RADIOLOGIX INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NO. 0-23311

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

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was $318,524,356, based on the closing sales
price of $15.25 of the registrant's Common Stock on the American Stock Exchange
on June 28, 2002.

As of March 24, 2003, 21,695,153 shares of the registrant's Common Stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2003 Annual Meeting of Stockholders
of the registrant are incorporated by reference in Part III.
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RADIOLOGIX, INC.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

THE DIAGNOSTIC IMAGING SERVICES INDUSTRY

OVERVIEW

Diagnostic imaging involves the use of less-invasive techniques to generate
representations of internal anatomy that can be recorded on film or digitized
for display on a video monitor. Diagnostic imaging procedures facilitate the
early diagnosis of diseases and disorders, often minimizing the cost and amount
of care required for patients and healthcare providers. Diagnostic imaging
procedures include: magnetic resonance imaging (MRI), computed tomography (CT),
positron emission tomography (PET), nuclear medicine, ultrasound, mammography,
bone densitometry (DEXA), general radiography (X-ray) and fluoroscopy.

The Centers for Medicare & Medicaid Services ("CMS"), formerly Health Care
Financing Administration, estimate that national healthcare spending in 2001 was
approximately $1.4 trillion and expect that spending will grow, on average, in
excess of 7% annually through 2012. The American College of Radiology estimates
that over 400 million diagnostic imaging procedures were performed in the United
States during 2000, the most recent year for which data are available,
generating estimated revenue of over $60 billion. Furthermore, the American
College of Radiology estimates that over 60% of this diagnostic imaging revenue
was generated on an outpatient basis.

We believe that the diagnostic imaging services industry will continue to
grow as a result of:

The Escalating Demand for Healthcare Services from an Aging
Population. There has been strong demand for healthcare services due to an
aging population in the United States. According to the United States Census
Bureau, one of the fastest growing segments of the population is the group over
65 years of age, which is expected to increase as much as 16% from 2000 to 2010.
We believe the aging population will help drive the growth for diagnostic
imaging procedures over the coming years because diagnostic imaging utilization
tends to increase as a person ages.

The Increasing Role of Diagnostic Imaging in Healthcare. Advanced imaging
equipment and modalities are allowing physicians to diagnose a wide variety of
diseases and injuries quickly and accurately without exploratory surgery or
other surgical or invasive procedures, which are usually more expensive, involve
greater risk to patients and result in longer rehabilitation time. We believe
that future technological advances will continue to enhance the ability of
radiologists to diagnose and influence treatment. For example, experimental MRI
techniques, such as magnetic resonance spectroscopic imaging, are used to show
the functions of the brain and to investigate how epilepsy, AIDS, brain tumors,
Alzheimer's disease and other abnormalities affect the brain. In addition,
advanced imaging systems are gaining wider acceptance among payors, as they are
increasingly seen and accepted as a tool for reducing long-term healthcare
costs.

Greater Consumer Awareness of and Demand for Preventive Diagnostic
Screening. Diagnostic imaging is increasingly being used as a screening tool
for preventive care. Consumer awareness of and demand for diagnostic imaging as
a less-invasive and preventive screening method has added to the growth in
diagnostic imaging procedures. Consumers are now more aware of the advanced
procedures that are available to them and are requesting them as preventive
procedures from their physicians and healthcare providers. We believe that, with
increased technological advancements, there will be greater consumer awareness
of and demand for diagnostic imaging procedures as preventive and less-invasive
procedures for early diagnosis of diseases and disorders.

An Increased Number of High-End Procedures That Utilize Advancements in
Technology. Recent technological advancements include: magnetic resonance
spectroscopic imaging, which can differentiate malignant from benign lesions;
magnetic resonance angiography, which can produce three-dimensional images of
body parts and assess the status of blood vessels; and enhancements in
teleradiology systems,

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which permit the digital transmission of radiological images from one location
to another for interpretation. Additional improvements in imaging technologies,
contrast agents and scanning capabilities are leading to new, less invasive
methods of diagnosing diseases. For example, these improvements are aiding in
detecting blockages in the heart's vital arteries, liver metastases, pelvic
diseases and certain vascular abnormalities without exploratory surgery.

DIAGNOSTIC IMAGING MODALITIES

The principal diagnostic imaging modalities include the following:

Magnetic Resonance Imaging. MRI utilizes a strong magnetic field in
conjunction with low energy electromagnetic waves that are processed by a
computer to produce high-resolution, three-dimensional, cross-sectional images
of body tissue, including the brain, spine, abdomen, heart and extremities.
Unlike CT and conventional X-rays, MRI does not utilize ionizing radiation,
which can cause tissue damage in high doses. A typical MRI examination takes
from 20 to 45 minutes. MRI systems are priced in the range of $0.9 million to
$2.5 million.

Computed Tomography. CT utilizes a computer to direct the movement of an
X-ray tube to produce multiple cross-sectional images of a particular organ or
area of the body. CT is used to detect tumors and other conditions affecting
bones and internal organs. It is also used to detect the occurrence of strokes,
hemorrhages and infections. CT provides higher resolution images than
conventional X-rays, but generally not as well-defined as those produced by
magnetic resonance. A typical CT examination takes from 15 to 45 minutes. CT
systems are priced in the range of $0.3 million to $1.2 million.

Positron Emission Tomography. PET utilizes a scanner to record signals
emitted by compounds with signal-emitting tracers after such compounds are
injected into a patient's body. A scanner records the signals as they travel
through the body and collect in the various organs targeted for examination. A
computer assembles the signals into actual images. PET has proven effective in
the detection and tracking of cancer (including lung, colorectal, breast and
prostate cancers), heart disease and brain disorders, including Alzheimer's
disease, Parkinson's disease and seizure disorders. PET systems are priced in
the range of $1 million to $1.4 million.

Nuclear Medicine. Nuclear medicine utilizes short-lived radioactive
isotopes that release small amounts of radiation that can be recorded by a gamma
camera and processed by a computer to produce an image of various anatomical
structures or to assess the function of various organs such as the heart,
kidneys, thyroid and bones. Nuclear medicine is used primarily to study anatomic
and metabolic functions. Nuclear medicine systems are priced in the range of
$300,000 to $400,000.

Ultrasound. Ultrasound imaging utilizes high-frequency sound waves to
develop images of internal organs, fetuses and the vascular system. Ultrasound
has widespread applications, particularly for procedures in obstetrics,
gynecology and cardiology. Ultrasound systems are priced in the range of $90,000
to $250,000.

Mammography. Mammography is a specialized form of radiology utilizing low
dosage X-rays to visualize breast tissue and is the primary screening tool for
breast cancer. Mammography procedures and related services assist in the
diagnosis and treatment planning for breast cancer. Mammography systems are
priced in the range of $70,000 to $100,000.

Bone Densitometry. Bone densitometry uses an advanced technology called
dual-energy X-ray absorptiometry, or DEXA, which safely, accurately and
painlessly measures bone density and the mineral content of bone for the
diagnosis of osteoporosis and other bone diseases. Bone densitometry systems are
priced in the range of $40,000 to $90,000.

General Radiography (or X-ray) and Fluoroscopy. X-rays utilize roentgen
rays to penetrate the body and record images of organs and structures on film.
Fluoroscopy utilizes ionizing radiation combined with a video viewing system for
real time monitoring of organs. X-ray and fluoroscopy are the most

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frequently used imaging modalities. Digital X-ray systems add computer image
processing capability to traditional X-ray images. X-ray systems are priced in
the range of $50,000 to $250,000.

OUR COMPANY

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 MRI, CT, PET, nuclear medicine,
ultrasound, mammography, DEXA, X-ray and fluoroscopy. As of December 31, 2002,
we operated 117 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. We offer multi-
modality imaging services at 64 of our diagnostic imaging centers, which provide
patients and referring physicians access to advanced diagnostic imaging services
in one convenient location.

We also provide administrative, management and information services to
certain radiology practices that provide professional services in connection
with our diagnostic imaging centers and to hospitals and radiology practices
with which we operate joint ventures. The services we provide leverage our
existing infrastructure and improve radiology practice or joint venture
profitability, efficiency and effectiveness.

For the year ended December 31, 2002, we performed over 1.9 million
diagnostic imaging procedures and generated service fee revenue of $283.9
million. In addition, we generated cash flow from operations of $45.5 million
for the year ended December 31, 2002.

COMPETITIVE STRENGTHS

We believe that we are well-positioned to continue to take advantage of
favorable demographic and diagnostic imaging services industry trends by
capitalizing on the following strengths:

Our Leading Market Position in Our Core Markets. We have a concentrated
presence in our core markets, which enables us to offer patients, referring
physicians and payors a higher degree of responsiveness and convenience than
independent operators or hospitals. We provide flexible scheduling, convenient
locations and expanded hours of operation, as well as the expeditious delivery
of radiology reports to referring physicians. The 88 centers in our core markets
generated 89% of our service fee revenue for the year ended December 31, 2002.
We believe that payors contract with us because of our strong market presence,
the high quality of our services and our ability to provide a single point of
contact and centralized administration. In addition, our leading position
enables us to increase our procedure volume, optimize equipment utilization,
benefit from economies of scale in purchasing and negotiation of payor contracts
and leverage our administrative and information technology infrastructure in our
core markets.

Comprehensive, Leading-Edge Diagnostic Imaging Services. We provide a
broad range of diagnostic imaging services within our core markets. Our 64
multi-modality centers enable us to offer one-stop shopping to patients,
referring physicians and payors. In our experience, referring physicians and
payors prefer to enter into relationships with diagnostic imaging providers that
offer a broad spectrum of services at convenient locations, benefiting referring
physicians and patients who require more than one type of diagnostic imaging
procedure. From January 1, 2000 to December 31, 2002, we added over $68 million
of equipment and leasehold improvements through purchase or lease to enhance our
diagnostic imaging centers and increase the number of modalities offered per
center to provide services demanded by patients, referring physicians and
payors. Our multi-modality offerings, coupled with the introduction of
technologically advanced imaging equipment, have contributed to an increase in
our volume of procedures and an increase in the average revenue per technical
procedure from $87.61 in 1998 to $119.51 for the year ended December 31, 2002.

Diversified Payor Mix and Multi-Modality Service Offerings. Our revenue
base comprises a diverse mix of payors, including managed care organizations,
traditional indemnity providers, Medicare, Medicaid and private and other
payors. For the year ended December 31, 2002, revenue generated at our
diagnostic

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imaging centers consisted of 64% from commercial third-party payors, 27% from
Medicare and Medicaid, and 9% from private and other payors. In addition, we
have experienced relatively stable pricing, with modest increases in most
markets and across most modalities. We believe our payor diversity and multi-
modality service offerings mitigate our exposure to possible unfavorable
reimbursement trends within any one payor class and to modality-specific rate
changes.

Strong Relationships with Leading Radiology Practices. In each of our core
markets, we contract with leading radiology practices to provide professional
radiology services in connection with our diagnostic imaging centers. We believe
that our affiliation with these leading radiology practices enhances our
reputation with referring physicians and their patients. We also provide
administrative, management and information services to certain radiology
practices. In light of an ongoing shortage of radiologists, we believe that our
contractual relationships with large, established radiology practices are
important to maintaining our high quality service.

Experienced Management Team. We have a highly experienced management team
with an average of approximately 18 years of healthcare services experience.
Management has successfully generated growth by increasing same center revenue
and executing a disciplined expansion strategy.

BUSINESS STRATEGY

Our strategy is to enhance our strong market presence and to increase
revenue and cash flow by continuing to pursue the following business strategy:

Increase Procedure Volume and Maximize Revenue at Existing Centers. We
continue to enhance our operations and increase procedure volume and revenue at
our existing centers by:

- expanding referring physician, hospital and payor relationships;

- increasing patient referrals through targeted marketing efforts; and

- leveraging our multi-modality offerings to increase the number of
high-end procedures performed.

Maintain Market Leadership in Our Core Markets. We continue to maintain
our leading market position in our core markets by pursuing strategic "tuck-in"
acquisitions and developing de novo centers. In addition, 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 due to federal healthcare regulations that favor outpatient centers that
are managed or owned in joint venture or outsourcing arrangements with third
parties.

Maximize Equipment Utilization and Enhance Service Offerings. Sixty-four
of our centers provide multi-modality imaging services, including various
combinations of MRI, CT, PET, nuclear medicine, ultrasound, mammography, DEXA,
X-ray and fluoroscopy. We intend to maximize our equipment utilization by
adding, upgrading and re-deploying equipment where we experience excess demand
and by consolidating, divesting or closing unprofitable centers or markets. In
addition, we intend to enhance our service offerings by adding, upgrading and
replacing our diagnostic imaging equipment to meet referring physician and
patient demands.

OPERATION OF CENTERS

At December 31, 2002, we operated 117 diagnostic imaging centers located in
17 states. We utilize sophisticated technology and technical expertise to
perform a broad range of imaging procedures such as MRI, CT, PET, nuclear
medicine, ultrasound, mammography, DEXA, X-ray and fluoroscopy. As part of
operating our diagnostic imaging centers, we purchase and maintain diagnostic
imaging equipment, hire and train employees, schedule patient appointments,
perform patient procedures, process bills, keep records and obtain and maintain
permits, licenses and insurance.

Referrals for diagnostic imaging services at our centers come from
referring physicians, including primary care physicians and specialists. In our
experience, these referrals are influenced by individual

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patients acting as consumers as well as by health systems, managed care
organizations, insurers and other entities representing large groups of
patients. Offering a wide spectrum of modalities at a diagnostic imaging center
enables us to offer "one-stop shopping" to referring physicians and patients.
For example, a physician may refer a patient for an X-ray. If the X-ray, when
interpreted by a radiologist who is providing professional services at the
diagnostic imaging center, reveals that further diagnostic imaging (for example,
a CT procedure) is necessary, the radiologist can confer with the referring
physician and the patient can undergo the CT procedure at the same center. Thus,
by offering both X-ray and CT modalities at the diagnostic imaging center, the
patient can avoid multiple visits, thereby decreasing costs and time delays.

Managed care organizations, insurers and other entities often represent
large groups of patients who are dispersed throughout a wide geographic area.
These entities influence referring physicians' decisions by entering into
provider agreements with, or otherwise selecting or approving, healthcare
service providers, including diagnostic imaging service providers. Our
experience is that entities representing large groups of patients often prefer
to enter into managed care contracts with providers who offer a broad array of
diagnostic imaging services throughout a corresponding geographic area. We have
developed our diagnostic imaging networks, in part, to be selected as a
preferred provider for these entities more frequently, which may increase
physician referrals to our centers.

To increase the convenience of our diagnostic imaging centers to patients,
we implement market-wide scheduling systems where practical. In these instances,
each diagnostic imaging center in a market area can access the patient
appointment calendar of other centers in the market area. Each center also can
schedule patient appointments at every other center within the network. This
system permits each of our centers within a market area to efficiently allocate
time available at our diagnostic imaging centers within that market area and to
meet a patient's appointment time, date or location preferences.

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.

Payment for diagnostic imaging services comes primarily from commercial
third-party payors, governmental payors (including Medicare and Medicaid) and
private and other payors. 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
year ended December 31, 2002, approximately 5% of our revenue generated at our
diagnostic imaging centers was generated from capitated arrangements. The
following table illustrates our approximate payor mix, based on revenue
generated at our diagnostic imaging centers, for the year ended December 31,
2002:

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CONTRACTED RADIOLOGY PRACTICES

We contract with radiology practices to provide professional services,
including 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.

We have two models by which we contract with radiology practices: a
comprehensive services model and a technical services model. Under our
comprehensive services model, we enter 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 our diagnostic imaging
equipment and the provision of technical services, we provide management
services and receive a fee based on the practice group's professional revenue,
including revenue derived outside of our diagnostic imaging centers. Under our
technical services model, we enter into a shorter-term agreement with a
radiology practice group (typically 10 to 15 years) and pay them a fee based on
cash collections from reimbursements for imaging procedures. In both the
comprehensive services and technical services models, we own the diagnostic
imaging assets, and, therefore, receive 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 agreements with the radiology practices under our comprehensive
services model contain provisions whereby both parties have agreed to certain
restrictions on accepting or pursuing radiology opportunities within a five to
15-mile radius of any of our owned, operated or managed diagnostic imaging
centers at which the radiology practice provides professional radiology services
or any hospital at which the radiology practice provides on-site professional
radiology services. Each of these agreements also restricts the applicable
radiology practice from competing with us and our other contracted radiology
practices within a specified geographic area during the term of the agreement.
In addition, the agreements require the radiology practices to enter into and
enforce agreements with their physician shareholders at each radiology practice
(subject to certain exceptions) that include covenants not to compete with us
for a period of two years after termination of employment or ownership, as
applicable.

Under our comprehensive services model, we have the right to terminate each
agreement if the radiology practice or a physician employee of the contracted
radiology practice engages in conduct, or is formally accused of conduct, for
which the physician employee's license to practice medicine reasonably would be
expected to be subject to revocation or suspension or is otherwise disciplined
by any licensing, regulatory or professional entity or institution, the result
of any of which (in the absence of termination of this physician or other action
to monitor or cure this act or conduct) adversely affects or would reasonably be
expected to adversely affect the radiology practice. In addition, we may
terminate each of these agreements if, during the first five years of the
agreement, more than one-third of the total number of physicians employed or
retained by the practice are no longer employed or retained by the practice
other than because of certain events, including death, permanent disability,
pre-qualified retirement or involuntary loss of hospital contracts or
privileges.

Under our comprehensive services model, upon termination of an agreement
with a radiology practice, depending upon the termination event, we may have the
right to require the radiology practice to purchase and assume, or the radiology
practice may have the right to require us to sell, assign and transfer to it,
the assets and related liabilities and obligations associated with the
professional and technical radiology services provided by the radiology practice
immediately prior to the termination. The purchase price for the assets,
liabilities and obligations would be the lesser of their fair market value or
the return of the consideration received in the acquisition. However, the
purchase price may not be less than the net book value of the assets being
purchased.

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The agreements with most of the radiology practices under our technical
services model contain non-compete provisions that are generally less
restrictive than those provisions under our comprehensive services model. The
geographic scope of and types of services covered by the non-compete provisions
vary from practice to practice. Under our technical services model, we generally
have the right to terminate the agreement if a contracted radiology practice
loses the licenses required to perform the service obligations under the
agreement, violates non-compete provisions relating to the modalities offered or
if income thresholds are not met.

DIAGNOSTIC IMAGING CENTERS

At December 31, 2002, we operated 117 diagnostic imaging centers consisting
of 85 owned and operated free-standing diagnostic imaging centers; 21 diagnostic
imaging centers operated by us and owned through 15 joint venture relationships
with hospitals, health centers or radiology practices; and 11 diagnostic imaging
centers to which we provide management, administrative and information services
or diagnostic imaging equipment. Of our 117 centers, 64 centers offer multiple
modalities of diagnostic imaging services. The number and type of modalities
offered are determined primarily by the demand for such services within their
respective market areas.

Information related to these diagnostic imaging centers is set forth below:

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(1) Includes diagnostic imaging centers in Arizona, California, Colorado,
Florida, Georgia, Illinois, Kansas, Minnesota, Missouri, Nebraska, Nevada,
Ohio and Pennsylvania that are not integrated into our core market areas.

Many of the 21 joint venture diagnostic imaging centers are located on, or
adjacent to, the participating hospital or health center's campus. We are the
general partner or managing member of 13 of our 15 joint ventures, comprising 19
of the 21 joint venture diagnostic imaging centers.

The 11 diagnostic imaging centers to which we provide management,
administrative and information services include nine locations where we own the
diagnostic imaging equipment. Examples of these nine locations include hospitals
where we have installed equipment that we operate under an agreement with the
hospital or health center. These relationships permit us to provide services to
hospitals and health centers without directly competing against a radiology
department that is equipped and operated by the hospital or health center. In
the remaining two centers, we do not have an ownership interest in the
equipment, but provide management services and employees.

DIAGNOSTIC IMAGING EQUIPMENT

We currently operate 472 diagnostic imaging units at our 117 centers, of
which 80 are MRI units, 43 are CT units, 8 are PET units, 25 are nuclear
medicine units, 89 are ultrasound units, 68 are

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mammography units, 25 are DEXA units, 76 are X-ray units and 58 are fluoroscopy
units. The average age of our MRI units is 3.8 years, our CT units is 4.1 years
and our PET units is 1.8 years.

We continue to evaluate the mix of our diagnostic imaging equipment in
response to changes in technology and to maximize utilization of our equipment.
The overall technological competitiveness of our equipment continually improves
through upgrades, disposal and/or trade-in of older equipment and the purchase
or execution of leases for new equipment. Several substantial companies
presently manufacture MRI (including open MRI), CT, PET and other diagnostic
imaging equipment, including GE Medical Systems, Hitachi Medical Systems,
Siemens Medical Systems and Phillips Medical Systems. We maintain good working
relationships with many of the major manufacturers to better ensure an adequate
supply as well as access to the most appropriate types of diagnostic imaging
equipment for the specific imaging center to be established.

Timely, effective maintenance is essential for achieving high utilization
rates of our imaging equipment. Most of our equipment is covered by a one-year
warranty from the original equipment manufacturers. We also contract with the
original equipment manufacturers for comprehensive maintenance programs to
minimize the period of time our equipment is unavailable.

SALES AND MARKETING

We selectively invest in marketing and sales resources and activities in an
effort to attract new patients, expand business relationships, grow revenue at
our existing centers and maintain present business alliances and contractual
agreements. Marketing activities include having frequent contact with referring
physicians and their office staffs, organizing and presenting educational
programs on new applications and uses of technology, developing and conducting
customer service programs and proactively calling managed care organizations and
third-party insurance companies to solicit additional contracts. Sales
activities principally focus on referring physicians and managed care entities,
while general awareness programs are targeted to patients and referring
physicians.

GOVERNMENT REGULATION AND SUPERVISION

General. The healthcare industry is highly regulated, and we can give no
assurance that the regulatory environment in which we operate will not change
significantly in the future. Our ability to operate profitably will depend in
part upon us, the contracted radiology practices and their affiliated physicians
obtaining and maintaining all necessary licenses, certificates of need and other
approvals and operating in compliance with applicable healthcare regulations. We
believe that healthcare regulations will continue to change. Therefore, we
monitor developments in healthcare law and modify our operations from time to
time as the business and regulatory environment changes. Although we intend to
continue to operate in compliance, we cannot ensure that we will be able to
adequately modify our operations to address changes in the regulatory
environment.

Licensing and Certification Laws. Ownership, construction, operation,
expansion and acquisition of diagnostic imaging centers are subject to various
federal and state laws, regulations and approvals concerning licensing of
centers, personnel, certificates of need and other required certificates for
certain types of healthcare centers and major medical equipment. The laws of
some of the states in which we operate limit our ability to acquire new
diagnostic imaging equipment or expand or replace our existing equipment at
diagnostic imaging centers in those states. In addition, free-standing
diagnostic imaging centers that provide services not performed as part of a
physician office must meet Medicare requirements to be certified as an
independent diagnostic testing facility to bill the Medicare program. We may not
be able to receive the required regulatory approvals for any future
acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services.

Fee-Splitting; Corporate Practice of Medicine. The laws of many states,
including many of the states in which the contracted radiology practices are
located, prohibit us from exercising control over the medical judgments or
decisions of physicians and from engaging in certain financial arrangements,
such as splitting professional fees with physicians. These laws and their
interpretations vary from state to state and

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are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into service
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee. We structure our relationships with the radiology practices,
including the purchase of diagnostic imaging centers, in a manner that we
believe keeps us from engaging in the practice of medicine or exercising control
over the medical judgments or decisions of the radiology practices or their
physicians or violating the prohibitions against fee-splitting. State regulatory
authorities or other parties may assert that we are engaged in the corporate
practice of medicine or that the payment of service fees to us by the radiology
practices constitutes fee-splitting. If such a claim were successfully asserted,
we could be subject to civil and criminal penalties and could be required to
restructure or terminate the applicable contractual arrangements. This result or
our inability to successfully restructure our relationships to comply with these
statutes could jeopardize our business strategy.

Medicare and Medicaid Reimbursement Program. Our revenue is derived
through our ownership, operation and management of diagnostic imaging centers
and from service fees paid to us by contracted radiology practices. During the
year ended December 31, 2002, approximately 27% of our revenue generated at our
diagnostic imaging centers was derived from government sponsored healthcare
programs (principally, Medicare and Medicaid).

CMS implemented reimbursement rates for outpatient diagnostic imaging
services provided by hospital facilities that continue to favor reimbursement in
our diagnostic imaging centers and enhance opportunities to develop joint
venture or outsourcing arrangements with hospitals. In January 2002, Medicare
decreased the payment rates to physician and outpatient services, including
diagnostic imaging services by approximately 5.4%. This payment rate schedule is
effective through February 2003. In February 2003 and to be effective March 1,
through December 31, 2003, Congress legislated an increase of approximately 1.6%
in the overall reimbursement rates for physician and outpatient services,
including diagnostic imaging services. Combined with increased valuation of some
radiology procedure relative value units, overall reimbursement for our services
is expected to increase beyond the 1.6% rate for 2003. 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 agreement with the patient's health
benefit plan. In 2002, we experienced more utilization requirements from third
party payors, which provide conditions that must be met before a referral for
our services can be made.

Any further change in Medicare or Medicaid rates or conditions for payment
could substantially reduce the amounts reimbursed to us or our contracted
radiology practices for services provided. These reductions could have a
significant adverse effect on our revenue and financial results by creating
downward pricing pressure.

Medicare and Medicaid Fraud and Abuse. Federal law prohibits the knowing
and willful offer, payment, solicitation or receipt of any form of remuneration
in return for, or to induce, (i) the referral of a person, (ii) the furnishing
or arranging for the furnishing of items or services reimbursable under the
Medicare, Medicaid or other governmental programs or (iii) the purchase, lease
or order or arranging or recommending purchasing, leasing or ordering of any
item or service reimbursable under the Medicare, Medicaid or other governmental
programs. Enforcement of this anti-kickback law is a high priority for the
federal government, which has substantially increased enforcement resources and
is likely to continue increasing such resources. The applicability of the
anti-kickback law to many business transactions in the healthcare industry has
not yet been subject to judicial or regulatory interpretation. Noncompliance
with the federal anti-kickback legislation can result in exclusion from the
Medicare, Medicaid or other governmental programs and civil and criminal
penalties.

We receive fees under our service agreements for management and
administrative services, which include contract negotiation and marketing
services. We do not believe we are in a position to make or influence referrals
of patients or services reimbursed under Medicare, Medicaid or other
governmental programs to radiology practices or their affiliated physicians or
to receive referrals. However, we may be considered to be in a position to
arrange for items or services reimbursable under a federal healthcare

10

program. Because the provisions of the federal anti-kickback statute are broadly
worded and have been broadly interpreted by federal courts, the government could
take the position that our arrangements with the contracted radiology practices
implicate the federal anti-kickback statute. Violation of the law can result in
monetary fines, civil and criminal penalties, and exclusion from participation
in federal or state healthcare programs, any of which could have an adverse
effect on our business and results of operations. While our service agreements
with the contracted radiology practices will not meet a "safe harbor" to the
federal anti-kickback statute, failure to meet a "safe harbor" does not mean
that agreements violate the anti-kickback statute. We have sought to structure
our agreements to be consistent with fair market value in arms' length
transactions for the nature and amount of management and administrative services
rendered. For these reasons, we do not believe that service fees payable to us
should be viewed as remuneration for referring or influencing referrals of
patients or services covered by such programs as prohibited by statute.

The "Stark Law" prohibits a physician from referring Medicare or Medicaid
patients to an entity providing "designated health services," including, without
limitation, radiology services, in which the physician has an ownership or
investment interest or with which the physician has entered into a compensation
arrangement. The penalties for violating the Stark Law include a prohibition on
payment by these governmental programs and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a "circumvention
scheme."

Under CMS regulations, radiology and certain other imaging services and
radiation therapy services and supplies are services included in the designated
health services subject to the self-referral prohibition. Included are the
professional and technical components of any diagnostic test or procedure using
X-rays, ultrasound or other imaging services, CT, MRI, radiation therapy and
diagnostic mammography services (but not screening mammography services). The
regulations, however, exclude from designated health services: (i) X-ray,
fluoroscopy or ultrasonic procedures that require the insertion of a needle,
catheter, tube or probe through the skin or into a body orifice; (ii) radiology
procedures that are integral to the performance of, and performed during,
nonradiological medical procedures; (iii) nuclear medicine procedures; and (iv)
"invasive" or "interventional" radiology, because the radiology services in
these procedures are merely incidental or secondary to another procedure that
the physician has ordered.

The Stark Law provides that a request by a radiologist for diagnostic
radiology services or a request by a radiation oncologist for radiation therapy,
if such services are furnished by or under the supervision of the radiologist or
radiation oncologist pursuant to a consultation requested by another physician,
does not constitute a "referral" by a "referring physician." If these
requirements are met, the Stark Law self-referral prohibition would not apply to
such services. The effect of the Stark Law on the radiology practices,
therefore, depends on the precise scope of services furnished by each such
practice's radiologists and whether such services derive from consultations or
are self-generated. We believe that (other than self-referred patients) all of
the services covered by the Stark Law provided by the contracted radiology
practices derive from requests for consultations by non-affiliated physicians
and therefore are exempt from the Stark Law.

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

All Medicare carriers routinely perform audits of Medicare claims. These
carriers are contracted by CMS to adjudicate and pay Medicare claims. An
unsatisfactory audit of any of our diagnostic imaging

11

centers or contracted radiology practices could result in significant repayment
obligations, exclusion from the Medicare, Medicaid, or other governmental
programs and/or civil and criminal penalties.

Federal regulatory and law enforcement authorities have increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern our activities and the activities of the contracted
radiology practices. Our or the contracted radiology practices' activities may
be investigated, claims may be made against us or the contracted radiology
practices and these increased enforcement activities may directly or indirectly
have an adverse effect on our business, financial condition and results of
operations.

State Anti-kickback and Physician Self-referral Laws. All of the states in
which our diagnostic imaging centers are located have adopted a form of
anti-kickback law and almost all of those states have also adopted a form of
Stark Law. The scope of these laws and the interpretations of them vary from
state to state and are enforced by state courts and regulatory authorities, each
with broad discretion. Generally, state laws cover all referrals by all
healthcare providers for all healthcare services. A determination of liability
under these laws could result in fines and penalties and restrictions on our
ability to operate in these jurisdictions.

Federal False Claims Act. The Federal False Claims Act provides, in part,
that the federal government may bring a lawsuit against any person whom it
believes has knowingly presented, or caused to be presented, a false or
fraudulent request for payment from the federal government, or who has made a
false statement or used a false record to get a claim approved. The Federal
False Claims Act further provides that a lawsuit thereunder may be initiated in
the name of the United States by an individual who is an original source of the
allegations. The government has taken the position that claims presented in
violation of the federal anti-kickback law or Stark Law may be considered a
violation of the Federal False Claims Act. Penalties include civil penalties of
not less than $5,500 and not more than $11,000 for each false claim, plus three
times the amount of damages that the federal government sustained because of the
act of that person. We believe that we are in compliance with the rules and
regulations that apply to the Federal False Claims Act. However, we could be
found to have violated certain rules and regulations resulting in sanctions
under the Federal False Claims Act, and if we are so found in violation, any
sanctions imposed could result in fines and penalties and restrictions on and
exclusion from participation in federal and state healthcare programs that are
integral to our business.

Healthcare Reform Initiatives. Healthcare laws and regulations may change
significantly in the future. We continuously monitor these developments and
modify our operations from time to time as the regulatory environment changes.
We cannot assure you, however, that we will be able to adapt our operations to
address new regulations or that new regulations will not adversely affect our
business. In addition, although we believe that we are operating in compliance
with applicable federal and state laws, neither our current or anticipated
business operations nor the operations of the contracted radiology practices has
been the subject of judicial or regulatory interpretation. We cannot assure you
that a review of our business by courts or regulatory authorities will not
result in a determination that could adversely affect our operations or that the
healthcare regulatory environment will not change in a way that restricts our
operations.

Health Insurance Portability and Accountability Act of 1996. In an effort
to combat healthcare fraud, Congress enacted the Health Insurance Portability
and Accountability Act of 1996 ("HIPAA"). Under HIPAA, a "healthcare benefit
program" includes any private plan or contract affecting interstate commerce
under which any medical benefit, item or services is provided. A person or
entity that knowingly and willfully obtains the money or property of any
healthcare benefit program by means of false or fraudulent representations in
connection with the delivery of healthcare services is subject to a fine and/or
imprisonment. In addition, HIPAA authorizes the imposition of civil money
penalties against entities that employ or enter into contracts with excluded
Medicare or Medicaid program participants if such entities provide services to
federal health program beneficiaries. A finding of liability under HIPAA could
have a material adverse effect on our business, financial condition and results
of operations.

12

Further, the Administrative Simplification provisions of HIPAA required the
promulgation of regulations establishing national standards for, among other
things, certain electronic healthcare transactions, the use and disclosure of
certain individually-identifiable patient health information, and the security
of the electronic systems maintaining this information. These are commonly known
as the HIPAA transaction and code set standards, privacy standards, and security
standards, respectively.

Insurance payors, healthcare providers, and their business associates must
directly or indirectly comply with these new standards. The requirements for the
privacy standards and the transaction and code set standards have been
finalized. The compliance date for the privacy standards is April 14, 2003, and
compliance with the transaction and code set standards is required by October
16, 2003. The final security regulations were issued in February 2003 with a
compliance date of April 2005.

We may encounter certain costs associated with complying with the
HIPAA-mandated provisions. The failure of payors to update systems appropriately
may result in reimbursement delays to us and the contracted radiology practices.
This could materially affect our short-term revenues, or our business, financial
condition and results of operations.

We cannot guarantee that enforcement agencies or courts will not make
interpretations of the HIPAA standards that are inconsistent with ours, or the
interpretations of the contracted radiology practices or their affiliated
physicians. A finding of liability under the HIPAA standards may result in
criminal and civil penalties. Noncompliance also may result in exclusion from
participation in government programs, including Medicare and Medicaid. These
actions could have a material adverse effect on our business, financial
condition, and results of operations.

Many states recently have adopted statutes and regulations that are similar
to the HIPAA privacy standards. In some cases these restrictions are difficult
to harmonize with the federal regulations.

Compliance Program. With the assistance of our healthcare regulatory
counsel, we implemented a program to monitor compliance with federal and state
laws and regulations applicable to healthcare entities. We have appointed a
compliance officer who is charged with implementing and supervising our
compliance program, which includes the adoption of (i) "Standards of Conduct"
for our employees and affiliates and (ii) an "Ethics Process" that specifies how
employees, affiliates and others may report regulatory or ethical concerns to
our compliance officer. We believe that our compliance program meets the
relevant standards provided by the Office of Inspector General of the Department
of Health and Human Services. An important part of our compliance program
consists of conducting periodic audits of various aspects of our operations and
that of the contracted radiology practices. We also conduct mandatory
educational programs designed to familiarize our employees with the regulatory
requirements and specific elements of our compliance program.

Insurance Laws and Regulation. Certain states have enacted statutes or
adopted regulations affecting risk assumption in the healthcare industry,
including statutes and regulations that subject any physician or physician
network engaged in risk-based managed care contracting to applicable insurance
laws and regulations. These laws and regulations may require physicians and
physician networks to meet minimum capital requirements and other safety and
soundness requirements. Implementing additional regulations or compliance
requirements could result in substantial costs to us and the contracted
radiology practices and limit our ability to enter into capitated or other
risk-sharing managed care arrangements.

COMPETITION

The market for diagnostic imaging services is competitive. We compete
principally on the basis of our reputation, our ability to offer multiple
modalities, our conveniently located centers and our cost-effective,
high-quality diagnostic imaging services. We compete locally with groups of
radiologists, established hospitals, clinics and certain other independent
organizations that own and operate imaging equipment. Our major national
competitors include Alliance Imaging, Inc., HEALTHSOUTH Corporation, InSight
Health Services Corp., Medical Resources, Inc., Syncor International Corporation
and U.S. Diagnostic, Inc. Some of our local or national competitors that provide
diagnostic imaging services may now or in the

13

future have access to greater financial resources than we do and may have access
to newer, more advanced equipment.

In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging centers because of the
federal physician self-referral legislation. Regulations issued in January 2001
clarify certain of the exceptions to the physician self-referral legislation,
which may create opportunities for and encourage some physician practices to
establish their own diagnostic imaging centers within their group practices,
which may compete with us.

Each of the contracted radiology practices under our comprehensive services
model has entered into agreements with its physician shareholders and full-time
employed radiologists that generally prohibit those shareholders and
radiologists from competing for a period of two years within defined geographic
regions after they cease to be owners or employees, as applicable. In most
states, a covenant not to compete will be enforced only:

- to the extent it is necessary to protect a legitimate business interest
of the party seeking enforcement;

- if it does not unreasonably restrain the party against whom enforcement
is sought; and

- if it is not contrary to public interest.

Enforceability of a non-compete covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible to predict whether, or to what
extent, a court will enforce the contracted radiology practices' covenants. The
inability of the contracted radiology practices or us to enforce radiologists'
non-compete covenants could result in increased competition from individuals who
are knowledgeable about our business strategies and operations.

We may not be able to compete effectively for the acquisition of diagnostic
imaging centers, joint venture opportunities or other outsourcing relationships.
Our competitors may have better established operating histories and greater
resources than we do. Competitors may make it more difficult to complete
acquisitions or joint ventures on terms beneficial to us.

CORPORATE LIABILITY AND INSURANCE

We may be subject to professional liability claims including, without
limitation, for improper use or malfunction of our diagnostic imaging equipment.
We maintain insurance policies with coverages that we believe are appropriate in
light of the risks attendant to our business and consistent with industry
practice. We also require the contracted radiology practices to maintain
sufficient professional liability insurance consistent with industry practice.
However, adequate liability insurance may not be available to us and the
contracted radiology practices in the future at acceptable costs or at all.

Providing medical services entails the risk of professional malpractice and
other similar claims. The physicians employed by the contracted radiology
practices are from time to time subject to malpractice claims. We structure our
relationships with the practices under our agreements with them in a manner that
we believe does not constitute the practice of medicine by us or subject us to
professional malpractice claims for acts or omissions of physicians in the
contracted radiology practices. Nevertheless, claims, suits or complaints
relating to services provided by the contracted radiology practices may be
asserted against us in the future, including malpractice.

Any claim made against us not fully covered by insurance could be costly to
defend against, result in a substantial damage award against us and divert the
attention of our management from our operations, which could have an adverse
effect on our financial performance. In addition, claims might adversely affect
our business or reputation.

The contracted radiology practices maintain professional liability
insurance coverage primarily on a claims made basis. This insurance provides
coverage for claims asserted when the policy is in effect,

14

regardless of when the events that caused the claim occurred. The contracted
radiology practices are required by the terms of the service agreements to
maintain medical malpractice liability insurance consistent with minimum limits
mandated in their hospital contracts or by applicable state law.

We maintain general liability and umbrella coverage in commercially
reasonable amounts. Additionally, we maintain workers' compensation insurance on
all employees. Coverage is placed on a statutory basis and responds to each
state's specific requirements.

In 1997, a law became effective in the State of Texas that permits injured
patients to sue health insurance carriers, HMOs and other managed care entities
for medical malpractice. This law could increase the cost of liability insurance
to us for services provided in Texas or any other states in which we do business
if similar legislation is adopted in those states.

We have assumed and succeeded to substantially all of the obligations of
some of the operations that we have acquired. Therefore, claims may be asserted
against us for events that occurred prior to our acquiring these acquisitions.
The sellers of the operations that we have acquired have agreed to indemnify us
for certain claims. However, we may not be able to collect payment under these
indemnity agreements which could affect us adversely.

EMPLOYEES

As of December 31, 2002, we had approximately 2,500 employees,
approximately 80 of whom were employed at our headquarters and regional offices
and the remainder of whom are employed at our diagnostic imaging centers and
regional administrative operations. We believe that our relationship with our
employees is good.

ITEM 2. PROPERTIES

Radiologix's corporate headquarters are located at 3600 JP Morgan Chase
Tower, 2200 Ross Avenue, Dallas, Texas 75201-2776, in approximately 26,000
square feet occupied under a lease, which expires on September 30, 2011.

ITEM 3. LEGAL PROCEEDINGS

We are not currently subject to any material litigation nor, to our
knowledge, is any material litigation threatened against us. All of our current
litigation is (i) expected to be covered by liability insurance or (ii) not
expected to adversely affect our business. Some risk exists, however, that we
could subsequently be named as a defendant in additional lawsuits or that
pending litigation could adversely affect us.

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

Radiologix did not submit any matters to a vote of security holders during
the fourth quarter of 2002.

15

PART II

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

Radiologix's common stock is listed and has traded on the American Stock
Exchange since May 10, 2000 under the symbol "RGX." Prior to May 10, 2000,
Radiologix's common stock was traded on the NASDAQ National Market System under
the symbol "RDLX." The following table sets forth the high and low bid prices
per share of the common stock for the years ended December 31, 2001 and 2002 as
reported by the American Stock Exchange.

As of the close of business on March 24, 2003, the last reported sales
price per share of Radiologix's common stock was $1.95 and approximately 86
shareholders owned Radiologix common stock of record. This number does not
include persons whose shares are held by a bank, brokerage house or clearing
company, but does include the banks, brokerage houses and clearing companies.

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

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%. At August 1, 2001, the
convertible junior subordinated note was convertible into Radiologix's common
stock at the price of $7.52 per share. 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%.

ITEM 6. SELECTED FINANCIAL DATA

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

16

Operations" and with Radiologix's consolidated financial statements and their
notes included elsewhere in this report.

SELECTED CONSOLIDATED FINANCIAL DATA

17

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

(a) Other field expenses for the year ended December 31, 2000 includes a $3.7
million charge for the write-off in the fourth quarter of 2000 of a note
receivable. See Note 2 to consolidated financial statements.

(b) Bad debt expense for the year ended December 31, 2000 includes a $13.3
million charge recorded in the fourth quarter of 2000. See Note 2 to
consolidated financial statements.

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

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 (MRI),
computed tomography (CT), positron emission tomography (PET), nuclear medicine,
ultrasound, mammography, bone densitometry (DEXA), general radiography (X-ray)
and fluoroscopy. For the year ended December 31, 2002, we derived 81% of our
service fee revenue from the ownership, management and operation of our
radiology and imaging center network and 19% of our service fee revenue from the
administrative, management and information services provided to contracted
radiology practices. As of December 31, 2002, we owned, operated or maintained
an ownership interest in imaging equipment at 117 locations and provided
management services to ten radiology practices. As of December 31, 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 year ended December 31, 2002, payment for diagnostic imaging
services came primarily from commercial third-party payors (64%), governmental
payors (27%, including Medicare and Medicaid) and private and other payors (9%).
In August 2000, Medicare made significant changes in the payment methodology for
hospital outpatient services. In January 2002, Medicare decreased the payment
rates for physician and outpatient services, including diagnostic imaging
services, by approximately 5.4%. This payment rate schedule is effective through
February 2003. In February 2003 and to be effective March 1, through December
31, 2003, Congress legislated an increase of approximately 1.6% in the overall
reimbursement rates for physician and outpatient services, including diagnostic
imaging services. Our diagnostic imaging 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
year ended December 31,

18

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 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. Adjusted professional
revenues and adjusted technical revenues are determined by deducting
contractually agreed-upon expenses (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 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.

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. Operating income as discussed below is defined as service
fee revenue less operating expenses. Operating income is commonly

19

used as an analytical indicator within the healthcare industry, and also serves
as a measure of leverage capacity and debt service ability. Operating income
should not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from operating income
should not be considered in isolation or as an alternative to net income, cash
flows generated by operating, investing or financing activities or other
financial statement data presented in the consolidated financial statements as
an indicator of financial performance or liquidity. Because operating income is
not a measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, operating income as
presented may not be comparable to other similarity titled measures of other
companies.

During 2002, our operating results were affected by such factors as
increased competition, increased payor pre-authorization activity, the social
and economic environment, changing physician schedules, a shortage of
technologists, and seasonality. During the latter half of 2002, increased
competition resulted in lower volume than management had expected. In addition
to lower volumes, during the latter half of 2002 operating margins were impacted
by the implementation of pre-authorization programs by many of our larger
payors, and the recruitment and retention of technologists. Recently, an
increasing number of payors with which we do business have instituted more
comprehensive pre-authorization programs on certain procedures. Under
pre-authorization programs, the referring physician must justify medical
necessity based on the payor's specific guidelines prior to the services being
rendered. Also, in early fiscal 2002 the shortage of qualified technologists
resulted in scheduling backlogs and lost procedure volumes. As many of the open
technologist positions were filled by mid-2002, salaries and benefits increased.
These costs continued to increase or remain stable, while volume began to
decline resulting in lower revenues from contracted radiology practices and
diagnostic imaging centers. The combined effect of increased salaries and
benefits and lower revenues decreased our operating margins. We cannot give any
assurance that any of the factors discussed above will not continue to have an
adverse effect on our business, results of operations or financial condition.

The operating margin for each of the regions and Questar, decreased from
the year ended December 31, 2001 to the year ended December 31, 2002. For the
year ended December 31, 2001 and 2002, the Mid Atlantic region decreased from
31% to 30%, the Northeastern region decreased from 26% to 25%, the Central
region decreased from 34% to 33%, the Western region decreased from 26% to 23%
and Questar decreased from 17% to 11%. The decline in the operating margin for
each of the four regions and Questar was primarily affected by each of the
factors discussed above. Additional factors in specific regions also contributed
to the decreased operating margins. In the Central region, the decrease in the
operating margins was partially offset by decreased purchased billing services
and by increased technical revenues. The operating margin in the Western region
was also impacted by a decrease in the number of hospitals in which we provide
management services. 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 decreased from 17%
for the year ended December 31, 2001 to 11% for the year ended December 31,
2002, due primarily to an impairment charge on long-lived assets of $2.7
million. This was partially offset by improved collections compared to 2001,
which decreased estimated contractual allowances and, therefore, increased
service fee revenue.

In March 2000, Radiologix acquired an imaging center in Osceola, Florida
for total consideration of approximately $2.7 million. During 2000, we continued
to complete the development of imaging centers of Questar for total
consideration of approximately $5.9 million. Total consideration paid for all
other acquisitions and affiliations in 2000 was approximately $1.5 million.

In November 2001, Radiologix acquired an imaging center in Laurel, Maryland
for total consideration of $906,000.

We completed no acquisitions in 2002. During 2002, Questar disposed of two
imaging centers. Questar received consideration for the dispositions of
approximately $150,000 in cash and the buyers assumed $1.1 million of capital
leases. No material gain was recognized in 2002 as a result of the dispositions.

20

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Service Fee Revenue

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

Revenue from contracted radiology practices and diagnostic imaging centers,
net of contractual allowances, increased $8.0 million, from $383.5 million in
2001 to $391.5 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
$106.9 million in 2001 and 27.9% of revenue to $107.7 million in 2002 and 27.5%
of revenue. The increase in revenue from contracted radiology practices and
diagnostic imaging centers, net of contractual allowances, offset by the
increase in amounts retained by contracted radiology practices, resulted in an
increase in service fee revenue of $7.2 million, from $276.7 million in 2001 to
$283.9 million in 2002.

Salaries and Benefits

Salaries and benefits increased $8.3 million, from $75.7 million in 2001 to
$84.0 million in 2002. Salaries and benefits increased as volume and revenues
increased and as the cost of salaries and benefits for technologists increased.
As a percentage of service fee revenue, these costs were 27.4% and 29.6% in 2001
and 2002, respectively. Recently, some of our markets have experienced a
shortage of qualified radiology technologists, the personnel who operate our
equipment. If we are unable to continue to recruit and retain a sufficient
number of qualified technologists, we will be unable to operate our centers at
maximum capacity.

Field Supplies

Field supplies increased $1.0 million, from $16.5 million in 2001 to $17.5
million in 2002. As a percentage of service fee revenue, these costs were 6.0%
and 6.2% in 2001 and 2002, respectively. The increase in field supplies is
primarily attributable to an increase in the volume of speciality procedures.
These procedures require supplies with a higher unit cost than typically
required for other types of procedures.

Field Rent and Lease Expense

Field rent and lease expense decreased $1.5 million, from $34.4 million in
2001 to $32.9 million in 2002. As a percentage of service fee revenue, these
costs were 12.4% and 11.6% in 2001 and 2002, respectively. The decrease in field
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 $47.3 million in 2001 to
$46.9 million in 2002. As a percentage of service fee revenue, these costs
decreased from 17.1% in 2001 to 16.5% in 2002. Purchased billing services
decreased approximately $2.0 million 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. This was partially

21

offset by an increase of $1.0 million in service agreements on radiology
equipment, and an increase in other costs of $600,000.

Bad Debt Expense

Bad debt expense decreased $1.3 million, from $25.7 million in 2001 to
$24.4 million in 2002. As a percentage of service fee revenue, these costs were
9.3% and 8.6% 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 are inherently at a higher stated value. 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, net of contractual allowances, bad debt expense was 6.7% and
6.2% in 2001 and 2002, respectively. The decrease in bad debt expense is
primarily the result of terminating services performed at certain hospitals.
Generally, bad debt experience with reimbursement for hospital services is at a
higher percentage of revenues than the experience with reimbursement for imaging
center services.

Merger Related Costs

During the third quarter of 2001, we recorded $1.0 million in merger
related costs. The charge was our share of transaction costs incurred by
Saunders Karp & Megrue, L.P. and its affiliates in connection with the proposed
merger between Radiologix and SKM-RD Acquisition Corp. The proposed merger was
terminated in April 2001.

Supplemental Incentive Compensation

In the fourth quarter of 2001, upon the successful completion of a $160
million senior notes offering, we incurred $615,000 in supplemental incentive
compensation.

Severance and Other Related Costs

In the fourth quarter of 2002, we recorded $978,000 in severance and other
related costs. These costs include severance payments to our former chairman and
chief executive officer and recruiting costs related to the search for a new
chief executive officer. A current independent member of the board of directors
was named chairman of the board. In February 2003, a new president and chief
executive officer was named. In addition, in February 2003 the former president
and chief operating officer resigned from his positions. Severance and other
related costs will be incurred in fiscal 2003.

Corporate, General and Administrative

Corporate, general and administrative expenses increased $800,000, from
$13.9 million in 2001 to $14.7 million in 2002. As a percentage of service fee
revenue, these costs were 5.0% and 5.2% in 2001 and 2002, respectively. The
increase in these costs is primarily due to the further development of our
infrastructure at the corporate office, including additional employees and
associated employee benefits and incentive compensation.

Impairment Charge on Long-Lived Assets

In the fourth quarter of 2002, we recorded a $2.7 million impairment charge
on long-lived assets related to radiology equipment for 15 of our centers in our
Questar operations in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets".

22

Loss on Early Extinguishment of Debt

In the fourth quarter of 2001, we incurred a charge of $4.7 million for the
loss incurred on the early extinguishment of debt in relation to terminating our
senior credit facility with the proceeds from our senior notes issuance in
December 2001.

Depreciation and Amortization

Depreciation and amortization expense increased $3.0 million, from $23.5
million in 2001 to $26.5 million in 2002. As a percentage of service fee
revenue, these costs were 8.5% and 9.3% in 2001 and 2002, respectively. The
increase in depreciation expense is primarily attributable to the purchase of
$26.8 million of property and equipment for replacement, maintenance, and
expansion in 2002. In addition, the increase in depreciation and amortization
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 No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142") effective January 1,
2002. As a result, $28.5 million of intangible assets, primarily related to
acquired intangible assets with an indefinite lived 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 $3.3 million, from $15.5 million in 2001
to $18.8 million in 2002. The increase is due to higher interest costs
associated with our senior notes issued in December 2001.

Non-operating Income

Non-operating income of $1.3 million was recognized in the fourth quarter
of 2001 as partial consideration for early termination of management services
provided at certain imaging sites not owned or operated by Radiologix.

Income Tax Expense

Income tax expense of $9.2 million in 2001 and $7.2 million in 2002
remained comparable based on a 40% effective tax rate.

Net Income

Net income decreased from $13.8 million in 2001 to $10.8 million in 2002.
Net income as a percentage of service fee revenue was 3.8% in 2002, which
decreased from 5.0% in 2001. Included in net income for 2002 are $587,000 net of
tax benefit as an expense related to severance and other related costs and $1.6
million net of tax benefit for an impairment charge for long-lived assets.
Included in net income for 2001 are $780,000 net of tax of non-operating income
offset by $600,000 net of tax benefit as an expense related to merger costs and
$369,000 net of tax benefit as an expense for supplemental incentive
compensation related to our senior notes offering. In addition, net income for
2001 included a loss on the early extinguishment of debt of $2.8 million net of
tax benefit.

23

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 2001

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 $38.6 million, from $344.9 million in
2000 to $383.5 million in 2001. This increase was primarily due to increased
procedure volume, a shift in the mix to "high-end" procedures and the addition
of new reading contracts and agreements with managed care organizations. The
increase in volume growth was primarily attributable to a 14.8% increase in MRI
procedures and a 13.6% increase in CT procedures provided in imaging centers.
Revenue from contracted radiology practices and diagnostic imaging centers, net
of contractual allowances in 2001, was impacted by a change in the estimation of
contractual allowances of the billed charges. Generally, the change in the
estimation of contractual allowances increased the contractual allowance, which
decreased the revenue of the contracted radiology practices and diagnostic
imaging centers and therefore the service fee recognized. Amounts retained by
contracted radiology practices increased from $98.2 million in 2000 to $106.9
million in 2001. This increase is directly attributable to the growth in revenue
from contracted radiology practices and diagnostic imaging centers and the
higher profitability of the contracted radiology practices and diagnostic
imaging centers. The increase in revenue from contracted radiology practices and
diagnostic imaging centers, net of contractual allowances offset by the increase
in amounts retained by contracted radiology practices, resulted in service fee
revenue increasing $30 million, from $246.7 million in 2000 to $276.7 million,
in 2001.

Costs and Expenses

The comparison between periods for costs and expenses discussed below as a
percentage of service fee revenue is impacted by the change in the estimation of
contractual allowances of the billed charges in 2001. The change in the
estimation of contractual allowances increased the contractual allowance, which
decreased the revenue of the contracted radiology practices and diagnostic
imaging centers and service fee recognized. As a result of this change, costs
and expenses as a percentage of service fee revenue will be at a higher stated
value in 2001 when compared to 2000.

Salaries and Benefits

Salaries and benefits increased $9.1 million, from $66.6 million in 2000 to
$75.7 million in 2001. As a percentage of service fee revenue, these costs were
27.0% and 27.4% in 2000 and 2001, respectively.

Field Supplies

Field supplies increased $3.2 million, from $13.3 million in 2000 to $16.5
million in 2001. As a percentage of service fee revenue, these costs were 5.4%
and 6.0% in 2000 and 2001, respectively. The increase in field supplies is
primarily attributable to an increase in volume of speciality procedures. These
procedures require supplies with a higher unit cost than typically required for
other types of procedures.

24

Field Rent and Lease Expense

Field rent and lease expense increased $4.2 million, from $30.2 million in
2000 to $34.4 million in 2001. As a percentage of service fee revenue, these
costs were 12.2% and 12.4% in 2000 and 2001, respectively. The increase in these
costs is primarily attributable to additional equipment operating leases entered
into subsequent to fiscal 2000.

Other Field Expenses

Other field expenses increased $1.5 million, from $45.9 million in 2000 to
$47.4 million in 2001. As a percentage of service fee revenue, these costs were
18.6% and 17.1% in 2000 and 2001, respectively. During the fourth quarter of
2000, $3.7 million was recognized for the write-off of a note receivable. The
note receivable was due from one of the contracted radiology practices and was
determined in the fourth quarter to no longer be collectible. As a result of the
write-off, we have adjusted this contracted radiology group's incentive
technical bonus potential.

Bad Debt Expense

Bad debt expense decreased $8.7 million, from $34.4 million in 2000 to
$25.7 million in 2001. As a percentage of service fee revenue, these costs were
13.9% and 9.3% in 2000 and 2001, respectively. Since service fee revenue
represents contracted radiology practices' and diagnostic imaging centers'
revenue less amounts retained by contracted radiology practices, these
percentages are inherently at a higher stated value. Therefore, bad debt expense
should be compared for 2000 and 2001 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 10.0% and 6.7% in 2000 and 2001,
respectively. This decrease was primarily due to a $13.3 million charge recorded
in the fourth quarter of 2000 for the provision of uncollectible accounts.
During the fourth quarter of 2000, we performed an extensive review of our
accounts receivable and collection experience utilizing reports and analyses not
previously available. Based on this review, we believed that the estimation
process of determining contractual allowances for billed charges needed to be
revised and that a portion of our accounts receivable was no longer collectible.
This review allowed us to better analyze old accounts receivable, however it did
not indicate what our historical collection rates would have been if the newly
implemented collection policies and procedures had been in place. Accordingly,
the adjustment for an increase in the provision for uncollectible accounts was
recognized as a bad debt expense as opposed to an increase in contractual
allowances. We recognized the $13.3 million charge in the 2000 fourth quarter as
a change in accounting estimate when the information became known.

Merger Related Costs

During the third quarter of 2001, we recorded $1.0 million in merger
related costs. The charge was our share of transaction costs incurred by
Saunders Karp & Megrue, L.P. and its affiliates in connection with the proposed
merger between Radiologix and SKM-RD Acquisition Corp. The proposed merger was
terminated in April 2001. In the fourth quarter of 2000, we also incurred a $1.8
million charge for the write-off of transaction costs incurred in connection
with the proposed merger with SKM.

Supplemental Incentive Compensation

In the fourth quarter of 2001, upon the successful completion of a $160
million senior notes offering, we incurred $615,000 in supplemental incentive
compensation.

Corporate General and Administrative

Corporate general and administrative expenses increased $3.3 million, from
$10.6 million in 2000 to $13.9 million in 2001. As a percentage of service fee
revenue, these costs were 4.3% and 5.0% in 2000 and 2001, respectively. The
increase in these costs is primarily due to the further development of our

25

infrastructure at the corporate office, including additional employees and
associated employee benefits and incentive compensation.

Loss on Early Extinguishment of Debt

In the fourth quarter of 2001, we incurred a charge of $4.7 million expense
for the loss incurred on the early extinguishment of debt in relation to
terminating our senior credit facility with the proceeds from our senior notes
issuance in December 2001.

Depreciation and Amortization

Depreciation and amortization expense increased $1.4 million, from $22.1
million in 2000 to $23.5 million in 2001. We have continued to buy new equipment
to replace older equipment resulting in increased depreciation and amortization
expense. As a percentage of service fee revenue, these costs were 9.0% and 8.5%
in 2000 and 2001, respectively.

Interest Expense, net

Interest expense, net, decreased $2.5 million, from $18 million in 2000 to
$15.5 million in 2001. The decrease in interest expense in 2001 from 2000 was
due to lower interest rates during 2001 and the pay-down of outstanding debt
during 2001.

Non-operating Income

Non-operating income of $1.3 million was recognized in the fourth quarter
of 2001 as partial consideration for early termination of management services
provided at certain imaging sites not owned or operated by the Company.

Income Tax Expense

Income tax expense of $2.9 million in 2000 and $9.2 million in 2001
remained comparable based on a 40% effective tax rate.

Net Income

Net income increased from $4.3 million in 2000 to $13.8 million in 2001.
Net income as a percentage of service fee revenue was 5% in 2001, which
increased from 1.8% in 2000. Included in net income for 2001 are $780,000 net of
tax non-operating income offset by $600,000 net of tax benefit expense related
to merger costs and $369,000 net of tax benefit expense for supplemental
incentive compensation related to our senior notes offering. In addition, net
income for 2001 included an expense of $2.8 million net of tax benefit for the
loss incurred on the early extinguishment of debt. Included in net income for
2000 is an $8.3 million net of tax benefit charge for the provision of
uncollectible accounts, $2.2 million net of tax benefit write-off of a note
receivable and $1.1 million net of tax benefit expense related to merger costs.

SUMMARY OF OPERATIONS BY QUARTER

The following table presents unaudited quarterly operating results for each
of Radiologix's last eight fiscal quarters. Radiologix believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the consolidated
financial

26

statements. Results of operations for any particular quarter are not necessarily
indicative of results of operations for a full year or predictive of future
periods.

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

(a) Net income for the quarter ended September 30, 2001 includes $600,000 net
of tax benefit in merger related costs. See Note 12 to consolidated
financial statements.

(b) Net income for the quarter ended December 31, 2001 includes $369,000 net of
tax benefit in supplemental incentive compensation in connection with our
senior notes offering and $780,000 net of tax of non-operating income as
partial consideration for early termination of management services provided
at certain imaging sites not owned or operated by Radiologix. In addition,
net income for the quarter ended December 31, 2001 includes a $2.8 million
net of tax benefit loss on early extinguishment of debt. See Notes 5 and 12
to consolidated financial statements.

(c) Net income for the quarter ended December 31, 2002 includes $587,000, net
of tax benefit in severance and other related costs and a $1.6 million net
of tax benefit impairment charge on long-lived assets. See Notes 2 and 12
to consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity for the year ended December 31, 2002, was derived principally
from net cash proceeds from operating activities. As of December 31, 2002, we
had net working capital of $60.5 million, including cash and cash equivalents of
$19.2 million. We had current assets of $100.9 million and current liabilities
of $40.4 million, including current maturities of long-term debt and capital
lease obligations of $4.3 million. For the year ended December 31, 2002, we
generated $45.5 million in net operating cash flow, invested $31.2 million and
used cash of $5.9 million in financing activities.

Net cash from operating activities for the year ended December 31, 2002 of
$45.5 million increased from $41.0 million for the same period in 2001 primarily
due to the receipt of $8.1 million in consideration of the renegotiations of
service agreements with two contracted radiology practices. This is accounted
for as deferred revenue, which will be recognized in operations over
approximately 20 years. This was partially offset by the effect of higher
interest costs paid in 2002 versus 2001. Accounts receivable days outstanding
increased from 69 days at December 31, 2001 to 73 days at December 31, 2002.

Net cash from operating activities for the year ended December 31, 2001
increased $27.7 million, from $13.3 million in 2000 to $41.0 million in 2001.
The increase in cash from operating activities is primarily due to improved
collections of accounts receivable which resulted in a decrease in accounts
receivable days outstanding from 76 days at December 31, 2000 to 69 days at
December 31, 2001, as well as the implementation of certain cash management
strategies. In addition, cash paid for income taxes was only $7.5 million in
2001 compared to $11.5 million in 2000.

27

Net cash used in investing activities for the years ended December 31,
2000, 2001 and 2002 was $23.1 million, $19.1 million and $31.2 million,
respectively. Purchases of property and equipment during the years ended
December 31, 2000, 2001 and 2002 were $14.0 million, $7.2 million and $26.8
million, respectively. For the year ended December 31, 2002, we invested $12.8
million to replace and maintain property and equipment and $14.0 million in the
expansion of property and equipment.

Net cash flows used in financing activities for the years ended December
31, 2001 and 2002 were $14.8 million and $5.9 million, respectively. Net cash
flows from financing activities for the year ended December 31, 2000 were $9.1
million. Borrowings of long-term debt for the years ended December 31, 2000,
2001 and 2002 were used to purchase equipment and capital improvements, as well
as for working capital needs.

At December 31, 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 $6.2 million in other debt obligations. In
December 2001, we terminated our senior credit facility with proceeds from a
$160 million 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
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 December 31, 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 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
Radiologix's and its wholly owned subsidiaries' assets.

As of December 31, 2002, the contractual obligations of long-term debt,
including capital lease obligations and non-cancelable operating leases are as
follows (in millions):

In December 2001, Radiologix repurchased equipment previously held under
operating leases for approximately $13.9 million.

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.

28

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements requires the use
of judgments and estimates. Our critical accounting policies are described below
to provide a better understanding of how we develop our judgments about future
events and related estimations and how they can impact our financial statements.
A critical accounting policy is one that requires our most difficult, subjective
or complex estimates and assessments and is fundamental to our results of
operations. We identified our most critical accounting policies to be:

- revenue recognition and estimation of contractual allowances and bad
debts of accounts receivable; and

- evaluation of intangible and long-lived asset for impairment.

REVENUE RECOGNITION, CONTRACTUAL ALLOWANCES AND ALLOWANCES FOR DOUBTFUL
ACCOUNTS

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 estimated contractual allowances. Service fee revenue is recorded net of
estimated contractual allowances and amounts retained by the contracted
radiology practices under the terms of the service agreements. We estimate
contractual allowances based on the patient mix at each contracted radiology
practice and diagnostic imaging center, impact of managed care contract pricing,
and historical collection information. We operate 117 diagnostic imaging centers
in 17 different states, each of which has multiple managed care contracts and a
differing patient mix. We review monthly the estimated contractual allowance
rates for each contracted radiology practice and diagnostic imaging center. The
contractual allowance rate is adjusted as changes to the factors discussed above
become known. We record bad debt expense monthly based on historical collection
rates of each contracted radiology practice and diagnostic imaging center.
Should circumstances change (shift in payor mix, decline in economic conditions
or deterioration in aging of patient receivables) our estimates of the net
realizable value of patient receivables could be reduced by a material amount.
Bad debt expense as a percentage of the revenue from contracted radiology
practices and diagnostic imaging centers, net of contractual allowances was 6.7%
in 2001 and 6.2% in 2002.

IMPAIRMENT OF INTANGIBLE AND LONG-LIVED ASSETS

Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), became effective for us on January 1, 2002.
SFAS No. 142 requires that goodwill and other intangible assets with an
indefinite lived useful life no longer be 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. Amortization of goodwill and other indefinite
lived intangible assets amounted to $1.2 million ($749,900 net of tax benefit)
for the year ended December 31, 2001. These expense amounts, under SFAS 142, are
recorded on a ratable basis in years after fiscal 2001. During the first quarter
2002 we performed the initial impairment test of our Questar operations in
accordance with the provisions of SFAS No. 142. We engaged an independent third-
party valuation specialist to determine the fair value of these operations.
Their valuation was completed in the first quarter of 2002 and indicated that
the fair value of the Questar operations exceeded the carrying value and
consequently no impairment was recorded. We plan to conduct our annual
impairment test of goodwill and other indefinite lived intangible assets during
our first quarter of each subsequent year. Our service agreements, included in
the consolidated balance sheets as intangible assets, net, are not considered to
have an indefinite lived useful life and will continue to be amortized over a
useful life of 25 years. We regularly evaluate the carrying value and lives of
the finite lived intangible assets in light of any events or circumstances that
we believe may indicate that the carrying amount or amortization period should
be adjusted. As of December 31, 2002, we do not believe there are any indicators
that the carrying values or the useful lives of these assets need to be
adjusted.

29

We adopted Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") effective
January 1, 2002. SFAS No. 144 supersedes Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"); however, SFAS No. 144
retains the fundamental provisions of SFAS No. 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 No. 144 also
supersedes the accounting and reporting provisions of Accounting Principles
Board 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" ("APB 30") for segments of a
business to be disposed of.

SFAS No. 144 requires impairment losses to be recognized for long-lived
assets through operations when indicators of impairment exist and the underlying
cash flows are not sufficient to support the assets' carrying value. Potential
indicators of impairment can include, but are not limited to the following:

a. History of operating losses or expected future losses

b. Significant adverse change in legal factors

c. Changes in the extent or manner in which the assets are used

d. Current expectations to dispose of the assets by sale or other
means

e. Reductions or expected reductions of cash flow

We primarily used an expected sales value to estimate the fair values of
our long-lived assets. Sales values were based in part on recent acquisitions we
made and our knowledge of the radiology and imaging business environment. Based
on a comparison of our estimated fair value to the carrying values of the
long-lived assets, a $2.7 million impairment charge was recorded in December
2002.

This discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
report.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145 "Rescission of FASB
Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), which is required to be applied in fiscal years
beginning after May 15, 2002, with early application encouraged. SFAS No. 145
rescinds Statement of Financial Accounting Standards No. 4 "Reporting Gains and
Losses From Extinguishment of Debt". SFAS No. 145 requires any gains or losses
on extinguishment of debt that were classified as an extraordinary item in prior
periods that do not meet the criteria in APB 30 for classification as an
extraordinary item shall be reclassified into income from operations. The
Company has adopted the provisions of SFAS No. 145. The impact of adoption of
SFAS No. 145 reduced income from operations by $4.7 million for the year ended
December 31, 2001 from the reclassification of the extraordinary loss on
extinguishment of debt (see Note 5 to consolidated financial statements).

In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS No. 146"), which is effective for exit or disposal activities initiated
after December 31, 2002 with early application encouraged. SFAS No. 146
addresses the accounting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The Company does not
anticipate a material impact on the results of operations or financial position
from the adoption of SFAS No. 146.

The FASB in November 2002, Issued Financial Accounting Standards Board
Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirement for
Guarantees, Including Indirect Guarantees of

30

Indebtedness of Others" ("FIN No. 45"). FIN No. 45 states that the fair value of
certain guarantee obligations be recorded at the inception of the guarantee and
clarifies disclosures required for guarantee obligations. The initial
recognition provision of FIN No. 45 applies prospectively to guarantees issued
or modified after December 31, 2002.

On December 31, 2002, FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("SFAS No. 148"). SFAS No. 148 provides companies alternative
methods of transitioning to Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS No. 123") fair value of
accounting for stock-based employee compensation and amends certain disclosure
requirements. SFAS No. 148 does not mandate fair value accounting for
stock-based employee compensation, but does require all companies to meet the
disclosure requirements. We do not recognize compensation expense for our stock
option grants, which are issued at fair value at the date of grant. The
disclosure provisions are effective for financial statements of interim or
annual periods ending after December 31, 2002. At this time, the Company has not
determined whether it will adopt fair value accounting for its employee stock
options.

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 headings
"Our Company," "Risk Factors," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "The Diagnostic
Imaging Services Industry" and "Business," 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:

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

- a decline in patient referrals;

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

- the termination of our contracts with radiology practices;

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

- burdensome lawsuits against our contracted radiology practices and us;

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

- any failure on our part to comply with state and federal anti-kickback
and anti-self-referral laws or any other applicable healthcare
regulations;

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

31

- risks related to our senior notes and healthcare securities generally;
and

- other factors discussed in the "Risk Factors" section or elsewhere in
this report.

All future written and verbal forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this report might not occur.

RISK FACTORS

An investment in our common stock or notes involves a high degree of risk.
You should carefully consider the risk factors listed below, as well as the
other information included or incorporated in this report, before investing in
our common stock or notes.

RISKS RELATED TO OUR COMPANY AND OUR INDUSTRY

OUR REVENUE IS DEPENDENT ON REFERRALS.

We generate most of our revenue from fees charged for the use of our
diagnostic imaging equipment at our centers. This revenue depends on referrals
from third parties, many of which are made by physicians who have no contractual
relationship with us. We also generate revenue from service fees that we receive
from the contracted radiology practices. If a sufficiently large number of
physicians discontinues referring patients to us, our procedure volume could
decrease, which would reduce our revenue and operating margins.

Further, commercial third-party payors have implemented programs to control
costs that could limit the ability of physicians to refer patients to us. For
example, prepaid healthcare plans, such as health maintenance organizations, in
certain instances provide diagnostic imaging services directly and contract
directly with providers and require their enrollees to obtain these services
from only these providers. Some insurance companies and self-insured employers
also limit these services to contracted providers. These "closed panel" systems
are now common in the managed care environment. Other systems create an economic
disincentive for referrals to providers outside of the system's designated panel
of providers. We may not be able to compete successfully for managed care
contracts against entities with greater resources within a market area.

CHANGES IN THIRD-PARTY PAYMENT RATES OR METHODS FOR DIAGNOSTIC IMAGING
SERVICES COULD CREATE DOWNWARD PRICING PRESSURE, WHICH WOULD RESULT IN A
DECLINE IN OUR REVENUE AND HARM OUR FINANCIAL POSITION.

Our revenue is derived through our ownership, operation and management of
diagnostic imaging centers and from service fees paid to us by contracted
radiology practices. Substantially all of the revenue of our diagnostic imaging
centers and the contracted radiology practices is currently derived from
commercial third-party payors, government sponsored healthcare programs
(principally, Medicare and Medicaid) and private and other payors. For 2002,
revenue generated at our diagnostic imaging centers consisted of 64% from
commercial third-party payors, 27% from Medicare and Medicaid, and 9% from
private and other payors.

Rates paid by commercial third-party payors are based on established
physician and hospital charges and are generally higher than Medicare payment
rates. Any decrease in the relative number of patients covered by commercial
third-party payors could decrease our revenue.

Any change in the rates of or conditions for reimbursement from commercial
third-party payors, Medicare or Medicaid could substantially reduce the amounts
reimbursed to us or our contracted radiology practices for services provided.
These reductions could have a significant adverse effect on our revenue and
financial results by creating downward pricing pressure.

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WE COULD BE HARMED IF THE CONTRACTED RADIOLOGY PRACTICES TERMINATE THEIR
AGREEMENTS WITH US OR LOSE A SIGNIFICANT NUMBER OF RADIOLOGISTS.

Our diagnostic imaging services include a professional component that must
be provided by radiologists who are not directly employed by us. We do not
control the radiologists who perform professional services for us. Instead,
these radiologists are employed by the contracted radiology practices that
maintain agreements with us. These agreements typically have terms of between 10
and 40 years, but may be terminated by either party under certain limited
conditions. Depending on the termination event, the radiology practice may have
the right to require us to sell, assign and transfer to it, the assets and
related liabilities and obligations associated with the professional and
technical radiology services provided by the radiology practice immediately
prior to the termination. The termination or material modification of any of
them could reduce our revenue.

If a significant number of radiologists terminate their relationships with
the contracted radiology practices and the radiology practices cannot recruit
sufficient qualified radiologists to fulfill practice obligations under our
agreements with them, our ability to maximize the use of our diagnostic imaging
centers could be adversely affected. Competition in recruiting radiologists may
make it difficult for contracted radiology practices to maintain adequate levels
of radiologists. Neither we nor the contracted radiology practices maintain
insurance on the lives of any affiliated physicians.

WE COULD BE HARMED IF OUR TEXAS JOINT VENTURE IMAGING CENTER PARTNERSHIPS ARE
TERMINATED.

Five of our imaging centers in Texas conduct operations through our joint
ventures with a hospital company. The term of each joint venture expires on
December 31, 2003, with automatic one year extensions unless we or our joint
venture partner give a notice to terminate. If such a notice to terminate is
given by either us or our joint venture partner, then our joint venture partner
will have the option to buy our ownership interests in the joint ventures at
fair market value. Although we would be compensated in the event of a buyout,
our revenues and financial results could be negatively affected by a buy-out
unless we can deploy the capital advantageously.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE OUR MARKET DEVELOPMENT PLANS.

We intend to increase our presence in existing markets through acquisitions
of centers, developing de novo centers and adding additional equipment at
existing centers, establishing additional joint venture and outsourcing
relationships and selectively entering into contractual relationships with
high-quality, profitable radiology practices. We may not be able to expand
either within our existing markets or in new markets. In addition, any expansion
may not be beneficial to our overall strategy, and any such expansion may not
ultimately produce returns that justify our investment.

Our ability to expand is dependent upon many factors, including our ability
to:

- identify attractive and willing candidates for acquisitions, joint
ventures or outsourcing relationships;

- adapt our structure to comply with federal and state legal requirements
affecting our arrangements with contracted radiology practices, including
state prohibitions on fee-splitting, corporate practice of medicine and
self-referrals;

- obtain regulatory approvals and certificates of need, where necessary,
and comply with licensing and certification requirements applicable to
our diagnostic imaging centers, the contracted radiology practices and
the physicians associated with the contracted radiology practices;

- recruit a sufficient number of qualified radiology technologists;

- expand our infrastructure and management; and

- obtain adequate financing.

Our ability to expand is also dependent on our ability to compete for
opportunities. We may not be able to compete effectively for the acquisition of
diagnostic imaging centers, joint venture opportunities or

33

other outsourcing relationships. Our competitors may have better established
operating histories and greater resources than we do. Competitors may make it
more difficult to complete acquisitions or joint ventures on terms beneficial to
us.

Acquisitions involve a number of special risks, including the following:

- possible adverse effects on our operating results;

- diversion of management's attention and resources;

- failure to retain key personnel;

- difficulties in integrating new operations into our existing management
infrastructure;

- amortization or write-offs of acquired intangible assets; and

- risks associated with unanticipated events or liabilities.

Additionally, although we will continue to structure our operations in an
effort to comply with applicable antitrust laws, federal or state governmental
authorities may view us as being dominant in a particular market and, therefore,
cause us to divest ourselves of relationships or assets.

WE AND THE CONTRACTED RADIOLOGY PRACTICES MAY BECOME SUBJECT TO BURDENSOME
LAWSUITS.

We may be subject to professional liability claims, including, without
limitation, for improper use or malfunction of our diagnostic imaging equipment.
Our operations, as well as the services we provide on behalf of the contracted
radiology practices, also may be subject to lawsuits for inappropriate use or
disclosure of individually-identifiable patient health information. We maintain
insurance policies with coverages that we believe are appropriate in light of
the risks attendant to our business and consistent with industry practice. We
also require the contracted radiology practices to maintain professional
liability insurance consistent with industry practice. However, adequate
liability insurance may not be available to us and the contracted radiology
practices in the future at acceptable costs or at all.

Providing medical services entails the risk of professional malpractice and
other similar claims. The physicians employed by the contracted radiology
practices are from time to time subject to malpractice claims. We structure our
relationships with the practices under our agreements with them in a manner that
we believe does not constitute the practice of medicine by us or subject us to
professional malpractice claims for acts or omissions of physicians in the
contracted radiology practices. Nevertheless, claims, suits or complaints
relating to services provided by the contracted radiology practices may be
asserted against us in the future, including malpractice.

Any claim made against us not fully covered by insurance could be costly to
defend against, result in a substantial damage award against us and divert the
attention of our management from our operations, which could have an adverse
effect on our financial performance. In addition, claims might adversely affect
our business or reputation.

We have assumed and succeeded to substantially all of the obligations of
some of the operations that we have acquired. Therefore, claims may be asserted
against us for events that occurred prior to these acquisitions. In connection
with our acquisitions, the sellers of the operations that we have acquired have
agreed to indemnify us for certain claims. However, we may not be able to
collect payment under these indemnity agreements, which could affect us
adversely.

MOST OF OUR IMAGING MODALITIES REQUIRE THE UTILIZATION OF RADIATION, AND
CERTAIN IMAGING MODALITIES UTILIZE RADIOACTIVE MATERIALS. THESE OPERATIONS
GENERATE REGULATED WASTE AND COULD SUBJECT US TO REGULATION, RELATED COSTS AND
DELAYS AND POTENTIAL LIABILITIES FOR INJURIES OR VIOLATIONS OF ENVIRONMENTAL,
HEALTH AND SAFETY LAWS.

Most of our imaging modalities utilize radiation, and certain imaging
modalities utilize radioactive material. These operations generate medical and
other regulated wastes. Storage, use and disposal of these

34

materials and waste products present the risk of accidental environmental
contamination and physical injury. We are subject to federal, state and local
regulations governing storage, handling and disposal of these materials. We
cannot completely eliminate the risk of accidental contamination or injury from
these hazardous materials. In the event of an accident, we would be held liable
for any resulting damages, and any liability could exceed the limits of or fall
outside the coverage of our insurance. We may not be able to maintain insurance
on acceptable terms, or at all. We could incur significant costs and the
diversion of our management's attention to comply with current or future
environmental, health and safety laws and regulations.

WE MAY EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES. THIS
COMPETITION COULD ADVERSELY AFFECT OUR REVENUE AND OUR BUSINESS.

The market for diagnostic imaging services is competitive. We compete
principally on the basis of our reputation for providing multiple modalities,
our conveniently located centers and our cost-effective, high-quality diagnostic
imaging services. We compete locally with groups of radiologists, established
hospitals, clinics and certain other independent organizations that own and
operate imaging equipment. Our major national competitors include Alliance
Imaging, Inc., HEALTHSOUTH Corporation, InSight Health Services Corp., Medical
Resources, Inc., Syncor International Corporation and U.S. Diagnostic, Inc. Some
of our local or national competitors that provide diagnostic imaging services
may now or in the future have access to greater financial resources than we do
and may have access to newer, more advanced equipment.

In addition, in the past some non-radiologist physician practices have
refrained from establishing their own diagnostic imaging centers because of the
federal physician self-referral legislation. Final regulations issued in January
2001 clarify certain of the exceptions to the physician self-referral
legislation, which may create opportunities for and encourage some physician
practices to establish their own diagnostic imaging centers within their group
practices, which may compete with us.

TECHNOLOGICAL CHANGE IN OUR INDUSTRY COULD REDUCE THE DEMAND FOR OUR SERVICES
AND REQUIRE US TO INCUR SIGNIFICANT COSTS TO UPGRADE OUR EQUIPMENT.

Technological change in the diagnostic imaging industry has been gradual.
In the future, however, the development of new technologies or refinements of
existing modalities may make our existing equipment technologically or
economically obsolete, or cause a reduction in the value of, or reduce the need
for, our services. Diagnostic imaging equipment is currently manufactured by
numerous companies. Competition among manufacturers for a greater share of the
diagnostic imaging equipment market may result in technological advances in the
speed and imaging capacity of new equipment. Consequently, the obsolescence of
our equipment may be accelerated. We may not have the financial ability to
acquire the new or improved equipment.

A FAILURE TO MEET OUR CAPITAL EXPENDITURE REQUIREMENTS COULD ADVERSELY AFFECT
OUR BUSINESS.

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 expenses of new diagnostic imaging centers and the
acquisition of additional centers and new diagnostic imaging equipment. We incur
capital expenditures to, among other things:

- upgrade and replace existing equipment;

- purchase new diagnostic imaging equipment; and

- expand within our existing markets and enter new markets.

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.

35

OUR SUCCESS DEPENDS IN PART ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO
RETAIN SUFFICIENT QUALIFIED PERSONNEL.

Our success depends in part on our ability to attract and retain qualified
senior and executive management, managerial and technical personnel. Competition
in recruiting these personnel may make it difficult for us to continue our
growth and success. The loss of their services or our inability in the future to
attract and retain management and other key personnel could hinder the
implementation of our business strategy. We do not maintain key person insurance
for any of our executive officers. Recently, there has been a shortage in
certain of our markets of qualified radiology technologists, the personnel who
operate our equipment. If we are unable to recruit and retain a sufficient
number of qualified technologists, we will be unable to operate our centers at
maximum capacity.

OUR INABILITY TO ENFORCE NON-COMPETE AGREEMENTS WITH THE RADIOLOGISTS MAY
INCREASE COMPETITION.

Each of the contracted radiology practices under our comprehensive services
model has entered into agreements with its physician shareholders and full-time
employed radiologists that generally prohibit those shareholders and
radiologists from competing for a period of two years within defined geographic
regions after they cease to be owners or employees, as applicable. In most
states, a covenant not to compete will be enforced only:

- to the extent it is necessary to protect a legitimate business interest
of the party seeking enforcement;

- if it does not unreasonably restrain the party against whom enforcement
is sought; and

- if it is not contrary to public interest.

Enforceability of a non-compete covenant is determined by a court based on
all of the facts and circumstances of the specific case at the time enforcement
is sought. For this reason, it is not possible to predict whether, or to what
extent, a court will enforce the contracted radiology practices' covenants. The
inability of the contracted radiology practices or us to enforce radiologists'
non-compete covenants could result in increased competition from individuals who
are knowledgeable about our business strategies and operations.

IT IS DIFFICULT TO ESTIMATE OUR UNCOLLECTIBLE ACCOUNTS RECEIVABLE AND
CONTRACTUAL ALLOWANCES FOR BILLED CHARGES, WHICH MAY IMPACT OUR EARNINGS.

Due to the complex nature of billing for healthcare services, it is
difficult for us to estimate our uncollectible accounts receivable and our
contractual allowances for billed charges. If we have to revise our estimates
and our existing reserves are not adequate, this may impact our earnings. In
late 2000, we engaged in an extensive review of our collection processes and our
method of determining allowances for contractual adjustments and bad debts. At
that time, management determined, based on reports and analyses not previously
available, that the estimation process needed to be revised and that a portion
of our accounts receivable were no longer collectible. Accordingly, we incurred
a $13.3 million pre-tax charge for uncollectible accounts receivable during the
fourth quarter of 2000.

OUR ABILITY TO MAXIMIZE THE USE OF OUR DIAGNOSTIC IMAGING EQUIPMENT MAY BE
SUBJECT TO SEASONALITY.

During the summer months of 2002, our average daily diagnostic imaging
procedures decreased, which adversely affected our revenues during those months.
The decrease in average daily diagnostic imaging procedures may have resulted
from referring physicians or their patients taking vacation. We cannot give any
assurance that our future procedure volume and revenues will not be adversely
affected by similar circumstances during the summer months or other traditional
vacation times of the year.

36

OUR RECORDED GOODWILL AMOUNTS MAY BE IMPAIRED UNDER NEW ACCOUNTING STANDARDS.

At December 31, 2002, we had approximately $28.5 million recorded as
goodwill. On an annual basis, we assess our recorded goodwill amounts for
impairment by applying a fair-value-based test. If our goodwill is impaired, we
are required to record a non-cash charge by writing down all or a portion of our
recorded goodwill amounts. Such a write down could have a material impact on our
results of operations in 2003 or future periods.

MANAGED CARE CONTRACTS AND CAPITATED FEE ARRANGEMENTS COULD REDUCE OUR
OPERATING MARGINS.

During 2002, approximately 95% of revenue generated at our diagnostic
imaging centers was derived from payments made on a fee-for-service basis and
approximately 5% was derived from capitated arrangements. Under capitated or
other risk-sharing arrangements, the healthcare provider typically is paid a
pre-determined amount per-patient per-month from the payor in exchange for
providing all necessary covered services to patients covered under the
arrangement. These contracts pass much of the financial risk of providing
outpatient diagnostic imaging services, including the risk of over-use, from the
payor to the provider. Our success will depend in part on our ability to
negotiate effectively, on behalf of the contracted radiology practices and the
diagnostic imaging centers that we own, operate or manage, contracts with HMOs,
employer groups and other third-party payors for services to be provided on a
risk-sharing or capitated basis by some or all of the radiology practices and/or
diagnostic imaging centers. Risk-sharing arrangements result in better revenue
predictability, but more unpredictability of expenses and, consequently,
profitability. We may not be able to negotiate satisfactory arrangements on a
capitated or other risk-sharing basis, on behalf of our diagnostic imaging
centers or the contracted radiology practices. In addition, to the extent that
patients or enrollees covered by these contracts require more frequent or
extensive care than anticipated, we would incur unanticipated costs not offset
by additional revenue, which would reduce operating margins.

WE MAY BE UNABLE TO GENERATE REVENUE WHEN OUR EQUIPMENT IS NOT OPERATIONAL.

Timely, effective service is essential to maintaining our reputation and
high utilization rates on our imaging equipment. Our warranties and maintenance
contracts do not compensate us for loss of revenue when our systems are not
fully operational. Equipment manufacturers may not be able to perform repairs or
supply needed parts in a timely manner. Thus, if we experience more equipment
malfunctions than anticipated or if we are unable to promptly obtain the service
necessary to keep our equipment functioning effectively, our revenue could
decline and our ability to provide services would be harmed.

OUR CORPORATE ORGANIZATIONAL DOCUMENTS COULD DISCOURAGE ACQUISITION PROPOSALS
AND MAKE DIFFICULT A CHANGE OF CONTROL.

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

We have also entered into employment agreements with our three executive
officers, which contain provisions that require us to pay certain amounts to the
executives upon their termination following a change of control. These
agreements may delay or prevent a change of control of Radiologix.

37

RISKS RELATING TO GOVERNMENT REGULATION OF OUR BUSINESS

STATE AND FEDERAL ANTI-KICKBACK AND ANTI-SELF-REFERRAL LAWS MAY ADVERSELY
AFFECT OUR INCOME.

Various federal and state laws govern financial arrangements among
healthcare providers. The federal anti-kickback law prohibits the knowing and
willful offer, payment, solicitation or receipt of any form of remuneration in
return for, or to induce, the referral of Medicare, Medicaid, or other federal
healthcare program patients, or in return for, or to induce, the purchase, lease
or order of items or services that are covered by Medicare, Medicaid, or other
federal healthcare programs. Similarly, many state laws prohibit the
solicitation, payment or receipt of remuneration in return for, or to induce the
referral of patients in private as well as government programs. Violation of
these anti-kickback laws may result in substantial civil or criminal penalties
for individuals or entities and/or exclusion from federal or state healthcare
programs. We believe that we are operating in compliance with applicable law and
believe that our arrangements with providers would not be found to violate the
anti-kickback laws. However, these laws could be interpreted in a manner
inconsistent with our operations.

Federal law prohibiting physician self-referrals (the "Stark Law")
prohibits a physician from referring Medicare or Medicaid patients to an entity
for certain "designated health services" if the physician has a prohibited
financial relationship with that entity, unless an exception applies. Certain
radiology services are considered "designated health services" under the Stark
Law. Although we believe that our operations do not violate the Stark Law, our
activities may be challenged. If a challenge to our activities is successful, it
could have an adverse effect on our operations. In addition, legislation may be
enacted in the future that further addresses Medicare and Medicaid fraud and
abuse or that imposes additional requirements or burdens on us.

All of the states in which our diagnostic imaging centers are located have
adopted a form of anti-kickback law and almost all of those states have also
adopted a form of Stark Law. The scope of these laws and the interpretations of
them vary from state to state and are enforced by state courts and regulatory
authorities, each with broad discretion. A determination of liability under the
laws described in this risk factor could result in fines and penalties and
restrictions on our ability to operate in these jurisdictions.

ENFORCEMENT OF FEDERAL AND STATE PRIVACY AND ASSOCIATED LAWS MAY ADVERSELY
AFFECT OUR INCOME.

How providers and their business associates use and disclose certain
healthcare information has come under increasing public sensitivity and
scrutiny. Additional risks for healthcare providers and their business
associates are posed by the new HIPAA federal standards which set forth
guidelines concerning how individually-identifiable health information may be
used and disclosed. Historically, state law has governed confidentiality issues.
But as a result of the enactment of HIPAA, some states are considering revisions
to their existing laws and regulations. These changes may or may not be
consistent with the federal HIPAA provisions. As a provider of healthcare
services, we must conform to all applicable laws, both federal and state. We
believe that our operations are compliant with these legal standards.
Nevertheless, these laws and regulations are new and few have been interpreted
by government regulators or courts. Consequently, our interpretations and
activities may be challenged. If a challenge to our activities is successful, it
could have an adverse effect on our operations.

FEDERAL FALSE CLAIMS ACT VIOLATIONS COULD AFFECT OUR PARTICIPATION IN
GOVERNMENT PROGRAMS.

The Federal False Claims Act provides, in part, that the federal government
may bring a lawsuit against any person whom it believes has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the
federal government, or who has made a false statement or used a false record to
get a claim approved. The Federal False Claims Act further provides that a
lawsuit thereunder may be initiated in the name of the United States by an
individual who is an original source of the allegations. The government has
taken the position that claims presented in violation of the federal
anti-kickback law or Stark Law may be considered a violation of the Federal
False Claims Act. Penalties include fines ranging from $5,500 to 11,000 for each
false claim, plus three times the amount of damages

38

that the federal government sustained because of the act of that person. We
believe that we are in compliance with the rules and regulations that apply to
the Federal False Claims Act. However, we could be found to have violated
certain rules and regulations resulting in sanctions under the Federal False
Claims Act. If we are found in violation, any sanctions imposed could result in
fines and penalties and restrictions on and exclusions from participation in
federal and state healthcare programs that are integral to our business.

OUR AGREEMENTS WITH THE CONTRACTED RADIOLOGY PRACTICES MUST BE STRUCTURED TO
AVOID THE CORPORATE PRACTICE OF MEDICINE AND FEE-SPLITTING.

The laws of many states, including many of the states in which the
contracted radiology practices are located, prohibit us from exercising control
over the medical judgments or decisions of physicians and from engaging in
certain financial arrangements, such as splitting professional fees with
physicians. These laws and their interpretations vary from state to state and
are enforced by state courts and regulatory authorities, each with broad
discretion. A component of our business has been to enter into service
agreements with radiology practices. We provide management, administrative,
technical and other non-medical services to the radiology practices in exchange
for a service fee. We structure our relationships with the radiology practices,
including the purchase of diagnostic imaging centers, in a manner that we
believe keeps us from engaging in the practice of medicine or exercising control
over the medical judgments or decisions of the radiology practices or their
physicians or violating the prohibitions against fee-splitting. State regulatory
authorities or other parties may assert that we are engaged in the corporate
practice of medicine or that the payment of service fees to us by the radiology
practices constitutes fee-splitting. If such a claim were successfully asserted,
we could be subject to civil and criminal penalties and could be required to
restructure or terminate the applicable contractual arrangements. This result,
or our inability to successfully restructure our relationships to comply with
these statutes, could jeopardize our business strategy.

LICENSING AND CERTIFICATION LAWS MAY LIMIT OUR ABILITY TO EXPAND.

Ownership, construction, operation, expansion and acquisition of diagnostic
imaging centers are subject to various federal and state laws, regulations and
approvals concerning licensing of centers, personnel, certificates of need and
other required certificates for certain types of healthcare centers and major
medical equipment. The laws of some of the states in which we operate limit our
ability to acquire new diagnostic imaging equipment or expand or replace our
existing equipment at diagnostic imaging centers in those states. In addition,
free-standing diagnostic imaging centers that provide services that are not
performed as part of a physician office must meet Medicare requirements to be
certified as an independent diagnostic testing facility to bill the Medicare and
Medicaid programs. We may not be able to receive the required regulatory
approvals for any future acquisitions, expansions or replacements, and the
failure to obtain these approvals could limit the market for our services.

THE REGULATORY FRAMEWORK IS UNCERTAIN AND EVOLVING.

Healthcare laws and regulations may change significantly in the future. We
continuously monitor these developments and modify our operations from time to
time as the regulatory environment changes. We cannot assure you, however, that
we will be able to adapt our operations to address new regulations or that new
regulations will not adversely affect our business. In addition, although we
believe that we are operating in compliance with applicable federal and state
laws, neither our current or anticipated business operations nor the operations
of the contracted radiology practices have been the subject of judicial or
regulatory interpretation. We cannot assure you that a review of our business by
courts or regulatory authorities will not result in a determination that could
adversely affect our operations or that the healthcare regulatory environment
will not change in a way that restricts our operations.

Certain states have enacted statutes or adopted regulations affecting risk
assumption in the healthcare industry, including statutes and regulations that
subject any physician or physician network engaged in risk-based managed care
contracting to applicable insurance laws and regulations. These laws and

39

regulations may require physicians and physician networks to meet minimum
capital requirements and other safety and soundness requirements. Implementing
additional regulations or compliance requirements could result in substantial
costs to us and the contracted radiology practices and limits our ability to
enter into capitated or other risk sharing managed care arrangements.

RISKS RELATED TO NOTES

OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS ON OUR NOTES OR NOTES
ISSUED TO REPLACE THEM.

At December 31, 2002, we had approximately $178.2 million of indebtedness.
In addition, we have the ability to borrow up to $35 million under our credit
facility. Also, subject to restrictions in the indenture and the credit
facility, we may incur additional indebtedness.

Our high level of indebtedness could have important consequences, including
the following:

- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired;

- we must use a substantial portion of our cash flow from operations to pay
interest on our notes and our other indebtedness, which will reduce the
funds available to us for other purposes;

- all of the indebtedness outstanding under the credit facility is secured
by substantially all of our assets and will mature prior to any notes;

- our high level of indebtedness could place us at a competitive
disadvantage to our competitors that have less debt;

- some of our debt has a variable rate of interest, which exposes us to the
risk of increased interest rates; and

- our high level of indebtedness makes us more vulnerable to economic
downturns and adverse developments in our business.

We expect to obtain the money to pay our expenses and to pay the amounts
due under our notes and other debt from our operations and from borrowings under
our credit facility. Our ability to meet our expenses thus depends on our future
performance, which will be affected by financial, business, economic and other
factors. We will not be able to control many of these factors, such as economic
conditions in the markets where we operate and pressure from competitors. Our
business may not generate sufficient cash flow from operations in the future,
our currently anticipated growth in revenue and cash flow may not be realized on
schedule and future borrowings may not be available to us under our credit
facility in an amount sufficient to enable us to repay indebtedness, including
our notes, or to fund other liquidity needs. If we do not have enough money, we
may be required to refinance all or part of our then existing debt (including
our notes), sell assets or borrow more money. We cannot guarantee that we will
be able to do so on terms acceptable to us, or at all. In addition, the terms of
existing or future debt agreements, including our credit facility and any
indenture, may restrict us from adopting any of these alternatives. The failure
to generate sufficient cash flow or to achieve these alternatives could
significantly adversely affect the value of our notes and our ability to pay the
amounts due under them.

BECAUSE OUR NOTES ARE UNSECURED, THE RIGHT TO ENFORCE REMEDIES IS LIMITED BY
THE RIGHTS OF HOLDERS OF SECURED DEBT.

Our notes are not secured. Our credit facility is secured by substantially
all of our assets and a pledge of the capital stock of all of our wholly owned
subsidiaries. If we become insolvent or are liquidated, or if any payment under
the credit facility is accelerated, our lenders will be entitled to exercise the
remedies available to a secured lender under applicable law and will have a
claim on those assets before the holders of any notes. The liquidation value of
our assets may not be sufficient to repay in full any indebtedness under the
credit facility, as well as our other indebtedness, including our notes.

40

OUR ABILITY TO REPAY OUR NOTES AND OUR OTHER DEBT DEPENDS ON CASH FLOW FROM
OUR SUBSIDIARIES, SOME OF WHICH ARE NOT OBLIGATED TO MAKE FUNDS AVAILABLE TO
MAKE PAYMENTS ON NOTES.

Radiologix is a holding company. Its only material assets are its ownership
interests in its subsidiaries. Consequently, it depends on distributions or
other intercompany transfers of funds from its subsidiaries to meet its debt
service and other obligations, including with respect to its notes. Our
non-guarantor subsidiaries are not obligated to make funds available for payment
on our notes. Only our subsidiaries that are not unrestricted subsidiaries will
guarantee our notes. The financial statements included in this report are
presented on a consolidated basis, including all of our subsidiaries. The
aggregate total assets at December 31, 2002 of our subsidiaries that are not
guarantors of our notes were $10.9 million, or 3.6% of our total assets at
December 31, 2002. The operating results of our guarantor subsidiaries may not
be sufficient to enable us to make payments on our notes. In addition, our
rights and the rights of our creditors, including holders of our notes, to
participate in the assets of any of our non guarantor subsidiaries upon their
liquidation or recapitalization will generally be subject to the prior claims of
those subsidiaries' creditors. As a result, our notes are effectively
subordinated to the indebtedness of the non-guarantor subsidiaries. As of
December 31, 2002, the total liabilities of our non-guarantor subsidiaries,
excluding intercompany liabilities, were $3.6 million.

THE INDENTURE FOR OUR NOTES AND OUR CREDIT FACILITY IMPOSE SIGNIFICANT
OPERATING AND FINANCIAL RESTRICTIONS, WHICH MAY PREVENT US FROM PURSUING
CERTAIN BUSINESS OPPORTUNITIES AND TAKING CERTAIN ACTIONS.

The indenture for our notes and our credit facility impose significant
operating and financial restrictions on us. These restrictions limit our ability
to, among other things:

- borrow money;

- pay dividends on or redeem or repurchase our stock;

- make investments;

- create liens;

- sell certain assets or merge with or into other companies;

- enter into certain transaction with affiliates;

- sell stock in our subsidiaries; and

- restrict dividends, distributions or other payments from our
subsidiaries.

In addition, our senior credit facility requires us to maintain specified
financial ratios. These covenants could adversely affect our ability to finance
our future operations or capital needs and pursue available business
opportunities. A breach of any of these covenants or our inability to maintain
the required financial ratios could result in a default in respect of the
related indebtedness. If a default occurs, the relevant lenders could elect to
declare the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing that
indebtedness. Acceleration of our other indebtedness could result in a default
under the terms of the indentures governing our notes and our assets may not be
sufficient to satisfy our obligations under our indebtedness, including our
notes.

A COURT COULD CANCEL THE GUARANTEES UNDER CERTAIN CIRCUMSTANCES.

Each of our subsidiaries that is not an unrestricted subsidiary guarantees
our notes. If, however, a guarantor becomes a debtor in a case under the United
States Bankruptcy Code or encounters other financial difficulty, under federal
or state fraudulent conveyance laws a court might avoid (that is, cancel) its
guarantee. The court might do so if it found that, when the guarantor entered
into its guarantee or, in some states, when payments became due under its
guarantee, it (i) received less than reasonably equivalent value or fair
consideration for the guarantee and (ii) either (a) was or was rendered
insolvent, (b) was left with inadequate capital to conduct its business, or (c)
believed or should have believed that it

41

would incur debts beyond its ability to pay. The court might also avoid a
guarantee, without regard to the above factors, if it found that the guarantor
entered into its guarantee with actual intent to hinder, delay, or defraud its
creditors.

A court would likely find that a guarantor did not receive reasonably
equivalent value or fair consideration for its guarantee unless it benefited
directly or indirectly from the issuance of our notes. If a court avoided a
guarantee, a note holder would no longer have a claim against the guarantor. In
addition, the court might direct a note holder to repay any amounts already
received from the guarantor. If the court were to avoid any guarantor's
guarantee, we cannot assure a note holder that funds would be available to pay
our notes from another guarantor or from any other source.

The test for determining solvency for purposes of the foregoing will depend
on the law of the jurisdiction being applied. In general, a court would consider
an entity insolvent either if the sum of its existing debts exceeds the fair
value of all its property, or if the present fair saleable value of its assets
is less than the amount required to pay the probable liability on its existing
debts as they become due. For this analysis, "debts" includes contingent and
unliquidated debts.

The indenture states that the liability of each guarantor on its guarantee
is limited to the maximum amount that the subsidiary can incur without risk that
the guarantee will be subject to avoidance as a fraudulent conveyance. This
limitation may not protect the guarantees from a fraudulent conveyance attack
or, if it does, that the guarantees will be in amounts sufficient, if necessary,
to pay obligations under our notes when due.

WE MAY NOT BE ABLE TO SATISFY OUR OBLIGATIONS TO HOLDERS OF OUR NOTES UPON A
CHANGE OF CONTROL.

Upon the occurrence of a "change of control," as defined in our indenture,
a note holder will have the right to require us to purchase our notes at a price
equal to 101% of the principal amount, together with any accrued and unpaid
interest and liquidated damages, if any, to the date of purchase. Our failure to
purchase, or give notice of purchase of, our notes would be a default under the
indenture, which would in turn be a default under our senior credit facility.
Moreover, our failure to repay all amounts outstanding under our senior credit
facility upon a default would also be a default under the indenture.

In addition, a change of control may constitute an event of default under
our credit facility. A default under our credit facility will result in an event
of default under the indenture if the lenders accelerate the debt under our
senior credit facility.

If a change of control occurs, we may not have enough assets to satisfy all
obligations under our credit facility and the indenture related to our notes.
Upon the occurrence of a change of control, we could seek to refinance the
indebtedness under our credit facility and our notes or obtain a waiver from the
lenders or the note holders. We may not be able to obtain a waiver or refinance
our indebtedness on commercially reasonable terms, if at all.

NO ESTABLISHED TRADING MARKET EXISTS FOR OUR NOTES, AND NOTE HOLDERS MAY NOT
BE ABLE TO SELL THEM QUICKLY OR AT THE PRICE THAT NOTE HOLDERS PAID.

We do not intend to list our notes on any securities exchange or to arrange
for quotation on any automated dealer quotation system. We expect that our notes
will be designated for trading in the PORTAL market. Jefferies & Company, Inc.
and Deutsche Banc Alex Brown make a market in the notes, but they are not
obligated to do so. They may discontinue any market making at any time, in their
sole discretion. As a result, we cannot assure you as to the liquidity of any
trading market for the notes.

Note holders may not be able to sell notes at a particular time or at
favorable prices. We also cannot assure note holders as to the level of
liquidity of the trading market for the notes. As a result, note holders

42

may be required to bear the financial risk of their investment in the notes
indefinitely. Future trading prices of the notes may be volatile and will depend
on many factors, including:

- our operating performance and financial condition;

- the interest of securities dealers in making a market for our notes; and

- the market for similar securities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Radiologix's exposure to market risk for a change in interest rates relates
primarily to Radiologix's cash equivalents and its senior credit facility. At
December 31, 2002, Radiologix had no borrowings outstanding under its senior
credit facility. Radiologix's notes bear interest at fixed rates.

43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

44

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Radiologix, Inc.

We have audited the accompanying consolidated balance sheet of Radiologix,
Inc. as of December 31, 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit. The financial statements and
schedule of Radiologix, Inc. for the years ended December 31, 2001 and 2000,
were audited by other auditors who have ceased operations and whose report dated
February 11, 2002, expressed an unqualified opinion on those statements and
schedule.

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

In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Radiologix, Inc. at December 31, 2002 and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the 2002 basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set therein.

As discussed above, the financial statements of Radiologix, Inc. as of
December 31, 2001 and 2000, and for the years then ended were audited by other
auditors who have ceased operations. As described in Note 2, these financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards (Statement) No. 142, Goodwill and
Other Intangible Assets, which was adopted by the Company as of January 1, 2002,
and Statement No. 148, Accounting for Stock Based Compensation -- Transition and
Disclosure, which was adopted by the Company for the year ended December 31,
2002. Our audit procedures with respect to the disclosures in Note 2 with
respect to 2001 and 2000 included (a) agreeing the previously reported net
income to the previously issued financial statements, (b) agreeing the
adjustments to reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill to the
Company's underlying records obtained from management, (c) agreeing the
adjustments to reported net income representing stock-based compensation expense
determined under fair value based method for all awards (including any related
tax effects) to the Company's underlying records obtained from management, (d)
testing the mathematical accuracy of the reconciliation of reported net income
to adjusted net income, and the related earnings per share amounts, and (e)
testing the mathematical accuracy of the reconciliation of reported net income
to pro forma net income, and the related earnings per share amounts. In our
opinion, the disclosures for 2001 and 2000 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2001 and
2000 financial statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 financial statements taken as a whole.

ERNST & YOUNG LLP

Dallas, Texas
February 7, 2003

45

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Radiologix, Inc.:

We have audited the accompanying consolidated balance sheets of Radiologix,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Radiologix Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

February 11, 2002
Dallas, Texas

Copy of report previously issued; Andersen has not reissued their report.

46

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

47

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

48

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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

49

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

50

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002

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 (MRI), computed tomography (CT),
positron emission tomography (PET), nuclear medicine, ultrasound, mammography,
bone densitometry (DEXA), general radiography (X-ray) and fluoroscopy.
Radiologix operates 117 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 64 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

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 transactions have been eliminated. Investments in
entities that the Company does not control, but in which it has a substantial
ownership interest and can exercise significant influence, are accounted for
using the equity method.

51

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

CASH AND CASH EQUIVALENTS

Radiologix considers all highly liquid investments with original maturities
of three months or less as cash equivalents.

ACCOUNTS RECEIVABLE

Accounts receivables principally represent receivables from patients and
other third-party payors for medical services provided by the contracted
radiology practices and diagnostic imaging centers. Under the terms of the
service agreements, Radiologix purchases the accounts receivable at their
estimated collectible value from the contracted radiology practices. Accounts
receivable for services rendered at the contracted radiology practices and
diagnostic imaging centers have been recorded at their established charges and
reduced by the estimated contractual allowances and bad debts. Allowances for
contractual adjustments and bad debts are provided for accounts receivable based
on estimated collection rates. 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. These allowances are reviewed periodically and adjusted based on
historical payment rates. Generally, any increase to the contractual allowances
would reduce the revenue of the contracted radiology practices and diagnostic
imaging centers and therefore, reduce the service fee revenue recorded by
Radiologix and any decrease to the contractual allowances would increase the
revenue of the contracted radiology practices and diagnostic imaging centers and
therefore, increase the service fee revenue provided by Radiologix.

During the fourth quarter of 2000, the Company recorded a $13.3 million
charge for uncollectible accounts receivable. During the fourth quarter of 2000,
the Company performed an extensive review of its accounts receivable and
collection experience utilizing reports and analyses not previously available.
Based on this review, the Company believes that the estimation process of
determining contractual allowances for billed charges needed to be revised and
that a portion of its accounts receivable were no longer collectible. This
review allowed the Company to better analyze old accounts receivable, however
did not tell the Company what historical collection rates would have been if
newly implemented collection policies and procedures had been in place.
Accordingly, the increase in the allowance for uncollectible accounts was
recognized as an additional bad debt expense as opposed to an increase in
contractual allowance. The Company recognized the $13.3 million charge in the
2000 fourth quarter as, a change in the accounting estimate when the information
became known.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method. Amortization of assets under capital leases is included in depreciation
and amortization.

52

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

The value of intangible assets (consisting primarily of service agreements
and goodwill) is stated at the lower of cost or fair value.

Effective January 1, 2002, Radiologix adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142") issued by the Financial Accounting Standards Board. Under SFAS No. 142,
goodwill and other intangible assets with an indefinite lived 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. 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. Amortization of goodwill and
other indefinite lived intangible assets amounted to $1.1 million ($665,600, net
of tax benefit) of tax and $1.2 million ($749,900 net of tax benefit) for the
year ended December 31, 2000 and 2001, respectively.

During the first quarter 2002 we performed the initial impairment test of
our Questar operations in accordance with the provisions of SFAS No. 142. We
engaged an independent third party valuation specialist to determine the fair
value of these operations. Their valuation was completed in the first quarter
2002 and indicated that the fair value of the Questar operations exceeded the
carrying value and consequently no impairment was recorded. We plan to conduct
our annual impairment test of goodwill and other indefinite lived intangible
assets during our first quarter of each subsequent year.

With the adoption of SFAS No. 142, Radiologix ceased amortization of
goodwill as of January 1, 2002. The following table presents the results for the
years ended December 31, 2000, 2001 and 2002 on a comparable basis (in
thousands):

The intangible asset related to the service agreement is recorded on the
date of acquisition, and represents the difference between the cost of
purchasing the right to manage a radiology practice and the net assets acquired.
Under the initial 40-year term of the agreements, the contracted radiology
practices have agreed to provide medical services on an exclusive basis only
through facilities managed by Radiologix. In the event a contracted radiology
practice breaches the service agreement, or if Radiologix terminates with cause,
the contracted radiology practice is required to purchase all related tangible
and

53

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

intangible assets, including the unamortized portion of the service agreement
intangible asset, at the then net book value. The Company's service agreements,
included in the consolidated balance sheets as intangible assets, net, are not
considered to have an indefinite lived useful life and will continue to be
amortized over a useful life of 25 years. In connection with the restructuring
of certain management agreements during 2002 $6.0 million has been capitalized
as an addition to service agreements. Accumulated amortization at December 31,
2001 and 2002 amounted to $11.4 million and $14.8 million, respectively.
Amortization expense for the years ending December 31, 2000, 2001 and 2002
equated to $3.9 million, $5.2 million and $5.0 million, respectively. We expect
amortization expense to approximate $27.1 million over the next five years.

We regularly evaluate the carrying value of the finite lived intangible
assets in light of any events or circumstances that may indicate that the
carrying amount or amortization period should be adjusted. As of December 31,
2002, we do not believe there are any indicators that the carrying values or the
useful lives of these assets need to be adjusted.

OTHER ASSETS AND DEFERRED FINANCING COSTS

Deferred financing costs are being amortized over a straight-line method,
which approximates the effective interest method. As of December 31, 2001 and
2002, accumulated amortization of deferred financing costs was approximately
$272,000 and $1.8 million, respectively.

During the fourth quarter of 2001, the Company recorded a charge of $4.7
million for deferred financing costs related to the termination of its senior
credit facility with the proceeds from its $160 million senior notes issuance.
The charge is reflected as cost and expenses, loss on early extinguishment of
debt in the accompanying consolidated financial statements.

IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 2002, Radiologix adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supersedes Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"); however,
SFAS No. 144 retains the fundamental provisions of SFAS No. 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 No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board 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" ("APB
30") for segments of a business to be disposed of.

SFAS No. 144 requires impairment losses to be recognized for long-lived
assets through operations when indicators of impairment exist and the underlying
cash flows are not sufficient to support the assets' carrying value. Potential
indicators of impairment can include, but are not limited to the following:

a. History of operating losses or expected future losses

b. Significant adverse change in legal factors

c. Changes in the extent or manner in which the assets are used

d. Current expectations to dispose of the assets by sale or other
means

e. Reductions or expected reductions of cash flow

Based on a history of operating losses or expected future losses in our
Questar operations, we determined an impairment analysis was warranted. We
primarily used an expected sales value to estimate

54

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the fair values of our long-lived assets. Sales values were based in part on
recent acquisitions made by us, and our knowledge of the business environment.
Based on a comparison of our estimated fair value to the carrying values of the
long-lived assets, a $2.7 million ($1.6 million net of tax benefit) impairment
charge was recorded in December 2002 related to the Questar operations.

ACCRUED PHYSICIAN RETENTION

Accrued physician retention represents amounts payable to contracted
radiology practices under the service agreements. The service agreements require
Radiologix to remit physician retention to the contracted radiology practices by
the end of the subsequent month after the month in which services were rendered.

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 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 contracted radiology practices.

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 allowances. In addition, bad debt expense related to established
charges is recognized as costs and expenses rather than a deduction of net
revenue. The Company uses historical collection experience in estimating its
contractual allowances and bad debt expense.

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 (typically 20% 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.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Adjusted professional revenues and adjusted technical revenues are
determined by deducting certain contractually agreed-upon expenses
(non-physician salaries and benefits, rent, depreciation, insurance, interest
and other physician costs) from the contracted radiology practices' revenue.
Questar revenues are primarily derived from technical revenues generated from
its diagnostic imaging centers.

SEVERANCE AND OTHER RELATED COSTS

Based on Financial Accounting Standards Board's Emerging Issues Task Force
Issue 94-3, the Company met the criteria to recognize an accrual for severance
and other related costs related to severance to be paid to the former chairman
and chief executive officer and the recruiting costs for the search of a new
chief executive officer. This accrual is included in accounts payable and
accrued expenses on the balance sheet. The following table summarizes the
expense paid in 2002 and accrued at December 31, 2002 (in thousands):

Balance at January 1, 2002.................................. $ --
Expense..................................................... 978
Paid........................................................ (205)
-----
Balance at December 31, 2002................................ $ 773
=====

INCOME TAXES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" requires disclosure about the fair value of
certain financial instruments. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to the short maturity of these instruments. The fair
value of the Company's long-term debt and capital lease obligations was
determined by using quoted market prices.

CONCENTRATION OF CREDIT RISK

The Company's accounts receivable consist primarily of service fee revenues
due from radiology practices and medical service revenues due from patients
funded through Medicare, Medicaid, commercial insurance and private payment. The
Company estimates that approximately 23%, 25% and 24% of the radiology
practices' revenue in 2000, 2001 and 2002, respectively, is funded through the
Medicare program. The Company and its contracted radiology practices perform
ongoing credit evaluations of their patients and generally do not require
collateral. The Company and its contracted radiology practices maintain
allowances for potential credit losses.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED AWARDS

On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS No. 148"). SFAS
No. 148 provides companies alternative methods of transitioning to Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123") fair value of accounting for stock-based employee compensation
and amends certain disclosure requirements. SFAS No. 148 does not mandate fair
value accounting for stock-based employee compensation, but does require all
companies to meet the disclosure requirements. We do not recognize compensation
expense for our stock option grants, which are issued at fair value at the date
of grant. At this time, the Company has not determined whether it will adopt
fair value accounting for its employee stock options.

The Company currently accounts for its employee stock-based compensation
arrangements under the provisions of Accounting Principles Board, "Accounting
for Stock Issued to Employees" ("APB No. 25"). The Company accounts for
stock-based compensation of non-employees under the provisions of SFAS No. 123.
The Company did not have any stock-based compensation to non-employees during
2000, 2001 and 2002. SFAS No. 123 also requires that companies electing to
continue to use the intrinsic value method make pro forma disclosure of net
income and net income per share as if the fair value method of accounting had
been applied. The Company used the Black-Scholes option-pricing model to
estimate the fair value of options. The effects of applying SFAS No. 123 during
2000, 2001 and 2002 are as follows (in thousands, except per share amounts):

The fair value of each option grant is estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2000, 2001 and 2002, respectively: risk-free interest
rate of 5.0, 5.02, and 4.61 percent; expected life of 2.81, 2.81 and 2.81 years;
expected volatility of 84.3, 73.8, and 119.4 percent; and dividend yield of zero
in 2000, 2001 and 2002, respectively. The weighted-average grant-date fair value
of new grants in 2000, 2001 and 2002 was $3.27 per share, $6.21 per share, and
$11.56 per share, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 "Rescission of FASB Statements Nos. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"), which is required to be applied in fiscal years beginning
after May 15, 2002, with early application encouraged. SFAS No. 145 rescinds
Statement of Financial Accounting Standards No. 4 "Reporting Gains and Losses
From Extinguishment of Debt". SFAS No. 145 requires any gains or losses on
extinguishment of debt that were classified as an extraordinary item in prior
periods but do not meet the criteria in APB No. 30 for classification as an
extraordinary item shall be reclassified into income from operations. The
Company has adopted the provisions of SFAS No. 145. The impact of adopting SFAS
No. 145 reduced income from operations by $4.7 million for the year ended
December 31, 2001 from reclassifying extraordinary loss on extinguishment of
debt (see Note 5).

In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"), which is effective for exit or
disposal activities initiated after December 31, 2002 with early application
encouraged. SFAS No. 146 addresses accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The
Company does not anticipate a material impact on results of operations or
financial position from the adoption of SFAS No. 146.

The Financial Accounting Standards Board in November 2002, issued Financial
Accounting Standards Board Interpretation No. 45 "Guarantor's Accounting and
Disclosure Requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that the fair value of
certain guarantee obligations be recorded at the inception of the guarantee and
clarifies disclosures required for guarantee obligations. The initial
recognition provision of FIN 45 applies prospectively to guarantees issued or
modified after December 31, 2002. The disclosure provisions are effective for
financial statements of interim or annual periods ending after December 31,
2002.

3. ACQUISITIONS, AFFILIATIONS AND DISPOSITIONS

In March 2000, Radiologix acquired an imaging center in Osceola, Florida
for total consideration of approximately $2.7 million. During 2000, Radiologix
continued to complete the development of imaging centers of Questar for total
consideration of approximately $5.9 million. Total consideration paid for all
other acquisitions and affiliations was approximately $1.5 million.

In November 2001, Radiologix acquired an imaging center in Laurel, Maryland
for total consideration of $906,000.

No acquisitions were completed in 2002. During 2002, Questar disposed of
two imaging centers. Consideration received for the dispositions was
approximately $150,000 and the buyer assumed $1.1 million of capital leases. No
material gain was recognized in 2002 as a result of the dispositions.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2001 and
2002 (in thousands):

In December 2002, the Company recorded an impairment charge of $2.7 million
to write down the value of Questar's long-lived assets (see Note 2).

5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consists of the following at
December 31, (in thousands):

The maturities of long-term debt, including capital lease obligations are
$4.3 million in fiscal 2003, $1.7 million in fiscal 2004, $273,000 in fiscal
2005, no maturities in fiscal 2006 or fiscal 2007 and $172.0 million due in
fiscal 2008 and thereafter. Interest of $537,000 has been imputed based on the
varying terms of the leases held for the future capital lease obligations.

SENIOR NOTES

In December 2001, the Company terminated its senior credit facility with
proceeds from a $160 million senior notes issuance, due December 15, 2008. In
connection with the repayment, the Company recorded an expense for the loss
incurred on the early extinguishment of its senior credit facility debt in the
amount of $4.7 million. 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,
commencing 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.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 December 31, 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% dependent on certain
financial ratios 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 and the
maintenance of certain financial ratios (including minimum fixed charge to
coverage ratio and maximum leverage ratio, as defined). At December 31, 2002, we
were in compliance with these covenants. 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 JUNIOR SUBORDINATED NOTE

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%.

6. DEFERRED REVENUE

In connection with the amendment of the service agreement in July 2002 with
one of the contracted radiology practices, we have recorded deferred revenue of
$3.3 million in consideration recognized for the amended agreement, which will
be amortized over a 20 year period. In addition, in December 2002 we amended the
service agreement of another contracted radiology practice; and we recorded
deferred revenue of $4.8 million in consideration recognized for the amended
agreement. Beginning January 2003, we will amortize the deferred revenue over
approximately a 19-year period.

7. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space as well as certain equipment. Future
minimum lease payments under these operating leases for fiscal 2003, 2004, 2005,
2006, 2007 and 2008 and thereafter are $19.8 million, $14.3 million, $6.5
million, $4.1 million, $1.9 million, and $5.3 million, respectively. Rent
expense for equipment was approximately $19.2 million, $22.7 million and $20.0
million in 2000, 2001 and 2002, respectively.

In December 2001, the Company repurchased some equipment and other
equipment previously held under operating leases for approximately $13.9
million.

LITIGATION

We are not currently subject to any material litigation nor, to our
knowledge, is any material litigation threatened against us. All of our current
litigation is (i) expected to be covered by liability insurance or (ii) not
expected to adversely affect our business. Some risk exists, however, that we
could subsequently be named as a defendant in additional lawsuits or that
pending litigation could adversely affect us.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. 401(k) PLAN

The Company established a defined contribution plan (the "401(k) plan") in
January 1999. Employees are eligible immediately upon date of hire. The 401(k)
plan allows for an employer match of contributions made by participants after
such participants have completed 1,000 hours of service. With respect to the
Company match, a participant vests 20% after two years of service, 40% after
three years of service, 60% after four years of service, 80% after five years of
service and 100% after six years of service.

The Company makes matching contributions under this plan equal to 50% of
each participant's contribution of up to 6% of the participant's compensation.
Company contributions to the plan were approximately $770,000 in 2000, $856,000
in 2001 and $1,029,000 in 2002.

9. STOCKHOLDERS' EQUITY

COMMON STOCK

During 2001, the Company issued 117,878 shares of its common stock to
Saunders Karp & Megrue, L.P. in connection with the proposed merger between the
Company and SKM-RD Acquisition Corp. The proposed merger was terminated in April
2001 (See Note 12).

STOCK OPTION PLAN

Under the 1996 Stock Option Plan (the "Plan") 4,000,000 options to purchase
shares of the Company's common stock may be granted to key directors, employees
and other healthcare professionals associated with Radiologix, as defined by the
Plan. Options granted under the Plan may be either incentive stock options
("ISO") or nonqualified stock options ("NQSO"). The option price per share under
the Plan may not be less than 100% of the fair market value at the grant date
for ISO and may not be less than 85% of the fair market value at the grant date
for NQSO. All of the options granted under the Plan through December 31, 2002
were at fair market value. Generally, options vest over a five-year period and
are exercisable over a ten-year life. As of December 31, 2000, 2001 and 2002,
2,530,455, 2,902,517 and 2,732,710 shares, respectively, were outstanding under
the Plan. Since the Plan's inception, the Board of Directors granted options to
purchase 30,000 shares of common stock outside the Plan. Compensation expense
related to the non-employee portion of these shares is not material. The
following table summarizes the combined activity under the Plan and the options
granted outside the Plan at December 31 (shares in thousands):

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
2,732,710 options outstanding as of December 31, 2002 (shares in thousands):

10. SERVICE FEE REVENUE

Service fee revenue consists of the following for the years ended December
31 (in thousands):

For the years ended December 31, 2000, 2001 and 2002, four of the Company's
contracted radiology practices each contributed 10% or more of the Company's
service fee revenue as follows (in thousands):

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

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. INCOME TAXES

Income tax expense in 2000, 2001 and 2002 is composed of the following
amounts (in thousands):

A reconciliation between reported income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% for 2000, 2001
and 2002 is as follows (in thousands):

The tax effects of temporary differences that give rise to the deferred
income taxes at December 31, 2001 and 2002, are presented below (in thousands):

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SPECIAL CHARGES AND NON-OPERATING INCOME

During the third quarter of 2001, the Company recorded $1.0 million in
merger related costs. The charge was our share of transaction costs incurred by
Saunders Karp & Megrue, L.P. and its affiliates in connection with the proposed
merger between Radiologix and SKM-RD Acquisition Corp. The proposed merger was
terminated in April 2001. In the fourth quarter of 2000, the Company also
incurred a $1.8 million charge for the write-off of transaction costs incurred
for the proposed merger.

In the fourth quarter of 2001, the Company recognized $1.3 million of
non-operating income as partial consideration for early termination of
management services provided at certain imaging sites not owned or operated by
the Company.

In the fourth quarter of 2001, upon the successful completion of the senior
notes offering, the Company incurred $615,000 in supplemental incentive
compensation.

In conjunction with the Senior Notes Offering, the Company incurred an
expense of $4.7 million for the early extinguishment of debt in relation to
terminating its senior credit facility with the proceeds from its Senior Notes
issuance in December 2001.

During the fourth quarter of 2002, the Company recorded a $2.7 million
impairment charge on long-lived assets based on a comparison of our estimated
fair value to the carrying values of the long-lived assets related to radiology
equipment.

In the fourth quarter of 2002, we recorded $978,000 in severance and other
related costs. These costs include severance payments to our former chairman and
chief executive officer and recruiting costs related to the search for a new
chief executive officer. A current independent member of the board of directors
was named chairman of the board. In February 2003, a new president and chief
executive officer was named. In addition, in February 2003 the former president
and chief operating officer resigned from his positions. Severance and other
related costs will be incurred in fiscal 2003.

13. EARNINGS PER SHARE

Basic earnings per share ("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. Diluted EPS also includes the effect of the convertible note (see Note
5) using the "if converted" method to the extent the securities are not
anti-dilutive. For the year ended December 31, 2002, approximately $750,000 of
tax-effected interest savings and 2,036,107 weighted average shares related to
the convertible note were included in the computation of dilutive EPS. For the
year ended December 31, 2001, approximately $1.1 million of tax-effected
interest savings and 2,677,828 weighted average shares related to the
convertible note were included in the computation of diluted EPS. For the year
ended December 31, 2000, approximately $1.0 million of tax-effected interest
savings and 2,318,841 weighted average shares related to the convertible note
were not included in the computation of diluted EPS because to do so would be
anti-dilutive for the period.

For the years ended December 31, 2000, 2001 and 2002, 313,561, 415,359 and
974,293 shares, respectively, related to stock options were included in diluted
EPS.

14. SEGMENT REPORTING

The Company reports the results of its operations through four designated
regions of the United States: Mid-Atlantic, Northeastern, Central and Western.
In addition, the Company reports the results of

64

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 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 market 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.

Operating income as discussed below is defined as service fee revenue less
operating expenses. Operating income is commonly used as an analytical indicator
within the healthcare industry, and also serves as a measure of leverage
capacity and debt service ability. Operating income should not be considered as
a measure of financial performance under generally accepted accounting
principles, and the items excluded from operating income should not be
considered in isolation or as an alternative to net income, cash flows generated
by operating, investing or financing activities or other financial statement
data presented in the consolidated financial statements as an indicator or
financial performance or liquidity. Because operating income is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, operating income as
presented may not be comparable to other similarity titled measures of other
companies.

The following is a table, which summarizes the operating results and assets
by the five reportable segments (dollars in thousands):

FOR THE YEAR ENDED DECEMBER 31, 2000

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 2001

FOR THE YEAR ENDED DECEMBER 31, 2002

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

(1) Includes the Mid-Atlantic Market.

(2) Includes the Finger Lakes and Hudson Valley Markets.

(3) Includes the South Texas, Treasure Coast and Northeast Kansas Markets.

(4) Includes the Bay Area Market.

(5) Operating expense excludes a $13.3 million charge for uncollectible accounts
receivable and a charge of $3.7 million for the write-off of a note
receivable. See Note 2.

(6) Operating expense excludes a $4.7 million charge for loss on early
extinguishment of debt. See Note 5.

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) Purchases of property and equipment exclude buy out of operating leases for
$13.9 million. See Note 7.

(8) Operating expense includes a $2.7 million impairment charge on long-lived
assets. See Note 12.

The following table is a reconciliation of the segment income before income
taxes to Radiologix's consolidated reported income before income taxes for the
year ended December 31 (in thousands):

The following table is a reconciliation of the assets and purchases of
property and equipment for the segments to Radiologix's consolidated assets and
purchases of property and equipment as of and for the year ended December 31 (in
thousands):

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

* Total purchases of property and equipment excludes the buy out of operating
leases for $13.9 million. See Note 7.

15. JOINT VENTURE FINANCIAL INFORMATION

The Company has nine unconsolidated joint ventures with ownership interests
ranging from 22% to 50%. These joint ventures represent partnerships with
hospitals, health systems or radiology practices and were formed for the purpose
of owning and operating diagnostic imaging centers. Professional services at the
joint venture diagnostic imaging centers are performed by the contracted
radiology practices in such

67

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

market area or a radiology practice that participates in the joint venture. The
following table is a summary of key financial data for these joint ventures as
of and for the year ended December 31 (in thousands):

16. 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 sheet as of December 31, 2001 and 2002, and the statements
of income and cash flows for the years ended December 31, 2000, 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").

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RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN THOUSANDS)

69

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)

70

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

71

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

72

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

73

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)

74

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)

75

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)

76

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. UNAUDITED QUARTERLY FINANCIAL DATA

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

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

(d) Net income for the quarter ended September 30, 2001 includes $600,000 net
of tax benefit in merger related costs. See Note 12 to consolidated
financial statements.

(e) Net income for the quarter ended December 31, 2001 includes $369,000 net of
tax benefit in supplemental incentive compensation in connection with our
senior notes offering and $780,000 net of tax of non-operating income as
partial consideration for early termination of management services provided
at certain imaging sites not owned or operated by Radiologix. In addition,
net income for the quarter ended December 31, 2001 includes a $2.8 million
net of tax benefit loss on early extinguishment of debt. See Notes 5 and 12
to consolidated financial statements.

(f) Net income for the quarter ended December 31, 2002 includes $587,000, net
of tax benefit in severance and other related costs and a $1.6 million net
of tax benefit impairment charge on long-lived assets. See Notes 2 and 12
to consolidated financial statements.

77

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Ernst & Young LLP served as the Company's independent auditors for 2002.

From the Company's inception through 2001, Arthur Andersen LLP served as
the Company's independent public accountants. As a result of the uncertain
future of this firm resulting from its indictment by the United States
Department of Justice following the bankruptcy of Enron Corp., Radiologix
released it from future service to the Company effective April 22, 2002. Arthur
Andersen LLP's report on the Company's financial statements never contained an
adverse opinion or disclaimer of opinion, nor was it ever qualified or modified
as to uncertainty, audit scope, or accounting principles. Radiologix and Arthur
Andersen LLP never had any disagreement on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure. The
Company's Audit Committee recommended and approved the decision to release
Arthur Andersen LLP.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Items 401 and 405 of Regulation S-K is
contained under the caption "Directors and Executive Officers" in the
registrant's proxy statement for the 2003 annual meeting of stockholders and is
incorporated here by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is contained under
the caption "Executive Compensation" in the registrant's proxy statement for the
2003 annual meeting of stockholders and is incorporated here by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table presents certain information as of December 31, 2002
regarding compensation plans under which Radiologix common stock is authorized
for issuance.

EQUITY COMPENSATION PLAN INFORMATION

The information required by Item 403 of Regulation S-K is contained under
the caption "Security Ownership of Certain Beneficial Owners and Management" in
Radiologix's proxy statement for the 2003 annual meeting of its stockholders and
is incorporated here by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K is contained under
the caption "Certain Transactions" in the registrant's proxy statement for the
2003 annual meeting of stockholders and is incorporated here by reference.

78

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Annual Report
on Form 10-K, the Company's principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures (as
defined in Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.

Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There were no
significant deficiencies or material weaknesses, and therefore there were no
corrective actions taken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report

1. The list of financial statements and financial statement schedules
filed as part of this report is incorporated here by reference to Item 8.
Financial Statements and Supplementary Data, "Index to Consolidated
Financial Statements."

2. Schedule II, Valuation and Qualifying Accounts for the years ended
December 31, 2000, 2001 and 2002 is included herewith.

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.

3. 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 did not file any Current Reports on Form 8-K during the
last quarter of 2002.

79

SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, Radiologix has duly caused this Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized, on March 27, 2003.

RADIOLOGIX, INC.

By: /s/ STEPHEN D. LINEHAN
------------------------------------
Stephen D. Linehan
President and Chief Executive Officer

POWER OF ATTORNEY

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

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

80

CERTIFICATION OF
CHIEF EXECUTIVE OFFICER

I, Stephen D. Linehan, certify that:

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

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and

c) Presented in this annual 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
annual report whether 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.

By: /s/ STEPHEN D. LINEHAN
------------------------------------
Stephen D. Linehan
Chief Executive Officer and
President

Date: March 27, 2003

81

CERTIFICATION OF
CHIEF FINANCIAL OFFICER

I, Sami S. Abbasi, certify that:

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

2. Based on my knowledge, this annual 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 annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and

c) Presented in this annual 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
annual report whether 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.

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

Date: March 27, 2003

82

SCHEDULE II
RADIOLOGIX, INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

83

INDEX TO EXHIBITS

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

* Filed herewith.

(M) Management contract or compensatory plan.

** 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 10.44, 10.45 and 10.47, respectively,
to the registrant's Form 10-Q for the quarter ended March 31, 1999.

@ 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.

# Incorporated by reference to Exhibits 10.50, 10.51 and 10.52 to the
Registrant's Form 10-Q for the quarter ended June 30, 2000.

86