RADIOLOGIX INC - 10-Q Quarterly Report

Back to GetFilings.com

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________________________

COMMISSION FILE NO. 0-23311

RADIOLOGIX, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2648089
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)

2200 ROSS AVENUE
3600 JP MORGAN CHASE TOWER
DALLAS, TEXAS 75201-2776
(Address of principal executive offices, including zip code)

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

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

Yes [X] No [ ]

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

Class Outstanding at November 12, 2002
- --------------------------------- ------------------------------------

COMMON STOCK, $0.0001 PAR VALUE 21,567,153 SHARES

================================================================================

RADIOLOGIX, INC.

FORM 10-Q

INDEX

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

See accompanying notes to unaudited consolidated financial statements.

Note: The balance at December 31, 2001 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.

1

RADIOLOGIX, INC. AND SUBSIDIARIES

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

See accompanying notes to unaudited consolidated financial statements.

2

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying notes to unaudited consolidated financial statements.

3

RADIOLOGIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. DESCRIPTION OF BUSINESS

Radiologix, Inc. (together with its subsidiaries, "Radiologix" or the
"Company"), a Delaware corporation, is a leading national provider of diagnostic
imaging services through its ownership and operation of free-standing,
outpatient diagnostic imaging centers. Radiologix utilizes sophisticated
technology and technical expertise to perform a broad range of imaging
procedures, such as magnetic resonance imaging (or MRI), computed tomography (or
CT), positron emission tomography (or PET), nuclear medicine, ultrasound,
mammography, bone densitometry (or DEXA), general radiography (or X-ray) and
fluoroscopy. Radiologix operates 116 diagnostic imaging centers located in 17
states, with a concentration of diagnostic imaging centers in markets located in
California, Florida, Kansas, Maryland, New York, Texas and Virginia. Radiologix
offers multi-modality imaging services at 70 of its diagnostic imaging centers,
which provide patients and referring physicians access to advanced diagnostic
imaging services in one convenient location.

Radiologix also provides administrative, management and information
services to certain radiology practices that provide professional services in
connection with its diagnostic imaging centers and to hospitals and radiology
practices with which the Company operates joint ventures. The services
Radiologix provides leverage its existing infrastructure and improve radiology
practice or joint venture profitability, efficiency and effectiveness.

Radiologix has two models by which it contracts with radiology practices: a
comprehensive services model and a technical services model. Under the
comprehensive services model, the Company enters into a long-term agreement with
a radiology practice group (typically 40 years). Under this arrangement, in
addition to obtaining technical fees for the use of Radiologix's diagnostic
imaging equipment and the provision of technical services, the Company provides
management services and receives a fee based on the practice group's
professional revenue, including revenue derived from outside of our diagnostic
imaging centers. Under the technical services model, the Company enters into a
shorter-term agreement with a radiology practice group (typically 10 to 15
years) and pays them a fee based on cash collections from reimbursements for
imaging procedures. In both the comprehensive services and technical services
models, the Company owns the diagnostic imaging assets, and, therefore, receives
100% of the technical reimbursements associated with imaging procedures.
Additionally, in most instances, both the comprehensive services and the
technical services models contemplate an incentive technical bonus for the
radiology group if the net technical income exceeds specified thresholds. The
service agreements cannot be terminated by either party without cause,
consisting primarily of bankruptcy or material default. However, under certain
conditions, Radiologix can terminate the service agreement if the number of
physicians in a practice falls below a certain percentage of the total
physicians of the radiology practice. Two physicians of two of the contracted
radiology practices are members of the Board of Directors of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We have prepared the consolidated financial statements without audit. In
management's opinion, these financial statements include all normal recurring
adjustments necessary for a fair presentation of the results of operations for
the three months and nine months periods ended September 30, 2002 and 2001,
respectively, in accordance with the rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates in the Preparation of the Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, results of operations 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.

4

Recent Accounting Pronouncements

Radiologix adopted Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective
January 1, 2002. SFAS 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
This statement supersedes SFAS 121; however, SFAS 144 retains the fundamental
provisions of SFAS 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. SFAS 144 also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for segments of a
business to be disposed of.

Radiologix adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS 142, goodwill and other intangible assets
with an indefinite useful life are no longer amortized as expenses of
operations, but rather carried on the balance sheet as permanent assets. These
intangible assets are to be subject to at least annual assessments for
impairment by applying a fair value based test. The Company's service
agreements, included in the consolidated balance sheets as intangible assets,
net, are not considered to have an indefinite useful life and will continue to
be amortized over a useful life of 25 years.

As required by SFAS No. 142, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result, $28.5
million of intangible assets, primarily relating to acquired intangible assets,
were transferred to goodwill as of January 1, 2002.

With the adoption of SFAS No. 142, Radiologix ceased amortization of
goodwill as of January 1, 2002. The following table presents the quarterly
results on a comparable basis (in thousands):

As of January 1, 2002, Radiologix completed a goodwill impairment test. This
test involved the use of estimates related to the fair market value of
Radiologix's reporting units with which the goodwill was associated. No
impairment was indicated at that time.

Revenue Presentation

The Financial Accounting Standards Board's Emerging Issues Task Force issued
its abstract, Issue 97-2, "Application of FASB Statement No. 94 and Accounting
Principles Board ("APB") Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Arrangements" ("EITF
97-2"). Since Radiologix has not established a "controlling financial interest"
under EITF 97-2, Radiologix does not consolidate the revenue of contracted
radiology practices.

5

The following table sets forth the amounts of revenue for the contracted
radiology practices and diagnostic imaging centers that would have been
presented in the consolidated statements of income had Radiologix met the
provisions of EITF 97-2 (in thousands):

Revenue of the contracted radiology practices and diagnostic imaging centers
is recorded when services are rendered by the contracted radiology practice and
diagnostic imaging center based on established charges and reduced by
contractual adjustments. In addition, bad debt expense related to established
charges is recognized as costs and expenses rather than a deduction from
revenue. The Company uses historical collection experience in estimating its
contractual adjustments and bad debt expense. The factors influencing the
historical collection experience include the contracted radiology practices' and
diagnostic imaging centers' patient mix, impact of managed care contract pricing
and contract revenue and the aging of patient accounts receivable balances. As
these factors change, the historical collection experience is revised
accordingly in the period known.

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

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

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

6

3. LONG TERM DEBT

Senior Notes

In December 2001, the Company terminated its senior credit facility with
proceeds from a $160 million senior notes ("Senior Notes") issuance, due
December 15, 2008. In connection with the repayment, the Company recorded in
December 2001 an extraordinary loss from the early extinguishment of its senior
credit facility in the amount of $4.7 million, $2.8 million after tax. The
Senior Notes bear interest at an annual rate of 10 1/2% payable semiannually in
arrears on June 15 and December 15 of each year, and payments commenced June 15,
2002. The Senior Notes are redeemable on or after December 15, 2005 at various
redemption prices, plus accrued and unpaid interest to the date of redemption.
The Senior Notes are unsecured obligations which rank senior in right of payment
to all of our subordinate indebtedness and equal in right of payment with all
other senior indebtedness. The Senior Notes are unconditionally guaranteed on a
senior unsecured basis by certain restricted existing and future subsidiaries.

Credit Facility

In addition to the Senior Notes issuance in December 2001, the Company
entered into a credit facility whereby the Company can borrow up to $35 million.
At September 30, 2002, no borrowings were outstanding under the credit facility.
Under the credit facility the interest rate is (i) an adjusted LIBOR rate, plus
an applicable margin which can vary from 3.0% to 3.5%, or (ii) the prime rate,
plus an applicable margin which can vary from 1.75% to 2.25%. In each case, the
applicable margin varies based on financial ratios maintained by the Company.
The credit facility includes certain restrictive covenants including
prohibitions on the payment of dividends, limitations on capital expenditures
and the maintenance of certain financial ratios (including minimum fixed charge
coverage ratio and maximum leverage ratio, as defined). Borrowings under the
credit facility are secured by all service agreements which the Company is or
becomes a party to, a pledge of the stock of the Company's subsidiaries and all
of the Company's and its wholly owned subsidiaries' assets.

Convertible Subordinated Debt

At September 30, 2002 the Company has a $12.0 million convertible junior
subordinated note, which matures July 31, 2009, and bears interest, payable
quarterly in cash or payment in kind securities, at an annual rate of 8.0%. If
by August 1, 2003 the closing price of Radiologix's common stock has not
exceeded $7.52 for 45 of the 60 days of the determination period, the interest
rate will be increased to 8.5%. During the three months ended September 30,
2002, approximately $2.7 million of the convertible junior subordinated note was
converted into 363,923 shares. For the nine months ended September 30, 2002,
approximately $12.2 million of the convertible junior subordinated note was
converted into 1,625,600 shares.

4. DEFERRED REVENUE

In connection with the amendment of the service agreement with one of the
contracted radiology practices in July 2002, we have recorded deferred revenue
of $3.3 million in consideration recognized for the amended agreement. The
deferred revenue will be amortized over a 20 year period. In addition, a
receivable of $3.3 million was recorded to reflect the consideration due from
the contracted radiology practice, as a result of this amendment. The receivable
is classified as due from affiliates and will be funded by the contracted
radiology practice by a reduction of the payment retained by the contracted
radiology practice through December 31, 2002.

5. EARNINGS PER SHARE

Radiologix adopted SFAS No. 128, "Earnings per Share" ("EPS") effective
December 31, 1997. SFAS No. 128 simplifies the computation of EPS by replacing
the presentation of primary EPS with a presentation of basic EPS. Basic EPS is
calculated by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period (including shares
to be issued). Options, warrants, and other potentially dilutive securities are
excluded from the calculation of basic EPS. Diluted EPS includes the options,
warrants, and other potentially dilutive securities that are excluded from basic
EPS using the treasury stock method to the extent that these securities are not
anti-dilutive. For the three months ended September 30, 2001 and 2002, 373,671
and 1,131,534 shares, respectively, related to stock options were included in
diluted EPS. In addition, diluted EPS includes the effect of the convertible
junior subordinated note (see Note 3) using the "if converted" method to the
extent the securities are not anti-dilutive. For the three months ended
September 30, 2001, and 2002, under the "if converted" method, $286,000 and
$144,000, respectively, of tax effected interest savings and 2,866,094 and
1,613,898, respectively, weighted average shares were included in the
calculation of diluted EPS as an addition to net income and weighted average
shares outstanding, respectively.

7

For the nine months ended September 30, 2001 and 2002, 303,498 and 1,227,184
shares, respectively, related to stock options were included in diluted EPS. In
addition, diluted EPS includes the effect of the convertible junior subordinated
note (see Note 3) using the "if converted" method to the extent the securities
are not anti-dilutive. For the nine months ended September 30, 2001, and 2002,
under the "if converted" method, approximately $832,000 and $614,000,
respectively, of tax effected interest savings and 2,501,258 and 2,183,777,
respectively, weighted average shares were included in the calculation of
diluted EPS as an addition to net income and weighted average shares
outstanding, respectively.

6. SEGMENT REPORTING

The Company reports the results of its operations through four designated
regions of the United States: Mid-Atlantic, Northeastern, Central and Western
regions. In addition, the Company reports the results of its operations of the
imaging centers of its subsidiary, Questar. The Company's operations in each of
the four designated regions are comprised of the ownership and operation of
diagnostic imaging centers and the provision of administrative, management and
information services to the contracted radiology practices that provide
professional interpretation and supervision services in connection with its
diagnostic imaging centers and to hospitals and radiology practices with which
the Company operates joint ventures. The Company's services leverage our
existing infrastructure and improve radiology practice or joint venture
profitability, efficiency and effectiveness. The Company has divided the
operations into the four regions and Questar only for purposes of the division
of internal management responsibilities, but does not focus on each of these
regions as a separate product line or make financial decisions as if they were
separate product lines. The Questar operations are looked at as a separate group
only from the perspective that the imaging centers of Questar do not have the
same type of management service agreement with physicians as we have with each
of the contracted radiology practices in the four designated regions. In
addition, any imaging centers of Questar that are in the same region as the
operations of the contracted radiology practices in the four designated regions
are not included in the service agreements of the contracted radiology
practices. The following table summarizes the operating results and assets by
the five reportable segments (in thousands):

(1) Includes the Baltimore/Washington, D.C. Metropolitan area.

(2) Includes Rochester, New York, Rockland County, New York and the surrounding
areas.

(3) Includes San Antonio, Texas, St. Lucie County, Florida, Topeka, Kansas,
Northeast Kansas and the surrounding areas.

(4) Includes San Francisco/Oakland/San Jose, California and surrounding areas.

(5) Includes diagnostic imaging centers in Arizona, California, Colorado,
Delaware, Florida, Georgia, Illinois, Kansas, Minnesota, Missouri, Nebraska,
Nevada, Ohio and Pennsylvania that were acquired as part of the Questar
acquisition and that have not been integrated into pre-existing Radiologix
market areas.

Corporate assets, including intangible assets, as of September 30, 2001 and 2002
were $96,118 and $111,038 respectively.

The following is a reconciliation of income before taxes and purchases of
property and equipment by the Company's five reportable segments to the
Company's consolidated financial statements for the nine months ended September
30, 2001 and 2002 (in thousands):

9

7. SUPPLEMENTAL GUARANTOR INFORMATION

In connection with the Senior Notes, certain of the Company's subsidiaries
("Subsidiary Guarantors") guaranteed, jointly and severally, the Company's
obligation to pay principal and interest on the Senior Notes on a full and
unconditional basis.

The following supplemental condensed consolidating financial information
presents the balance sheets as of December 31, 2001 and September 30, 2002, and
the statements of income and cash flows for the nine months ended September 30,
2001 and 2002. In the consolidating condensed financial statements, the
Subsidiary Guarantors account for their investment in the non-guarantor
subsidiaries using the equity method.

The non-guarantor subsidiaries include Advanced PET Imaging of Maryland,
L.P., Lakewood OpenScan MR, LLC, Lexington MR, Ltd., Montgomery Community
Magnetic Imaging Center Limited Partnership, Tower OpenScan MRI, and MRI at St.
Joseph Medical Center LLC. The Guarantor Subsidiaries include all wholly owned
subsidiaries of Radiologix, Inc. (the "Parent").

10

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)

SEPTEMBER 30, 2002
(IN THOUSANDS)

11

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEET (AUDITED)

DECEMBER 31, 2001
(IN THOUSANDS)

12

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

13

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF INCOME (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

14

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

15

RADIOLOGIX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)

16

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

The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2001, and with the Company's
consolidated financial statements and notes included in this Form 10-Q.

OVERVIEW

We are a leading national provider of diagnostic imaging services through
our ownership and operation of free-standing, outpatient diagnostic imaging
centers. We utilize sophisticated technology and technical expertise to perform
a broad range of imaging procedures, such as magnetic resonance imaging (or
MRI), computed tomography (or CT), positron emission tomography (or PET),
nuclear medicine, ultrasound, mammography, bone densitometry (or DEXA), general
radiography (or X-ray) and fluoroscopy. For the nine months ended September 30,
2002, we derived 80% of our service fee revenue from the ownership, management
and operation of our radiology and imaging center network and 20% of our service
fee revenue from the administrative, management and information services
provided to contracted radiology practices. As of September 30, 2002, we owned,
operated or maintained an ownership interest in imaging equipment at 116
locations and provided management services to ten radiology practices. As of
September 30, 2002, our imaging centers are located in 17 states, with
concentrated geographic coverage in markets located in California, Florida,
Kansas, Maryland, New York, Texas and Virginia.

We focus on providing quality patient care and service to ensure patient and
referring physician satisfaction. Our development of comprehensive radiology
networks permits us to invest in technologically advanced imaging equipment,
including MRI, open MRI, spiral CT and PET. Our consolidation of diagnostic
imaging centers into coordinated networks improves response time, increases
overall patient accessibility, permits us to standardize certain customer
relations procedures and permits us to develop "best practices" for our
diagnostic imaging centers. We seek the input and participation of the
contracted radiology practices to which we provide administrative, management
and information services to develop best practices and to improve productivity
and the quality of services. By focusing on further improving and, where
appropriate, standardizing the operations of our diagnostic imaging centers, we
believe that we can increase patient and referring physician satisfaction, which
should lead to increased referrals and increased utilization of our diagnostic
imaging centers.

We contract with radiology practices to provide professional services,
including the supervision and interpretation of diagnostic imaging procedures
performed in our diagnostic imaging centers. We believe that we do not engage in
the practice of medicine nor do we employ physicians. The radiology practices
maintain full control over the provision of professional radiological services.
The contracted radiology practices generally have outstanding physician and
practice credentials and reputations; strong competitive market positions; a
broad sub-specialty mix of physicians; a history of growth and potential for
continued growth; and a willingness to embrace our strategy for the delivery of
diagnostic imaging services.

For the nine months ended September 30, 2002, payment for diagnostic imaging
services comes primarily from commercial third-party payors (65%), governmental
payors (27%, including Medicare and Medicaid) and private and other payors (8%).
In August 2000, Medicare made significant changes in the reimbursement
methodology for hospital outpatient services. We believe that we will have
opportunities to increase the use of our diagnostic imaging services through
additional joint venture or outsourcing arrangements with hospitals, in part
because such federal healthcare regulatory changes favor outpatient centers that
are managed or owned in joint venture or outsourcing arrangements with third
parties. As of January 2002, Medicare decreased reimbursement rates for
physician and outpatient services, including diagnostic imaging services. Our
centers are principally dependent on our ability to attract referrals from
primary care physicians, specialists and other healthcare providers. The
referral often depends on the existence of a contractual arrangement with the
referred patient's health benefit plan. For the nine months ended September 30,
2002, approximately 5% of our revenue generated at our diagnostic imaging
centers was generated from capitated arrangements.

Revenue of the contracted radiology practices and diagnostic imaging centers
is recorded when services are rendered by the contracted radiology practices and
diagnostic imaging centers based on established charges and reduced by
contractual allowances. In addition, bad debt expense related to established
charges is recognized as costs and expenses rather than a deduction from
revenue. We use historical collection experience in estimating contractual
adjustments and bad debt expense. The factors influencing the historical
collection experience include the contracted radiology practices' and diagnostic
imaging centers' patient mix, impact of managed care contract pricing and
contract revenue and the aging of patient accounts receivable balances. As these
factors change, the historical collection experience is revised accordingly in
the period known. Service fee revenue represents contracted radiology practices'
and diagnostic imaging centers' revenue less amounts retained by contracted
radiology practices. The amounts retained by contracted radiology practices
represents amounts paid to the physicians pursuant to the service agreements
between us and the contracted radiology practices. Under the service agreements,
we provide each contracted radiology practice with the facilities and equipment
used in its medical practice, assume responsibility for managing the operations
of the practice, and employ substantially all of the non-physician personnel
utilized by the contracted radiology practice. Although

17

we assist in negotiating managed care contracts for the contracted radiology
practices, we assume no risk under these arrangements.

Our service fee revenue is dependent upon the operating results of the
contracted radiology practices and diagnostic imaging centers. Where state law
allows, service fees due under the service agreements for the contracted
radiology practices are derived from two distinct revenue streams: (1) a
negotiated percentage (up to 30%) of the adjusted professional revenues as
defined in the service agreements; and (2) 100% of the adjusted technical
revenues as defined in the service agreements. In states where the law requires
a flat fee structure, we have negotiated a base service fee, which is equal to
the estimated fair market value of the services provided under the service
agreements and which is renegotiated each year to equal the fair market value of
the services provided under the service agreements. The fixed fee structure
results in us receiving substantially the same amount of service fee as we would
have received under a negotiated percentage fee structure. Adjusted professional
revenues and adjusted technical revenues are determined by deducting certain
contractually agreed-upon expenses (for example, non-physician salaries and
benefits, rent, depreciation, insurance, interest and other physician costs)
from the contracted radiology practices' revenue. Revenues of our subsidiary,
Questar Imaging, Inc. ("Questar") are primarily derived from technical revenues
generated from those imaging centers.

RESULTS OF OPERATIONS

We report the results of our operations through four designated regions of
the United States: Mid-Atlantic, Northeastern, Central and Western regions. In
addition, we report separately the results of our operations of the imaging
centers of our subsidiary, Questar. Our operations in each of the four
designated regions are comprised of the ownership and operation of diagnostic
imaging centers and the provision of administrative, management and information
services to the contracted radiology practices that provide professional
interpretation and supervision services in connection with our diagnostic
imaging centers and to hospitals and radiology practices with which we operate
joint ventures. Our services leverage our existing infrastructure and improve
radiology practice or joint venture profitability, efficiency and effectiveness.
We have divided the operations into the four regions and Questar only for
purposes of the division of internal management responsibilities, but do not
focus on each of these regions as a separate product line or make financial
decisions as if they were separate product lines. The Questar operations are
treated as a separate group only from the perspective that the imaging centers
of Questar do not have the same type of management service agreement with
physicians as we have with contracted radiology practices in the four designated
regions. In addition, any imaging centers of Questar that are in the same region
as the operations of the contracted radiology practices in the four designated
regions are not included in the service agreements of the contracted radiology
practices.

For discussion and analysis purposes, the operating margin is defined as
service fee revenue less operating expenses ("operating income") as a percent of
service fee revenue. The operating margin for the Mid Atlantic region increased
from 31% to 32% for the nine months ended September 30, 2001 and 2002. The
operating margin for the Northeastern region increased from 26% for the nine
months ended September 30, 2001 to 28% in 2002. The increase in the operating
margin is primarily attributable to the growth in technical volume and,
therefore, technical revenues. In addition, the operating margin increased
partially as a result of higher reimbursement on a managed care contract and was
also impacted by the higher fixed fee recognized at the New York practices
compared to 2001. The operating margin for the Central region of 34% for the
nine months ended September 30, 2001 decreased to 33% in 2002. The decrease in
the operating margin is primarily attributable to increased salaries and
benefits, as well as malpractice insurance costs. The decrease was partially
offset by decreased purchased billing services and by increased technical
revenues in the Central region overall. The operating margin for the Western
region decreased from 24% for the nine months ended September 30, 2001 to 22% in
2002. The decrease is primarily attributable to a decrease in the number of
hospitals in which we provide management services and the impact of increased
salaries and benefits. The decrease was partially offset by a decrease in rent
expense, attributable to the purchase in December 2001 of equipment previously
held under operating leases. The operating margin for Questar increased from 17%
for the nine months ended September 30, 2001 to 23% for the nine months ended
September 30, 2002. The increase in the operating margin is primarily
attributable to improved collections, which decreased estimated contractual
allowances and, therefore, increased service fee revenue.

Recent Developments

During the three months ended September 30, 2002, we experienced lower volume
than management's expectations as a result of greater than expected seasonality
and increased payor pre-authorization activity. Recently, an increasing number
of payors in which we do business with have instituted more comprehensive
pre-authorization programs on certain procedures. Under pre-authorization
programs, the referring physician must justify medical necessity based on
payor's specific guidelines prior to the services being rendered. As
pre-authorization programs mature with referring physicians and payors, we
cannot give any assurance that it will not continue to have an adverse effect on
our business, results of operations or financial condition.

18

THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002

Service Fee Revenue

The following table sets forth the amounts of revenue from the contracted
radiology practices and diagnostic imaging centers and the amounts retained by
contracted radiology practices (in thousands):

Revenue from contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, increased $3.3 million, from $94.8 million in
2001 to $98.1 million in 2002. This increase was primarily due to increased
revenues derived from increased volume at the diagnostic imaging centers which
increased our revenue from contracted radiology practices and diagnostic imaging
centers. Amounts retained by contracted radiology practices increased from $25.6
million in 2001 to $26.8 million in 2002. As a percentage of revenue from
contracted radiology practices and diagnostic imaging centers, net of
contractual adjustments, the costs remained constant at 27.0% and 27.3% for 2001
and 2002, respectively. The increase in revenue from contracted radiology
practices and diagnostic imaging centers, net of contractual adjustments, and
the increase in amounts retained by contracted radiology practices, resulted in
service fee revenue increasing $2.1 million, from $69.2 million in 2001 to $71.3
million, in 2002.

Salaries and Benefits

Salaries and benefits increased $2.9 million, from $18.7 million in 2001 to
$21.6 million in 2002. Salaries and benefits increased as volume and revenues
increased and as salaries and benefits for technologists increased. As a
percentage of service fee revenue, these costs increased from 27.0% in 2001 to
30.4% in 2002.

Field Supplies

Field supplies increased $100,000, from $4.2 million in 2001 to $4.3 million
in 2002. As a percentage of service fee revenue, these costs remained constant
at 6.0% for 2001 and 2002.

Field Rent and Lease Expense

Field rent and lease expense decreased $400,000, from $8.6 million in 2001
to $8.2 million in 2002. As a percentage of service fee revenue, these costs
were 12.5% and 11.4% in 2001 and 2002, respectively. The decrease in the rent
and lease expense was primarily attributable to the purchase in December 2001 of
equipment previously held under operating leases.

Other Field Expenses

Other field expenses decreased $400,000 from $12.0 million in 2001 to $11.6
million in 2002. Generally, these costs do not increase in proportion with
increases in volume and revenue. However, as a percentage of service fee
revenue, these costs

19

decreased from 17.3% in 2001 to 16.2% in 2002. Purchased billing services
decreased approximately $700,000 due to (i) the conversion of these services to
an in-house billing department at one of the Northeastern contracted radiology
practices at the end of 2001 and (ii) billing services no longer provided for
professional services at certain hospitals. In addition, malpractice liability
insurance expense decreased approximately $200,000 from $900,000 in 2001 to
$700,000 in 2002. In connection with the amendment of the service agreement with
certain of our contracted radiology practices, we no longer incur malpractice
liability insurance premiums for physicians of those contracted radiology
practices. Prior to July 1, 2002, malpractice liability insurance premiums for
these contracted radiology practices was included in certain contractually
agreed upon expenses in which we reimbursed those practices for a portion of
their expense.

Bad Debt Expense

Bad debt expense decreased $100,000 from $6.3 million in 2001 to $6.2
million in 2002. As a percentage of service fee revenue, these costs were 9.2%
and 8.7% in 2001 and 2002, respectively. Since service fee revenue represents
contracted radiology practices' and diagnostic imaging centers' revenue less
amounts retained by contracted radiology practices, these percentages inherently
result in a higher stated value than if it were calculated as a percentage of
revenue of the contracted radiology practices and diagnostic imaging centers.
Therefore, bad debt expense should be compared for 2001 and 2002 as a percentage
of revenue of the contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, rather than as a percentage of service fee
revenue. As a percentage of revenue of the contracted radiology practices and
diagnostic imaging centers, bad debt expense was 6.7% and 6.3% in 2001 and 2002,
respectively.

Corporate General and Administrative

Corporate general and administrative expenses decreased $800,000, from $4.5
million in 2001 to $3.7 million in 2002. As a percentage of service fee revenue,
these costs were 6.5% and 5.2% in 2001 and 2002, respectively. During the three
months ended September 30, 2001 we recorded a $1.0 million one-time charge for
transaction costs related to the termination of a merger. Adjusting for the
one-time charge, corporate general and administrative expenses increased 5.7%
due to the further development of our infrastructure at the corporate office
during the latter part of 2001, including additional employees and associated
employee benefits, offset by lower incentive compensation.

Depreciation and Amortization

Depreciation and amortization expense increased $900,000, from $5.8 million
in 2001 to $6.7 million in 2002. As a percentage of service fee revenue, these
costs were 8.4% and 9.4% in 2001 and 2002, respectively. The increase in
depreciation expense is primarily attributable to the purchase of $7.8 million
of property and equipment for replacement, maintenance, and expansion during the
three months ended September 2002 compared to $1.0 million during the three
months ended September 2001. In addition, the increase in depreciation expense
is due to the purchase in December 2001 of equipment previously held under
operating leases. This is partially offset by a decrease in amortization due to
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. As a result,
$28.5 million of intangible assets, primarily related to acquired intangible
assets with an indefinite useful life, are no longer amortized as expenses of
operations, but rather carried on the balance sheet as permanent assets.

Interest Expense, net

Interest expense, net, increased $1.0 million from $3.6 million in 2001 to
$4.6 million in 2002. The increase is due to higher interest costs associated
with our Senior Notes issued in December 2001.

Income Tax Expense

Income tax expense of $2.5 million in 2001 and $2.1 million in 2002 was
based on a 40% effective tax rate.

Net Income

Net income decreased from $3.8 million in 2001 to $3.2 million in 2002. Net
income as a percentage of service fee revenue was 4.5% in 2002, which decreased
from 5.5% in 2001.

20

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002

Service Fee Revenue

The following table sets forth the amounts of revenue from the contracted
radiology practices and diagnostic imaging centers and the amounts retained by
contracted radiology practices (in thousands):

Revenue from contracted radiology practices and diagnostic imaging centers,
net of contractual adjustments, increased $13.8 million, from $284.2 million in
2001 to $298.0 million in 2002. This increase was primarily due to increased
revenues derived from increased volume at the diagnostic imaging centers, which
increased our revenue from contracted radiology practices and diagnostic imaging
centers. Amounts retained by contracted radiology practices decreased from $80.9
million in 2001 to $80.7 million in 2002. The increase in revenue from
contracted radiology practices and diagnostic imaging centers, net of
contractual adjustments, and the decrease in amounts retained by contracted
radiology practices, resulted in service fee revenue increasing $14.1 million,
from $203.3 million in 2001 to $217.4 million, in 2002.

Salaries and Benefits

Salaries and benefits increased $6.9 million, from $55.8 million in 2001 to
$62.7 million in 2002. Salaries and benefits increased as volume and revenues
increased and as salaries and benefits for technologists increased. As a
percentage of service fee revenue, these costs were 27.4% and 28.8% in 2001 and
2002, respectively.

Field Supplies

Field supplies increased $1.1 million, from $12.1 million in 2001 to $13.2
million in 2002. As a percentage of service fee revenue, these costs remained
relatively constant at 5.9% and 6.1% in 2001 and 2002, respectively.

Field Rent and Lease Expense

Field rent and lease expense decreased $1.0 million, from $25.4 million in
2001 to $24.4 million in 2002. As a percentage of service fee revenue, these
costs were 12.5% and 11.2% in 2001 and 2002, respectively. The decrease in the
rent and lease expense was primarily attributable to the purchase in December
2001 of equipment previously held under operating leases.

Other Field Expenses

Other field expenses remained relatively constant at $34.9 million in 2001
and $35.2 million in 2002. Generally, these costs do not increase in proportion
with increases in volume and revenues. However, as a percentage of service fee
revenue, these costs decreased from 17.3% in 2001 to 16.2% in 2002. Purchased
billing services decreased approximately $1.8 million due to (i) the conversion
of these services to an in-house billing department at one of the Northeastern
contracted radiology practices in 2002 and (ii) billing services no longer
provided for professional services at certain hospitals.

Bad Debt Expense

Bad debt expense decreased $500,000, from $19.1 million in 2001 to $18.6
million in 2002. As a percentage of service fee revenue, these costs were 9.4%
and 8.5% in 2001 and 2002, respectively. Since service fee revenue represents
contracted radiology practices' and diagnostic imaging centers' revenue less
amounts retained by contracted radiology practices, these percentages inherently
result in a higher stated value than if it were calculated as a percentage of
revenue of the contracted radiology practice and diagnostic imaging centers.
Therefore, bad debt expense should be compared for 2001 and 2002 as a percentage
of revenue of the contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, rather than as a percentage of service fee
revenue. As a percentage of revenue of the contracted radiology practices and
diagnostic imaging centers, bad debt expense was 6.7% and 6.2% in 2001 and 2002,
respectively.

21

Corporate General and Administrative

Corporate general and administrative expenses increased $600,000, from $11.0
million in 2001 to $11.6 million in 2002. As a percentage of service fee
revenue, these costs were 5.4% and 5.3% in 2001 and 2002, respectively. The
increase in these costs is primarily due to the further development of our
infrastructure at the corporate office during the latter part of 2001, including
additional employees and associated employee benefits. This increase is offset
by a $1.0 million one-time charge related to the termination of a merger
recorded during the nine months ended September 30, 2001, and lower year to date
incentive compensation.

Depreciation and Amortization

Depreciation and amortization expense increased $2.0 million, from $17.3
million in 2001 to $19.3 million in 2002. As a percentage of service fee
revenue, these costs were 8.5% and 8.9% in 2001 and 2002, respectively. The
increase in depreciation expense is primarily attributable to the purchase of
$17.9 million of property and equipment for replacement, maintenance, and
expansion during the nine months ended September 30, 2002. In addition, the
increase in depreciation expense is attributable to the purchase in December
2001 of equipment previously held under operating leases. This is partially
offset by a decrease in amortization due to the adoption at SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. As a result,
$28.5 million of intangible assets, primarily related to acquired intangible
assets with an indefinite useful life, are no longer amortized as expenses of
operations, but rather carried on the balance sheet as permanent assets.

Interest Expense, net

Interest expense, net, increased $2.2 million, from $12.1 million in 2001 to
$14.3 million in 2002. The increase is due to higher interest costs associated
with our Senior Notes issued in December 2001.

Income Tax Expense

Income tax expense of $7.5 million in 2001 and $8.3 million in 2002 was
based on a 40% effective tax rate.

Net Income

Net income increased from $11.2 million in 2001 to $12.4 million in 2002.
Net income as a percentage of service fee revenue was 5.7% in 2002, which
increased from 5.5% in 2001.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity for the nine months ended September 30, 2002, was derived
principally from net cash proceeds from operating activities. As of September
30, 2002, we had net working capital of $63.4 million, including cash and cash
equivalents of $16.1 million. We had current assets of $102.7 million and
current liabilities of $39.3 million, including current maturities of long-term
debt and capital lease obligations of $4.3 million. For the nine months ended
September 30, 2002, we generated $30.8 million in net operating cash flow,
invested $20.8 million and used cash of $4.6 million in financing activities.

Net cash from operating activities for the nine months ended September 30,
2002 of $30.8 million increased from the $30.1 million for the same period in
2001 due to increased net income. This was partially offset by the effect of
higher interest costs paid in 2002 versus 2001. Increased collections of
accounts receivable, as well as the implementation of certain cash management
strategies, resulted in a decrease in accounts receivable days outstanding from
73 days at September 30, 2001 to 70 days at September 30, 2002.

Net cash used in investing activities for the nine months ended September
30, 2001 and 2002 was $3.5 million and $20.8 million, respectively. Purchases of
property and equipment during the nine months ended September 30, 2001 and 2002
were $4.6 million and $17.9 million, respectively. For the nine months ended
September 30, 2002, we have invested $9.9 million in the replacement and
maintenance of property and equipment and $8.0 million in the expansion of
property and equipment.

Net cash flows used in financing activities for the nine months ended
September 30, 2001 and 2002 were $26.2 million and $4.6 million, respectively.
At September 30, 2002, we had outstanding borrowings of $160 million under our
senior notes, $12.0 million outstanding under our convertible subordinated
junior note and an additional $7.6 million in other debt obligations. In
December 2001, we terminated our senior credit facility with proceeds from a
$160 million senior notes ("Senior Notes") issuance, due December 15, 2008. The
Senior Notes bear interest at an annual rate of 10 1/2% payable semiannually in
arrears on June 15

22

and December 15 of each year, and commenced June 15, 2002. The Senior Notes are
redeemable on or after December 15, 2005 at various redemption prices, plus
accrued and unpaid interest to the date of redemption. The Senior Notes are
unsecured obligations which rank senior in right of payment to all of our
subordinated indebtedness and equal in right of payment with all other senior
indebtedness. The Senior Notes are unconditionally guaranteed on a senior
unsecured basis by certain restricted existing and future subsidiaries. In
addition to the Senior Notes issuance in December 2001, we entered into a credit
facility whereby we can borrow up to $35 million. At September 30, 2002, no
borrowings were outstanding under the credit facility. Under the credit
facility, the interest rate is (i) an adjusted LIBOR rate, plus an applicable
margin, which can vary from 3.0% to 3.5%, or (ii) the prime rate, plus an
applicable margin, which can vary from 1.75% to 2.25%. In each case, the
applicable margin varies based on financial ratios maintained by us. The credit
facility includes certain restrictive covenants, including prohibitions on the
payment of dividends, limitations on capital expenditures and the maintenance of
certain financial ratios (including minimum fixed charge coverage ratio and
maximum leverage ratio, as defined). Borrowings under the credit facility are
secured by all service agreements to which we are a party, a pledge of the stock
of our subsidiaries and all of the Company's and its wholly owned subsidiaries'
assets.

We operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expense of new diagnostic imaging centers and the
acquisition of additional centers and new diagnostic imaging equipment. To the
extent we are unable to generate sufficient cash from our operations, funds are
not available under our credit facility or we are unable to structure or obtain
operating leases, we may be unable to meet our capital expenditure requirements.
Furthermore, we may not be able to raise any necessary additional funds through
bank financing or the issuance of equity or debt securities on terms acceptable
to us, if at all.

Health Insurance Portability and Accountability Act

The administrative provisions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") direct the federal government to adopt
national electronic standards for automated transfer of certain health care data
between health care payors, plans and providers. HIPAA is designed to enable the
entire health care industry to communicate electronic data using a single set of
standards, thus eliminating all nonstandard formats currently in use. Our
contracted radiology practices and diagnostic imaging centers are "covered
entities" under HIPAA, and as such, must comply with the HIPAA electronic data
interchange mandates. We are required to be compliant by October 16, 2003. We
are in the process of determining the readiness status of our software vendors,
payors and claim clearinghouses to assess exposure with regard to this
legislation. We are at risk for both our own HIPAA compliance and the compliance
of those with whom we do business , particularly third party payors and
hospitals. There can be no assurance that HIPAA compliance issues will not have
an adverse effect on our business, results of operations or financial condition.

Forward-Looking Statements

Throughout this report we make "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"). Forward-looking
statements include words such as "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about our acquisition and
development plans. We do not guarantee that the transactions and events
described in this report will happen as described or that any positive trends
noted in this report will continue. The forward-looking statements contained in
this report are generally located in the material set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", but may be found in other locations as well. These forward-looking
statements generally relate to our plans, objectives and expectations for future
operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that our plans and objectives reflected
in or suggested by such forward-looking statements are reasonable, we may not
achieve such plans or objectives. You should read this report completely and
with the understanding that actual future results may be materially different
from what we expect. We will not update forward-looking statements even though
our situation may change in the future.

Specific factors that might cause actual results to differ from our
expectations include, but are not limited to:

o economic, competitive, demographic, business and other conditions in our
markets;

o a decline in patient referrals;

o changes in the rates or methods of third-party reimbursement for
diagnostic imaging services;

o the termination of our contracts with radiology practices;

o the availability of additional capital to fund capital expenditure
requirements;

o burdensome lawsuits against our contracted radiology practices and us;

o reduced operating margins due to our managed care contracts and
capitated fee arrangements;

o any failure by us to comply with state and federal anti-kickback and
anti-self referral laws or any other applicable healthcare regulations;

o our substantial indebtedness, debt service requirements and liquidity
constraints; and

o risks related to our notes and healthcare securities generally.

23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents, credit facility, and its
convertible notes.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q,
we carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 15d-14 under the
Securities Exchange Act of 1934. The evaluation was carried out under the
supervision of our Chief Executive Officer and Chief Financial Officer. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
alerting them on a timely basis to material information that is required to be
included in our periodic filings with the Securities and Exchange Commission.
After the date of that evaluation, no significant changes were made in our
internal controls or in other factors that could significantly affect internal
controls, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses.

We also have investments, not material in amount, in certain unconsolidated
entities. Since we do not control these entities, our disclosure controls and
procedures with respect to these entities are necessarily substantially more
limited than those we maintain with respect to our consolidated subsidiaries.

24

PART II: OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. The list of exhibits filed as part of this report is
incorporated by reference to the Index to Exhibits at the end of this
report.

(b) Reports on Form 8-K. The registrant filed a Current Report on Form 8-K
dated September 24, 2002, announcing the modification of its financial
guidance for fiscal year 2002 following the impact on third quarter
procedure volume and service fee revenue of greater than expected
seasonality in July and August.

25

SIGNATURES

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

RADIOLOGIX, INC.

Date: November 14, 2002 /s/ MARK L. WAGAR
-----------------
Mark L. Wagar
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)

Date: November 14, 2002 /s/ SAMI S. ABBASI
------------------
Sami S. Abbasi
Chief Financial Officer and
Executive Vice President
(Principal Accounting Officer)

26

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER

I, Mark L. Wagar, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Radiologix, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 14, 2002

By: /s/ Mark L. Wagar
-----------------------------------------
Mark L. Wagar
Chairman and Chief Executive Officer

27

CERTIFICATION OF
CHIEF FINANCIAL OFFICER

I, Sami S. Abbasi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Radiologix, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: November 14, 2002

By: /s/ Sami S. Abbasi
-----------------------------------------
Sami S. Abbasi
Executive Vice President and Chief Financial Officer

28

INDEX TO EXHIBITS

- ----------

* Filed herewith.

** Incorporated by reference to Exhibits 4.1, 10.1, 10.3 and 10.5 through
10.19, respectively, to the registrant's Registration Statement No. 333-31611
on Form S-4.

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

@ Incorporated by reference to Exhibits 2.1, 4.1 and 4.2, respectively, to
the Registrant's Form 8-K filed on August 3, 1999.

29