fully
exercisable. These warrants expire in May, 1997.

On July 1, 1995, the Company implemented an Employee Stock Purchase
Program. The Program allows an employee of the Company to receive Common Stock
contributions from the Company in an amount equal to 50% of the participants net
Common Stock purchases up to a maximum of 2,500 shares per participant, per
program year. To receive the Stock Contribution, the employee must own the
Common Stock for at least six months.

F-11
<PAGE> 70

Changes in stock options for the three years ended December 31, 1995, and
six months ended June 30, 1996, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- JUNE 30,
1993 1994 1995 1996 PRICE RANGE
--------- --------- --------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Outstanding at Beginning of
Period....................... 1,191,200 1,228,200 1,046,800 1,211,100 $ 2.94-13.50
Granted........................ 125,000 187,500 369,600 228,300 5.00- 9.63
Exercised...................... (7,900) (22,800) (39,200) (20,500) 2.94-10.00
Cancelled...................... (80,100) (346,100) (166,100) (77,000) 5.00-13.50
--------- --------- --------- -----------
Outstanding at End of Period... 1,228,200 1,046,800 1,211,100 1,341,900 5.00-13.50
======== ======== ======== =========
Exercisable at End of Period... 3,300 75,100 324,700 557,000 2.94-10.73
======== ======== ======== =========
</TABLE>

SFAS Statement Number 123, "Accounting for Stock Based Compensation" issued
in 1995, defines a fair value method of accounting for stock options and
encourages companies to adopt that method. Management anticipates continuing to
use the intrinsic method acceptable under APB 25 and will disclose the effect of
not using the fair value method in its 1996 financial statements as required by
SFAS 123.

NOTE 7 -- RELATED PARTY TRANSACTIONS

Transactions and outstanding balances with related parties are summarized
as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- JUNE 30,
1993 1994 1995 1996
------- ----- ----- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
RELATED COMPANIES
Deferred Gain on Sale of Real Estate..................... 7,200 3,900 3,300 --
Investment in Affiliated Company......................... 364,700 -- -- --
Accounts Receivable...................................... 895,000 -- -- --
</TABLE>

The Company recognized equity losses in National Diagnostic Systems, Inc.
("NDS") of $466,300 in 1993 and $364,700 in 1994. On August 2, 1994 the Company
purchased the remaining 51.5% ownership in NDS. (See Note 15).

NOTE 8 -- LEASE COMMITMENTS

The Company has certain equipment under capital leases and also leases
certain land, buildings and equipment under operating leases. Minimum lease
payments under existing non-cancelable capital and operating leases are as
follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL TOTAL LEASE
YEAR ENDING: LEASES LEASES COMMITMENTS
- --------------------------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C>
December 31, 1996........................................ $ 2,818,900 $3,020,400 $ 5,839,300
December 31, 1997........................................ 1,998,000 2,871,200 4,869,200
December 31, 1998........................................ 1,944,800 1,490,100 3,434,900
December 31, 1999........................................ 1,806,400 208,500 2,014,900
December 31, 2000........................................ 1,045,900 -- 1,045,900
Later Years.............................................. 3,643,200 -- 3,643,200
----------- ---------- -----------
Total Payments................................. $13,257,200 7,590,200 $20,847,400
Less: Amount representing interest....................... (773,000)
----------
Present Value of Capital Lease Payments.................. $6,817,200
=========
</TABLE>

F-12
<PAGE> 71

Certain building leases include provisions for short-term rent deferral,
additional rent payments equal to 5% of estimated collections in excess of
$400,000 at particular locations, and rent adjustments based on a United States
government index.

Rental expense is calculated on a straight line basis over the life of each
lease after giving effect to scheduled rent increases and totaled $1,626,300 for
1993, $1,872,500 for 1994, and $3,124,800 for 1995.

NOTE 9 -- COMMITMENTS

As of December 31, 1995, the Company had no material commitments on
construction contracts. As of December 31, 1995, the Company had outstanding
commitments to purchase equipment totaling $4,345,200 primarily related to the
Company's expansion of imaging services provided at the centers and the
Company's upgrade program for its magnetic resonance imaging ("MRI") equipment.
At June 30, 1996 the Company had outstanding commitments of $5,381,900 on
equipment and construction contracts. In addition, the Company intends to
complete the construction of a new corporate headquarters during 1996. The total
cost is projected to be approximately $4,500,000, of which $620,000 had been
paid at June 30, 1996.

The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In management's opinion, the amount of ultimate
liability will not materially affect the financial position or results of
operations of the company.

NOTE 10 -- PROVISION FOR INCOME TAXES

Provisions for income taxes attributable to continuing operations consist
of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current Provision --
Federal Income Taxes............................. $1,054,600 $2,129,500 $3,567,200
Foreign Income Taxes............................. -- 371,400 436,500
State Income Taxes............................... 218,900 439,400 671,800
General Business Credit.......................... (217,000) (210,800) (50,700)
Minimum Tax Credit............................... (200,700) (514,900) (250,400)
---------- ---------- ----------
855,800 2,214,600 4,374,400
Deferred Provision --
Federal Income Taxes............................. 1,158,600 590,400 (225,600)
Foreign Income Taxes............................. -- 21,000 --
State Income Taxes............................... 241,500 97,700 (9,000)
Minimum Tax Credit Carryforward.................. 200,700 514,900 250,400
---------- ---------- ----------
1,600,800 1,224,000 15,800
---------- ---------- ----------
$2,456,600 $3,438,600 $4,390,200
========= ========= =========
</TABLE>

F-13
<PAGE> 72

Reconciliation of the provisions for income taxes to statutory rates is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax at Statutory Rates -- US....................... $2,271,800 $2,664,500 $3,404,700
Tax at Statutory Rates -- Foreign.................. -- 338,200 430,800
Amortization of Goodwill........................... 70,800 68,000 77,200
General Business Credit............................ (217,000) (210,800) (50,700)
State Taxes -- net of Federal Income Taxes......... 303,800 354,600 437,500
Meals and Entertainment............................ -- 63,700 110,800
Permanent Differences of Foreign Subsidiary........ -- 64,200 22,800
Other.............................................. 27,200 96,200 (42,900)
---------- ---------- ----------
$2,456,600 $3,438,600 $4,390,200
========= ========= =========
</TABLE>

Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
the net deferred income tax liability relate to the following:

<TABLE>
<CAPTION>
DECEMBER 31, TEMPORARY
------------------------- DIFFERENCES
1994 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
Property and equipment, principally due to
differences in depreciation................... $ 8,681,800 $ 7,196,000 $(1,485,800)
Machinery enhancement costs expensed for income
tax purposes.................................. 2,806,200 4,434,800 1,628,600
Accounts receivable, principally due to
allowance for doubtful accounts............... (1,822,600) (2,561,000) (738,400)
Net operating loss carryforward................. 408,500 408,500 0
Minimum tax credit.............................. (235,000) -- 235,000
Other, net...................................... (561,800) (185,400) 376,400
----------- ----------- -----------
Subtotal.............................. 9,277,100 9,292,900 15,800
Valuation allowance............................. (408,500) (408,500) 0
----------- ----------- -----------
Net deferred income tax liability..... $ 8,868,600 $ 8,884,400 $ 15,800
========== ========== ==========
</TABLE>

The Company has net operating loss carryforwards for income tax purposes as
of December 31, 1995 of approximately $1,201,400. The carryforwards expire in
the year 2008 and are restricted for use against a subsidiary's future earnings.
These carryforwards represent $408,500 in potential tax relief to the Company.
At present, management believes these carryforwards are not likely to be
available and the full amount is carried as a valuation allowance.

F-14
<PAGE> 73

NOTE 11 -- EARNINGS PER SHARE

Primary earnings per share is computed based on the weighted average number
of shares actually outstanding plus common equivalents which would arise from
the exercise of stock options and warrants. Fully diluted earnings per share are
similarly computed but would include the dilutive effect of the Company's common
equivalents. Earnings per share have been computed by dividing net income by the
weighted average number of common stock and equivalent shares outstanding.

<TABLE>
<CAPTION>
JUNE 30, 1996
1993 1995 1994 -------------
---------- ---------- ---------- (UNAUDITED)
<S> <C> <C> <C> <C>
PRIMARY:
Weighted Average Common Shares................. 11,550,800 11,664,700 11,492,500 11,423,800
Stock Options and Warrants..................... 60,900 60,900 90,200 245,500
---------- ---------- ---------- -------------
Weighted Average Common Stock and
Equivalents.................................. 11,611,700 11,725,600 11,582,700 11,669,300
FULLY DILUTIVE:
Additional Dilutive Effect of Stock and
Equivalents.................................. -0- 2,300 68,400 126,400
---------- ---------- ---------- -------------
Weighted Average Common Stock and
Equivalents.................................. 11,611,700 11,727,900 11,651,100 11,795,700
---------- ---------- ---------- -------------
</TABLE>

NOTE 12 -- BUSINESS SEGMENT INFORMATION

Since March 31, 1985, the Company's principal operations have been devoted
to the establishment and operation of imaging centers providing magnetic
resonance imaging diagnostic services ("Medical Imaging"). Since January 1990,
the Company has also operated a radiation oncology center, which provides
radiation oncology services, and is included in Medical Imaging. In 1992, the
Company expanded its Medical Imaging services at certain locations to include
computed tomography, ultrasound, mammography and X-ray. During 1995, the Company
acquired 15 diagnostic facilities from MedAlliance Inc. (See note 15). The newly
acquired centers were primarily multi-modality. During September 1986, the
Company established an engineering services division which is engaged in the
service and maintenance of major medical diagnostic equipment primarily owned by
outside parties ("Engineering Services"). During February 1987, the Company
established a medical construction management division which provides medical
facility development consulting services to the Company's affiliated imaging
centers and to non-affiliated third parties ("Medical Construction Services").
For the three years presented, the operations of Medical Construction Services
did not have a material impact upon the overall consolidated operations of the
Company. Capital expenditures and assets of Medical Construction Services for
the three years presented have, therefore, been combined with the Medical
Imaging category in the accompanying table.

Operations of all segments have been limited to the United States until
November 1990 at which time the Company opened its first center providing
magnetic resonance imaging diagnostic services in Guildford, England. The
Company opened or acquired two additional imaging centers in the United Kingdom
during 1992 and opened one additional imaging center in 1993. In 1994, the
Company leased two mobile MRI units in Tiajuana and Celaya, Mexico. The company
discontinued the operation of these mobile units during 1995. Results of
operations for the Company's United Kingdom and Mexico operations were not
significant to the overall consolidated results of the Company for the three
years presented and are, therefore, not separately presented in the accompanying
table.

F-15
<PAGE> 74

The following table presents financial data for business segments:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
------------------------------------------------------------------------------------------------------
REVENUE
FROM NET INCOME DEPRECIATION
UNAFFILIATED INTERSEGMENT TOTAL BEFORE CAPITAL AND
CUSTOMERS REVENUE REVENUE TAXES EXPENDITURES AMORTIZATION ASSETS
------------ ------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical Imaging.......... $ 68,511,400 $ -- $68,511,400 $ 3,942,600 $ 12,090,100 $ 9,928,000 $ 92,430,900
Engineering
Services............... 4,714,600 9,219,400 13,934,000 2,869,200 874,200 288,800 12,050,000
------------ ------------ ----------- ----------- ------------ ------------ ------------
73,226,000 9,219,400 82,445,400 6,811,800 12,964,300 10,216,800 104,480,900
Eliminations and
Adjustments -- Intersegment
Sales.................. (9,219,400) (9,219,400) -- -- -- --
General Corporate........ 2,862,800 -- 2,862,800 1,725,200 1,757,000 1,636,700 14,873,700
Minority Interest in
Income of Consolidated
Entities............... -- -- -- (171,700) -- -- --
Interest Expense......... -- -- -- (1,673,500) -- -- --
------------ ------------ ----------- ----------- ------------ ------------ ------------
TOTAL $ 76,088,800 $ -- $76,088,800 $ 6,681,800 $ 14,721,300 $ 11,853,500 $119,354,600
========== ========== ========== ========== ========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------------------------------------------------------
REVENUE
FROM NET INCOME DEPRECIATION
UNAFFILIATED INTERSEGMENT TOTAL BEFORE CAPITAL AND
CUSTOMERS REVENUE REVENUE TAXES EXPENDITURES AMORTIZATION ASSETS
------------ ------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical Imaging.......... $ 72,421,400 $ -- $72,421,400 $ 5,924,000 $ 4,997,700 $ 10,768,900 $ 88,739,200
Engineering
Services............... 3,673,200 6,652,600 10,325,800 2,016,800 358,200 497,300 14,875,800
------------ ------------ ----------- ----------- ------------ ------------ ------------
76,094,600 6,652,600 82,747,200 7,940,800 5,355,900 11,266,200 103,615,000
Eliminations and
Adjustments -- Intersegment
Sales.................. -- (6,652,600) (6,652,600) -- -- -- --
General Corporate........ 1,027,300 -- 1,027,300 2,338,200 1,244,300 905,100 22,211,900
Minority Interest in
Income of Consolidated
Entities............... -- -- -- (196,100) -- -- --
Interest Expense......... -- -- -- (1,251,500) -- -- --
------------ ------------ ----------- ----------- ------------ ------------ ------------
TOTAL $ 77,121,900 $ -- $77,121,900 $ 8,831,400 $ 6,600,200 $ 12,171,300 $125,826,900
========== ========== ========== ========== ========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------------------------------------
REVENUE
FROM NET INCOME
UNAFFILIATED INTERSEGMENT TOTAL BEFORE CAPITAL DEPRECIATION AND
CUSTOMERS REVENUE REVENUE TAXES EXPENDITURES AMORTIZATION ASSETS
------------ ------------ ----------- ----------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Medical Imaging..... 111,346,900 -- 111,346,900 $18,527,400 $10,644,500 $ 15,899,600 $145,107,500
Engineering
Services.......... 3,078,000 5,411,400 8,489,400 1,794,900 651,100 744,700 20,945,400
------------ ------------ ----------- ----------- ------------- ---------------- ------------
114,424,900 5,411,400 119,836,300 20,322,300 11,295,600 16,644,300 166,052,900
Eliminations and
Adjustments --
Intersegment
Sales............. -- (5,411,400) (5,411,400) -- -- -- --
General Corporate... 1,100,500 -- 1,100,500 (4,708,400) 399,100 935,100 10,259,500
Minority Interest in
Income of
Consolidated
Entities.......... -- -- -- (605,700) -- -- --
Interest Expense.... -- -- -- (3,727,200) -- -- --
------------ ------------ ----------- ----------- ------------- ---------------- ------------
TOTAL....... 115,535,400 $ -- 115,535,400 $11,281,000 $11,694,700 $ 17,579,400 $176,312,400
========== ========== ========== ========== =========== ============= ===========
</TABLE>

NOTE 13 -- STOCKHOLDERS' EQUITY AND RIGHTS PLAN

The Board of Directors is authorized to issue shares of preferred stock in
one or more series, and to determine the designations and the powers,
preferences, and other special rights of each series.

F-16
<PAGE> 75

On May 10, 1989, the Company adopted a Stockholder Rights Plan and,
pursuant to the plan, declared a dividend on its Common Stock of one right
("Right") for each share of Common Stock then outstanding and for each share of
Common Stock issued thereafter and prior to the time the Rights expire or become
exercisable. Upon the occurrence of certain events, each Right becomes
exercisable to purchase one one-hundredth of a share of Series B Participating
Preferred Stock at a price of $56. The Rights expire on May 21, 1999, and, prior
to the occurrence of certain events, may be redeemed at a price of $.01 per
Right. Of the Company's 2,000,000 authorized shares of preferred stock, the
Board of Directors has designated 200,000 shares as Series B Participating
Preferred Stock.

NOTE 14 -- EMPLOYEE BENEFIT PLAN

During 1989, the Company adopted the Health Images, Inc., Profit Sharing
and Savings Plan which qualified under Internal Revenue Code Section 401(k).
Contributions by the Company are discretionary and made from profits to match a
portion of the elective before-tax contributions of participating employees. In
1993, the Company made a cash contribution of $105,300 to the Plan to match 25%
of the contributions made by participating employees in 1992. In 1994, the
Company made a cash contribution of $125,100 to the plan to match 25% of the
contributions made by participating employees in 1993. In 1995, the Company made
a cash contribution of $121,200 to the plan to match 25% of the contributions
made by participating employees in 1994.

The Company changed its employer contribution method in 1995 to match
employees' contributions to the Plan on a dollar-for-dollar basis with a maximum
match of 3% of the contributing employee's salary. In 1996, the Company
contributed $332,600 in Common Stock and cash to match 1995 contributions by
participating employees.

NOTE 15 -- ACQUISITIONS

During April 1993, the Company purchased the assets of Matlock Imaging
Center in Arlington, Texas, for $1,410,000 with $1,350,000 cash and 10,000
shares of restricted common stock. The acquisition was accounted for as a
purchase with the excess purchase price over the fair value of the assets
attributed to goodwill.

During August 1994, the Company acquired the remaining interest in its
equity affiliate, National Diagnostic Systems, Inc. ("NDS") and merged NDS into
a wholly-owned subsidiary of the Company, Accountable Radiology, Inc. Prior to
the acquisition the Company recorded its 48.5% interest in NDS under the equity
method of accounting. The resulting subsidiary was renamed "Interactive
Diagnostic Services, Inc." ("IDSI"). The Company issued an aggregate of 559,811
shares of its common stock, market value of $2,939,000, to the selling
shareholders of NDS to acquire their respective equity interests in NDS. As
additional consideration, the Company paid off NDS indebtedness of $524,000 and
paid $22,200 to a selling shareholder for his NDS stock options. The Company
paid $315,000 in salary buydowns to selling shareholders who would remain
employees of IDSI and $120,000 in a consulting agreement with the former
Chairman and Chief Executive Officer of NDS. In addition, the Company cancelled
indebtedness of $1,010,000 owed by NDS to Health Images. Goodwill of $4,271,900
was recorded and acquisition costs of $1,087,400 related to the salary buydowns,
the consulting agreement, a write-off of abandoned software and other
miscellaneous costs were expensed.

On December 31, 1994, the Company wrote off the $4,271,900 in goodwill
related to NDS investment in addition to the previous write-off of $1,087,400 in
acquisition costs. In addition, the Company expensed $218,900 for estimated
contract losses, and $538,700 in organization and start-up costs. The
nonrecurring asset impairment charge totaled $6,116,900 and was expensed in
1994.

The Company filed a lawsuit on February 21, 1995 against the selling
shareholders of NDS asking for rescission of the acquisition described above and
restitution. The complaint alleges breach of contract, intentional
misrepresentation, negligent misrepresentation, and suppression of fact.

F-17
<PAGE> 76

The Company discontinued the operations of IDSI during the quarter ending
March 31, 1995. Revenues attributable to discontinued operations were $401,800
for 1995. The loss from discontinued operations and loss on disposal of
discontinued operations before taxes totaled $1,874,100. An income tax benefit
of $712,200 was recognized in 1995 based on a 38% applicable rate, which differs
from the Company's overall effective rate due to certain permanent tax
differences. The net loss attributable to discontinued operations was $1,161,900
for 1995.

On December 9, 1994, the Company purchased 2,127,508 shares of MedAlliance,
Inc. preferred stock for $11,254,428 in anticipation of acquiring 15 imaging
centers from MedAlliance. On April 14, 1995, the Company completed the
acquisition of the 15 imaging centers from MedAlliance, Inc. by paying
$23,859,200 in cash (net of cash received), redemption of the MedAlliance
preferred stock and accumulated dividends of $11,569,300, assumption of
liabilities totaling $28,991,800, and the issuance of a note payable to
MedAlliance of $6,241,600. The acquisition was accounted for as a purchase with
the excess purchase price over the fair value of the assets attributed to
goodwill. The transaction was effective for accounting purposes as of April 1,
1995. The following table discloses unaudited pro forma operating statement
information as if the acquisition occurred at the beginning of each period
presented.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
Net Revenue..................................................... $124,097,700 $127,048,400
Net Income from Continuing Operations........................... $ 5,426,600 $ 7,158,000
Net Income (Loss)............................................... $ (1,101,700) $ 6,124,800
Primary Earnings per Share
Net Income from Continuing Operations......................... $ 0.46 $ 0.62
Net Income (Loss)............................................. $ (0.09) $ 0.52
</TABLE>

For the year ended December 31, 1995, net revenue recorded from the centers
acquired from MedAlliance was $41,563,800 and operating net income (after
interest expense) was $2,976,400. The Company issued the note payable to
MedAlliance of $6,241,600 in December of 1995 in settlement of an earnout
agreement. Goodwill amortization expense for 1995 included only one month of
expense related to this $6,241,600. Total goodwill amortization expense related
to the MedAlliance Center Acquisition will approximate $143,400 a month or
$1,720,500 a year for future periods.

NOTE 16 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial instruments are as
follows:

<TABLE>
<CAPTION>
1995
-----------------------------
CARRYING AMOUNT FAIR VALUE
--------------- -----------
<S> <C> <C>
Cash and Short Term Investments........................... $ 3,472,100 $ 3,472,100
Long Term Debt............................................ $54,535,800 $54,788,700
</TABLE>

The fair value of long-term debt is based on current rates at which the
Company could borrow funds with similar remaining maturities.

F-18
<PAGE> 77

NOTE 17 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1994 and 1995 is as follows:

<TABLE>
<CAPTION>
1994 QUARTERS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue..................................... $18,763,100 $19,880,500 $19,393,800 $19,084,500
Operating Expenses.......................... 16,802,600 17,090,000 16,705,500 16,516,000
Income from Operating Activities............ 1,960,500 2,790,500 2,688,300 2,568,500
Net Income (Loss)........................... 879,900 1,382,800 591,900 (3,990,100)
Earnings(Loss) Per Share*
Net Income from Continuing Operations per
Share..................................... 0.09 0.14 0.12 0.11
Discontinued Operations per Share........... (0.01) (0.02) (0.07) (0.46)
Net Income per Share........................ 0.08 0.12 0.05 (0.35)
</TABLE>

<TABLE>
<CAPTION>
1995 QUARTERS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue..................................... $18,238,900 $32,421,200 $32,655,000 $32,220,300
Operating Expenses.......................... 15,845,800 28,238,600 28,093,100 27,871,300
Income from Operating Activities............ 2,393,100 4,182,600 4,561,900 4,349,000
Net Income.................................. 84,500 1,708,300 1,945,400 1,990,700
Earnings (Loss) Per Share*
Net Income from Continuing Operations per
Share..................................... 0.11 0.14 0.17 0.17
Discontinued Operations per Share........... (0.10) 0.00 0.00 0.00
Net Income per Share........................ 0.01 0.14 0.17 0.17
</TABLE>

- ---------------

* The sum of the 1994 and 1995 quarterly earnings per share may differ from the
annual earnings per share because of the differences in the weighted average
number of common shares outstanding and common shares used in the quarterly
and annual computation as well as differences in rounding.

F-19
<PAGE> 78

- ------------------------------------------------------
- ------------------------------------------------------

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Dividend Policy....................... 13
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Consolidated Historical and
Pro Forma Financial Data............ 16
Pro Forma Condensed Consolidated
Statement of Income................. 18
Management's Discussion and Analysis
of
Financial Condition and Results of
Operations.......................... 19
Business.............................. 25
Management............................ 48
Principal Stockholders................ 51
Selling Stockholder................... 51
Description of Capital Stock.......... 51
Underwriting.......................... 55
Legal Matters......................... 55
Experts............................... 55
Available Information................. 56
Incorporation of Certain Information
By
Reference........................... 56
Index to Financial Statements......... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------

2,500,000 SHARES

HEALTH IMAGES, INC.

COMMON STOCK

------------

PROSPECTUS

, 1996

------------

SMITH BARNEY INC.

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 79

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

<TABLE>
<S> <C>
SEC Registration Fee.............................................................. $ 11,003
NASD Fee.......................................................................... *
New York Stock Exchange Additional Listing Fee.................................... *
Blue Sky Fee and Expenses......................................................... *
Printing and Engraving Expenses................................................... *
Legal Fees and Expenses........................................................... *
Accounting Fees and Expenses...................................................... *
Transfer Agent Fees and Expenses.................................................. *
Miscellaneous..................................................................... *
--------
Total............................................................................. $ *
========
</TABLE>

- ---------------

* To be completed by amendment.

The foregoing items, except for the SEC registration fee and NASD fee, are
estimated. The Registrant has agreed to bear all expenses (other than selling
commissions) in connection with the registration and sale of the shares of
Common Stock.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of the State of Delaware
empowers the Registrant to, and the By-laws of the Registrant provide that it
shall, indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than an action, suit or proceeding by or in the right of the Registrant) by
reason of the fact that he or she is or was a director or officer of the
Registrant, or is or was serving at the request of the Registrant as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Registrant, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful; except that, in the
case of an action or suit by or in the right of the Registrant, no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the Registrant unless and
only to the extent that the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought shall determine that such person
is fairly and reasonably entitled to indemnity for proper expenses.

The Registrant's By-laws provide, pursuant to Section 145 of the General
Corporation Law of the State of Delaware, for indemnification of officers and
directors of the Registrant and persons serving at the request of the Registrant
in such capacities of other business organizations against certain losses,
costs, liabilities and expenses incurred by reason of their positions with the
Registrant or such other business organizations.

The Registrant's Certificate of Incorporation contains a provision which
eliminates, to the fullest extent permitted by law, director liability for
monetary damages for breaches of fiduciary duty of care.

The Registrant has entered into an Indemnification Agreement (the
"Indemnification Agreement") with each of its directors and officers. The
Indemnification Agreement sets forth certain procedural matters relating to
indemnification, including the manner in which an indemnified party may make a
claim and the right of an indemnified party to court adjudication of his or her
claim if indemnification is denied by the Registrant.

The Registrant maintains an insurance policy insuring the Registrant and
directors and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933.

II-1
<PAGE> 80

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ---------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement.*
4(a) -- Instruments defining the rights of security holders are contained in the Restated
Certificate of Incorporation of Registrant, and Article I of the Restated Bylaws
of Registrant.(1)
4(d) -- Form of Indenture between the Registrant and The Provident Bank, Cincinnati,
Ohio, as trustee.(2)
4(e) -- Successor Rights Agreement between the Registrant and First Union National Bank
of North Carolina as Successor Rights Agent dated as of September 1, 1992.(3)
5 -- Opinion of Powell, Goldstein, Frazer & Murphy as to the legality of the
securities being registered.*
23(a) -- Consent of Joseph Decosimo and Company, LLP.
23(b) -- Consent of Deloitte & Touche LLP.
23(c) -- The consent of Powell, Goldstein, Frazer & Murphy will be contained in its
opinion to be filed as Exhibit 5 hereto.
24 -- Power of Attorney (see the signature page to this Registration Statement).
27 -- Financial Data Schedule (for SEC use only).
</TABLE>

- ---------------

* To be filed by amendment.
(1) Incorporated herein by reference to exhibit of same number of Registrant's
Annual Report on Form 10-K for fiscal year ended December 31, 1989. (File
No. 0-14746)
(2) Incorporated herein by reference to exhibit of same number of Amendment No.
2 to Registrant's Registration Statement on Form S-2 filed June 14, 1990.
(Reg. No. 33-34161)
(3) Incorporated herein by reference to exhibit of same number of Registrant's
Annual Report on Form 10-K for fiscal year ended December 31, 1992. (File
No. 0-14746)

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expense incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-2
<PAGE> 81

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the city of Atlanta, State of Georgia, on October 25, 1996.

HEALTH IMAGES, INC.

By: /s/ ROBERT D. CARL, III
-----------------------------
Robert D. Carl, III
Chairman, President and Chief
Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints ROBERT D. CARL, III and ROBIN EUBANKS MURRAY, and
each of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, to sign
any related registration statement pursuant to Rule 462(b) of the Securities Act
of 1933, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ ROBERT D. CARL, III Chairman of the Board,
- --------------------------------------------- President and Chief
Robert D. Carl, III Executive Officer October 25, 1996

/s/ ANTHONY T. PRESCOTT Senior Executive Vice
- --------------------------------------------- President, Chief Operating
Anthony T. Prescott Officer and Director October 25, 1996

/s/ RON L. CLARK, JR. Treasurer and Controller
- --------------------------------------------- (Principal Financial and
Ron L. Clark, Jr. Accounting Officer) October 25, 1996

/s/ MARC I. RAPHAELSON, M.D. Director
- ---------------------------------------------
Marc I. Raphaelson, M.D. October 25, 1996

/s/ WILLIAM E. WHITESELL, PH.D. Director
- ---------------------------------------------
William E. Whitesell, Ph.D. October 25, 1996
</TABLE>

II-3
<PAGE> 82

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>
/s/ JACK O. GREENBERG, M.D. Director
- ---------------------------------------------
Jack O. Greenberg, M.D. October 25, 1996

/s/ ROBERT L. TAYLOR Director
- ---------------------------------------------
Robert L. Taylor October 25, 1996

/s/ STUART B. STRASNER, SR. Director
- ---------------------------------------------
Stuart B. Strasner, Sr. October 25, 1996
</TABLE>

II-4

<PAGE> 1

EXHIBIT 23(A)

CONSENT OF JOSEPH DECOSIMO AND COMPANY, LLP

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Health Images, Inc.
for the registration of 2,875,000 shares of its common stock, $.01 par value per
share, and to the incorporation by reference therein of our report dated
February 23, 1996, with respect to the consolidated financial statements and
schedules of Health Images, Inc. included or incorporated by reference in its
Annual Report (Form 10-K) for the year ended December 31, 1995, filed with the
Securities and Exchange Commission.

JOSEPH DECOSIMO AND COMPANY, LLP

Atlanta, Georgia
October 25, 1996

<PAGE> 1

EXHIBIT 23(B)

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement
of Health Images, Inc. on Form S-3 of our report dated May 26, 1995 (relative to
the financial statements of MedAlliance Imaging Centers -- a division of
MedAlliance, Inc.), appearing in Amendment No. 1 on Form 8-K/A dated June 30,
1995 to current report on Form 8-K of Health Images, Inc. and to the reference
to us under the heading "Experts" in the Registration Statement.

DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 24, 1996

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 2,886,800
<SECURITIES> 0
<RECEIVABLES> 35,185,700
<ALLOWANCES> 10,600,200
<INVENTORY> 309,600
<CURRENT-ASSETS> 34,701,800
<PP&E> 163,268,100
<DEPRECIATION> 65,996,000
<TOTAL-ASSETS> 178,871,300
<CURRENT-LIABILITIES> 34,979,200
<BONDS> 43,279,800
0
0
<COMMON> 134,000
<OTHER-SE> 87,318,900
<TOTAL-LIABILITY-AND-EQUITY> 178,871,300
<SALES> 64,180,200
<TOTAL-REVENUES> 64,180,200
<CGS> 0
<TOTAL-COSTS> 38,627,200
<OTHER-EXPENSES> 16,588,400
<LOSS-PROVISION> 2,476,200
<INTEREST-EXPENSE> 1,860,600
<INCOME-PRETAX> 7,147,900
<INCOME-TAX> 2,519,600
<INCOME-CONTINUING> 4,260,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,260,800
<EPS-PRIMARY> .36
<EPS-DILUTED> .36

</TABLE>