RADIOLOGIX INC, 10-K405/A, 2000-10-20

RADIOLOGIX INC
10-K405/A, 2000-10-20
MISC HEALTH & ALLIED SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 0-23311

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

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

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

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

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

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
None None
</TABLE>

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

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

Yes X No
----- -----

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

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was $102,690,572, based on the closing sales
price of $5.50 of the registrant's Common Stock on the Nasdaq National Market
System on March 24, 2000.

As of March 24, 2000, 19,430,978 shares of the registrant's Common Stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the Annual Meeting of Stockholders of
the registrant to be held during 2000 are incorporated by reference in Part
III.

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RADIOLOGIX, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
FORM 10-K ITEM PAGE
-------------- ----
<S> <C>
PART I.
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 16
Item 3. Legal Proceedings...................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................... 16

PART II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................................ 17
Item 6. Selected Consolidated Financial Data................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............. 33
Item 8. Financial Statements and Supplementary Data............................ F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... F-20

PART III.
Item 10. Directors and Executive Officers of the Registrant..................... F-20
Item 11. Executive Compensation................................................. F-20
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................. F-20
Item 13. Certain Relationships and Related Transactions......................... F-20

PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................................ F-21
</TABLE>

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PART I

ITEM 1. BUSINESS.

GENERAL

Radiologix, Inc. is a leading provider of radiology services in the United
States through (i) its ownership and operation of technologically advanced,
multi-modality diagnostic imaging centers, and (ii) its provision of
administrative, management and other information services to certain radiology
business partners. Radiologix derives approximately 73% of its revenues from
the production and management of diagnostic images that are utilized by
radiologists in preparing written reports. These images and the radiology
reports that are based on the images permit ordering physicians to diagnose and
manage diseases and injuries more accurately and effectively than would be
possible without such clinical information. Ordering physicians rely
extensively on this type of diagnostic information in making health care
treatment decisions.

Radiologix's radiology services primarily consist of utilizing
sophisticated technology and technical expertise to perform diagnostic imaging
procedures. Radiologix performs diagnostic imaging procedures utilizing
technologies such as x-ray, magnetic resonance imaging ("MRI"), computed
tomography ("CT"), mammography, ultrasound, nuclear medicine and positron
emission tomography ("PET"), as well as general radiography and fluoroscopy.

During 1999, Radiologix performed approximately 1.4 million imaging
procedures for patients at the 113 imaging centers owned or operated by
Radiologix as of December 31, 1999. Radiologix's imaging centers are located in
17 states and the District of Columbia, with concentrated geographic coverage
in markets located in California, Florida, Illinois, Kansas, Maryland, New
York, Pennsylvania, Texas, Virginia and Washington D.C.

Radiologix also provides administrative, management and information
services to certain business partners, including a component of the physician
practices whose radiologists provide professional services in connection with
Radiologix's radiology services, and hospitals with which Radiologix operates
joint ventures. These administrative services are intended to improve radiology
practice or joint venture profitability, efficiency and effectiveness.
Radiologix's relationships with radiology practices and hospitals enhance
Radiologix's growth and expansion opportunities in its core business.

Radiologix was incorporated in Delaware in 1996. In November 1997,
Radiologix conducted its initial public offering of common stock. Radiologix's
principal executive offices are located at 3600 Chase Tower, 2200 Ross Avenue,
Dallas, Texas, 75201, and its telephone number is (214) 303-2776.

RECENT ACQUISITIONS

In August 1999, Radiologix purchased all the outstanding capital stock of
Questar Imaging, Inc. for $15.7 million in cash and the assumption of
approximately $16.2 million of debt. As of such date, Questar owned or operated
27 imaging centers in 14 states. These imaging centers offered MRI and other
diagnostic imaging modalities.

When Radiologix acquired Questar, Questar had 17 additional imaging centers
under development. As of December 31, 1999, three of those 17 centers had
become operational. Pursuant to the agreements governing the Questar
acquisition, Radiologix paid an additional $500,000 to Questar's former owners
during 1999 relating to the additional imaging centers that became operational
after the acquisition. From January 1, 2000, through March 24, 2000, six
additional imaging centers became operational. Radiologix paid an additional
$500,000 for each such center. There can be no assurance that the remaining
eight undeveloped imaging centers will become operational.

Radiologix incorporated one of the Questar imaging centers into
Radiologix's pre-existing imaging center networks. Radiologix operates the
remaining Questar imaging centers as a separate market segment. Radiologix has
closed or consolidated two of the Questar imaging centers. Radiologix continues
to integrate the Questar imaging centers into Radiologix's information systems
and management practices.

In addition to the Questar acquisition, Radiologix acquired seven
additional imaging centers during 1999. These acquisitions included
approximately nine separate transactions for an aggregate purchase price of
approximately $8.3 million. Substantially, all of these non-Questar
transactions were effected through asset purchase transactions.

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RADIOLOGY MARKET OVERVIEW

The Health Care Financing Administration estimates that national health
care spending in 1998 was approximately $1.1 trillion. According to the
American College of Radiology, an estimated 350 million radiological procedures
were performed in the United States during 1995. Total spending on radiology
services including diagnostic imaging, interventional radiology and radiation
oncology was estimated at $56 to $70 billion according to a 1995 report
prepared by SMG Marketing Group. Diagnostic imaging, including interventional
radiology procedures, accounted for approximately 82% of the aggregate amount
spent on radiological services performed in the United States, with radiation
oncology services accounting for approximately 18%.

Technical facilities are located within hospitals and in approximately
3,150 outpatient centers throughout the United States. Professional radiology
services are provided by radiologists, general practitioners and other
specialists. There are approximately 3,200 radiology groups in the United
States comprised of approximately 27,000 practicing radiologists. These groups
have a typical size of six members, but vary in size up to approximately 100
physicians serving a specific market.

OPERATIONS

Imaging Centers

As of December 31, 1999, Radiologix owned 94 imaging centers and operated
and managed 19 additional imaging centers through joint venture relationships.
Information related to these 113 imaging centers, and information about 18
other sites at which Radiologix provides imaging equipment, management services
or employees, is set forth below and is provided as of December 31, 1999:

<TABLE>
<CAPTION>
IMAGING FACILITIES
------------------------------
JOINT
OWNED VENTURE OTHER
MARKET AREAS AND SEGMENTS CENTERS CENTERS(1) SITES
------------------------- ------- ---------- -----
<S> <C> <C> <C>
Mid Atlantic(3) ........................ 27 10 3(2)

Finger Lakes(4) ........................ 10 0 4(2)

Bay Area(5) ............................ 19 0 0(2)

South Texas(6) ......................... 3 5 0(2)

Northeast Kansas(7) .................... 1 1 0(2)

Hudson Valley(8) ....................... 12 0 7(2)

Treasure Coast(9) ...................... 2 0 0(2)
Questar(10) ............................ 20 3 4(11)
-- -- --
Totals ........................ 94 19 18
== == ==
</TABLE>

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

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

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

(4) Encompasses the greater Rochester, New York metropolitan area.

(5) Encompasses the greater San Francisco/Oakland/San Jose, California
metropolitan areas.

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

(7) Encompasses the Topeka, Kansas and Northeast Kansas area.

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

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(9) Encompasses St. Lucie County, Florida.

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

(11) Includes imaging centers at which Radiologix does not have an ownership
interest in the imaging equipment, but provides management services or
employees.

Joint Venture Relationships

As of December 31, 1999, Radiologix was a partner or member in 14
partnerships or limited liability companies formed by Radiologix and hospitals,
health systems or radiology practices. These partnerships own and operate 19
imaging centers, a majority of which are located on, or adjacent to, the
participating hospital or health center's campus. As the general partner or
managing member of 12 of these joint ventures, Radiologix operates the imaging
centers.

Other Sites

As of December 31, 1999, Radiologix had installed Radiologix-owned imaging
equipment at 14 locations that are not freestanding imaging centers owned or
operated by Radiologix or by a partnership or limited liability company of
which Radiologix served as the general partner or managing member. Examples of
these locations include hospital or health care departments where Radiologix
had installed imaging equipment that Radiologix operates pursuant to an
agreement with the hospital or health center. These relationships permit
Radiologix to provide radiology 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 addition to those 14 locations,
Radiologix provides management services or employees for four locations at
which Radiologix does not have an ownership interest in the imaging equipment.

Operation of Facilities

In conjunction with its operation of imaging centers, Radiologix purchases
imaging equipment, hires and trains employees, schedules patient appointments,
processes data relating to production of images and other technical radiology
services, and obtains and maintains permits, licenses and insurance.

Radiologix's diagnostic imaging centers offer multiple modalities of
technologically advanced imaging procedures. The number and type of imaging
modalities offered at Radiologix's imaging centers are determined by the demand
for such services within their respective market areas. Presently, the majority
of these imaging centers offer multiple modalities including various
combinations of MRI, CT, mammography, ultrasound, nuclear medicine, fluoroscopy
and traditional radiography. By offering a wide spectrum of imaging modalities,
Radiologix markets itself as a full-service provider of diagnostic imaging
services.

Offering a wide spectrum of imaging modalities at an imaging center enables
Radiologix 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
imaging center, reveals that further imaging (for example, a CT scan) is
necessary, the radiologist can confer with the referring physician and the
patient can immediately undergo the CT scan. Thus, by offering both X-ray and
CT modalities at the imaging center, the referring physician and the patient
can avoid multiple visits to an imaging center or hospital.

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

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

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

Radiologix has increased the efficiency of its networks by installing
teleradiology systems in selected markets. Teleradiology permits a physician at
one facility to interpret images from imaging equipment located at other
facilities. These systems also permit Radiologix to leverage the services of
radiology specialists and subspecialists located at one location who can
provide professional services to multiple locations within the network. In
1999, Radiologix installed two upgrades to existing teleradiology systems, one
in its Northeast Kansas market area and one in its South Texas market area. As
a result, all of Radiologix's markets (excluding the Questar market segment)
now have teleradiology systems. These systems permit the radiology practices to
offer 24-hour professional radiology services to hospitals and other locations
equipped with Radiologix's teleradiology equipment. Prior to the installation
of the teleradiology network, continuous on-site staffing may not have been
appropriate. Teleradiology systems are attractive to referring physicians and
hospitals since they receive timely radiology interpretations from a
radiologist outside of normal business hours or on weekends or holidays. These
systems are attractive to radiologists since they utilize one radiologist to
cover multiple sites and avoid on-site staffing or call coverage at each site
during these periods.

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

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

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

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

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

Radiology Practices

The radiology practices whose radiologists perform professional services
for Radiologix's non-Questar imaging centers consist of ten radiology
practices, comprised of approximately 280 radiologists, located in seven states
and Washington, D.C. All of the practices provide professional services, which
consist of the supervision, performance and interpretation of radiological
procedures in hospitals, imaging centers or other settings. As of December 31,
1999, the practices provided professional radiology services to 58 hospitals.
In the aggregate, the practices provide all subspecialty diagnostic and
interventional radiology and radiation oncology services. Substantially all of
the radiologists are board certified. In addition to providing professional
services at Radiologix's imaging facilities and the hospitals, the radiology
practices provide professional services to hospital outpatient facilities,
physicians' offices, mobile imaging units and nursing homes.

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

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Affiliation Structure for Radiologix's Radiology Practices

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

In connection with the acquisition of imaging centers and affiliations with
radiology practices, Radiologix acquires certain tangible and intangible assets
and assumes certain liabilities of the radiology practices. Radiologix pays the
purchase price for such transactions in cash and shares of its Common Stock.
Simultaneously with the acquisitions, Radiologix enters into a 40-year service
agreement with each radiology practice pursuant to which Radiologix will
provide a wide range of management, administrative, technical and non-medical
services. For providing services under the service agreement, Radiologix
receives a fee which is structured to align the interests of Radiologix and the
radiology practices. Additionally, the service agreements restrict the
radiology practices from competing with Radiologix and other of Radiologix's
radiology practices within a specified geographic area during the term of the
service agreements and also require each radiology practice to obtain and
enforce similar restrictive covenants with the full-time physicians affiliated
with their practices. Radiologix anticipates that some, but not the majority
of, future acquisitions of imaging centers and affiliated radiology practices
will be based on the partnership model Radiologix has established or a
variation of such model.

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

Information Management

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

Service Agreements

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

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

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

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

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

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

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

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

Each service agreement may also be terminated by Radiologix if the
radiology practice or a physician employee engages in conduct, or is formally
accused of conduct, for which the physician employee's license to practice
medicine reasonably would be

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

Upon termination of a service agreement with a radiology practice,
depending upon the termination event, Radiologix may have the right to require
such radiology practice to purchase and assume, or the radiology practice may
have the right to require Radiologix to sell, assign and transfer to it, the
assets and related liabilities and obligations associated with the professional
and technical radiology services provided by the radiology practice immediately
prior to such termination. The purchase price for such assets, liabilities and
obligations will be the lesser of fair market value thereof or the return of
the consideration received in the acquisition; provided, however, that the
purchase price shall not be less than the net book value of the assets being
purchased.

Radiology Industry

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

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

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

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

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

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

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

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

Positron Emission Tomography. PET utilizes a scanner to record signals
emitted by compounds with signal-emitting tracers after such compounds are
injected into a patient's body. A scanner records the signals as they
travel through the body and collect in

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the various organs targeted for examination. A computer assembles the
signals into actual images. PET has proven effective in the detection and
tracking of cancer (including lung, colorectal, breast and prostate), heart
disease and brain disorders, including Alzheimer's disease, Parkinson's
disease and seizure disorders. PET can provide accurate information
currently unobtainable through any other imaging means and can eliminate
the need for multiple tests and diagnostic surgical procedures.

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

Trends In Radiology

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

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

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

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

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

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imaging centers to hospitals, radiologists and companies engaged exclusively in
the ownership, operation and management of imaging centers. Radiologix believes
that many of these entities have and will continue to consolidate the ownership
of imaging centers.

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

Trends in Radiology Organizations. The trends toward managed care, cost
containment and health care consolidation have combined to limit the number of
positions available and the salaries paid to radiologists. In addition, small
independent physician groups and individual practices are typically at a
competitive disadvantage to larger associations or networks of physicians
because they lack the capital necessary to (i) expand the geographic coverage
of the practice and the imaging modalities offered, (ii) develop
state-of-the-art information systems and (iii) purchase costly new imaging
technologies, each of which can improve quality of care and reduce costs.
Generally, they also lack the cost accounting and quality management systems
necessary to allow physicians to price and monitor complex risk-sharing
arrangements with third-party payors. Additionally, small to medium-sized
groups and individual practices often do not have contractual ties with other
providers nor do they have the ability to offer a broad range of subspecialty
imaging services. Small practices often have higher operating costs (since
overhead must be spread over a relatively small revenue base) and minimal
vendor purchasing power. In order to remain competitive in the changing medical
service environment, radiologists are beginning to affiliate with or create
larger organizations by adding radiologists to their groups, creating or
joining a network or an independent physician association or affiliating with a
services provider such as Radiologix.

Year 2000 Compliance

Radiologix has not experienced any material adverse impact from the
transition to the year 2000. However, there can be no assurance that
Radiologix's suppliers and customers have not been affected in a manner that is
not yet apparent. Radiologix will continue to monitor its Year 2000 compliance
and the year 2000 compliance of its suppliers and customers. Prior to December
31, 1999, the Company verified that all of its personal computers and software
were Year 2000 compliant. The Company replaced or upgraded all items that were
not Year 2000 compliant. The costs related to these efforts were not material.

GOVERNMENT REGULATION AND SUPERVISION

General

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

Licensing and Certification Laws

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

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Fee-Splitting; Corporate Practice of Medicine

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

Medicare Physician Payment System

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

The inability of Radiologix to negotiate satisfactory arrangements with managed
care companies would have a material adverse effect on Radiologix's business,
financial condition and results of operation.

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

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

Medicare and Medicaid Fraud and Abuse

Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of
a person, (ii) the furnishing or arranging for the furnishing of items or
services reimbursable under the Medicare, Medicaid or other governmental
programs or (iii) the purchase, lease or order or arranging or recommending
purchasing, leasing or ordering of any item or service reimbursable under the
Medicare, Medicaid or other governmental programs. Enforcement of this
anti-kickback law is a high priority for the federal government, which has
substantially increased enforcement resources and is scheduled to continue
increasing such resources. The applicability of the anti-kickback law to many
business transactions in the health care

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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.

Radiologix believes that although it receives fees under the service
agreements for management and administrative services, it is not in a position
to make or influence referrals of patients or services reimbursed under the
Medicare, Medicaid or other governmental programs to radiology practices or
their affiliated physicians, or to receive such referrals. Such service fees
are intended by Radiologix 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, Radiologix does not believe that service
fees payable to it should be viewed as remuneration for referring or
influencing referrals of patients or services covered by such programs as
prohibited by statute.

Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions are commonly known as the "Stark law." 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." Radiologix believes that, although it receives fees
under the service agreements for management and administrative services, it is
not in a position to make or influence referrals of patients.

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

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 such
radiologist or radiation oncologist pursuant to a consultation requested by
another physician, does not constitute a "referral" by a "referring physician."
Therefore, if such requirements were met, the Stark law self-referral
prohibition would not apply to such services. The effect of the Stark law on
the radiology practices, therefore, will depend on the precise scope of
services furnished by each such practice's radiologists and whether such
services derive from consultations or are self-generated. Management of
Radiologix believes that all of the services covered by the Stark law provided
by the radiology practices derive from requests for consultation. In light of
the complexity of the issues relating to the Stark law, and the uncertainty
regarding the Proposed Regulations, it is unclear whether the existing
relationships between Radiologix and the radiology practices and the
relationships between the radiology practices and physicians who refer patients
to them would be deemed to comply with Stark law after the final regulations
are adopted.

In addition, Radiologix believes that it has structured its acquisitions of
the assets of existing practices and intends to structure its future
acquisitions so as to not violate the anti-kickback and Stark law and
regulations. Specifically, Radiologix believes the consideration paid by
Radiologix 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 Radiologix's
acquisitions could be viewed as possibly violating anti-kickback and
anti-referral laws and regulations. A determination of liability under any such
laws could have a material adverse effect on Radiologix's business, financial
condition and results of operations.

The federal government recently announced an initiative to audit all
Medicare Carriers, which are the companies that adjust and pay Medicare claims.
These audits are expected to intensify governmental scrutiny of individual
providers. An unsatisfactory audit of any of the Company's imaging centers or
affiliated radiology practices could result in significant repayments
obligations, exclusion from the Medicare, Medicaid, or other governmental
programs and civil and criminal penalties.

Federal regulatory and law enforcement authorities have recently increased
enforcement activities with respect to Medicare and Medicaid fraud and abuse
regulations and other reimbursement laws and rules, including laws and
regulations that govern Radiologix's contemplated activities and the activities
of the radiology practices. There can be no assurance that Radiologix's or such
radiology practices' contemplated activities will not be investigated, that
claims will not be made against Radiologix or the radiology

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practices or that these increased enforcement activities will not directly or
indirectly have an adverse effect on Radiologix's business, financial condition
and results of operations.

State Anti-kickback and Physician Self-referral Laws

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

Health Care Reform Initiatives

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

Health Insurance Portability and Accountability Act of 1996

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

Compliance Program

With the assistance of Radiologix's special health care regulatory counsel,
Radiologix implemented a program to monitor compliance with federal and state
laws and regulations applicable to health care entities. Radiologix has
appointed a compliance officer who is charged with implementing and supervising
Radiologix's compliance program, which includes the adoption of (i) "Standards
of Conduct" for its employees and affiliates and (ii) an "Ethics Process" that
will specify how employees, affiliates and others may report regulatory or
ethical concerns to Radiologix's compliance officer. Radiologix believes that
its 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 Radiologix's compliance program consists of conducting periodic audits
of various aspects of its operations, including the radiology practices.
Radiologix also conducts mandatory educational programs designed to familiarize
its employees with the regulatory requirements and specific elements of
Radiologix's compliance program.

Insurance Laws and Regulation

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

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Competition

Radiologix's owned, operated or managed imaging centers and the radiology
practices compete with local radiologists and technical imaging service
providers, including for-profit and non-profit hospitals and health systems, in
each of the markets served by Radiologix. Radiologix believes that changes in
governmental and private reimbursement policies and other factors have resulted
in increased competition among providers for medical services to consumers and
that cost, accessibility, quality and scope of services provided are the
principal factors that affect competition. There can be no assurance that
Radiologix's owned, operated or managed imaging centers or the radiology
practices will be able to compete effectively in the markets that they serve,
which inability to compete could adversely affect Radiologix.

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

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

Facilities and Employees

Radiologix's corporate headquarters are located at 3600 Chase Tower, 2200
Ross Avenue, Dallas, Texas 75201-2776, in approximately 26,000 square feet
occupied under a lease which expires on August 31, 2011. As of December 31,
1999, Radiologix had approximately 1,950 employees, approximately 60 of whom
are employed at Radiologix's headquarters and regional offices and the
remainder of which are employed at Radiologix's imaging centers and at the
radiology practices. Radiologix believes that its relationship with its
employees is good.

Corporate Liability and Insurance

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

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Radiologix's intent is to not influence
or control the practice of medicine by physicians or have responsibility for
compliance with certain regulatory and other requirements directly applicable
to physicians and physician groups. As a result of the relationship between
Radiologix and the related radiology practices, however, Radiologix may become
subject to medical malpractice actions under various theories, including
successor liability. There can be no assurance that claims, suits or complaints
relating to services provided by radiology practices will not be asserted
against Radiologix in the future. Radiologix maintains insurance coverage that
it believes will be adequate. Radiologix

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anticipates that such insurance will extend to professional liability claims
that may be asserted against employees of Radiologix that work on site at
radiology practice locations. In addition, pursuant to the service agreements,
the radiology practices are required (and Radiologix intends to require any
other future related radiology practices) to maintain comprehensive
professional liability insurance. The availability and cost of such insurance
is affected by various factors, many of which are beyond the control of
Radiologix and the practices. The cost of such insurance to Radiologix and the
radiology practices may have an adverse effect on Radiologix's operations. In
addition, successful malpractice or other claims asserted against radiology
practices or Radiologix that exceed applicable policy limits could have a
material adverse effect on Radiologix.

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

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

ITEM 2. PROPERTIES.

ITEM 3. LEGAL PROCEEDINGS.

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

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

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 1999.

16
<PAGE> 17

PART II

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

Market Information and Stock Price

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

<TABLE>
<CAPTION>
HIGH LOW
------ ------
1998
<S> <C> <C>
Fiscal Quarter Ended March 31, 11 7/8 9 1/2
Fiscal Quarter Ended June 30, 11 1/2 7
Fiscal Quarter Ended September 30, 9 1/8 6
Fiscal Quarter Ended December 31, 1999 7 1/8 4 1/2
Fiscal Quarter Ended March 31, 7 7/8 5 3/8
Fiscal Quarter Ended June 30, 9 5
Fiscal Quarter Ended September 30, 8 1/8 5 3/4
Fiscal Quarter Ended December 31, 7 15/16 3 7/16
</TABLE>

As of the close of business on March 24, 2000, the last reported sales
price per share of the Company's Common Stock was $5.50. There were 258 holders
of record of the Company's Common Stock at the close of business on March 24,
2000. Such number does not include persons whose shares are held by a bank,
brokerage house or clearing company, but does include such banks, brokerage
houses and clearing companies.

On January 10, 2000, the Company was notified by NASDAQ that the Company's
Common Stock had not maintained a minimum bid price of at least $5.00 per share
during the previous 30 consecutive trading days, a requirement of NASDAQ's
Marketplace Rules. The Company has until April 10, 2000, to regain compliance,
which will be met if the Company's Common Stock attains a bid price of at least
$5.00 for ten consecutive trading days. If compliance is not met, the Company's
Common Stock may be delisted on April 12, 2000. If the NASDAQ National Market
System elects to delist the Company's Common Stock, the Company intends to
appeal the determination by requesting a hearing with the Nasdaq Listing
Qualifications Panel (the "Panel"). The hearing request will stay the Company's
delisting pending the Panel's decision. If the Company is unsuccessful with its
appeal, the Company will apply to be listed on the NASDAQ SmallCap Market or
the American Stock Exchange ("AMEX"). There can be no assurance the Company's
Common Stock will meet the compliance requirements for NASDAQ, or the Company
will be successful in its appeal, or that, if delisted from the NASDAQ National
Market System, listing will be attained on the NASDAQ SmallCap Market or the
AMEX.

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

17
<PAGE> 18

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

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

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 30, 1996)
TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1997 1998 1999
---------------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SERVICE FEE REVENUE .............................. $ -- $ 9,545 $ 149,327 $ 199,700

COSTS AND EXPENSES:
Salaries and benefits ......................... -- 2,922 42,227 52,826
Field supplies ................................ -- 1,036 8,865 11,630
Field rent and lease expense .................. -- 852 11,532 18,444
Other field expenses .......................... -- 1,557 25,311 32,278
Bad debt expense .............................. -- 862 13,723 18,838
Corporate general and administrative .......... 1,623 4,910 9,597 11,192
Depreciation and amortization ................. 3 888 12,178 18,403
Interest expense, net ......................... 23 617 7,541 12,357
--------- --------- --------- ---------
Total costs and expenses .................. 1,649 13,644 130,974 175,968
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES, MINORITY
INTERESTS IN CONSOLIDATED SUBSIDIARIES
AND EQUITY IN EARNINGS OF INVESTMENTS ......... (1,649) (4,099) 18,353 23,732
EQUITY IN EARNINGS OF INVESTMENTS ................ -- 220 4,339 3,581
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES .................................. -- (49) (710) (910)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES ....................... (1,649) (3,928) 21,982 26,403
INCOME TAX EXPENSE ............................... -- -- 6,499 10,346
--------- --------- --------- ---------
NET INCOME (LOSS) ................................ $ (1,649) $ (3,928) $ 15,483 $ 16,057
========= ========= ========= =========

NET INCOME (LOSS) PER COMMON SHARE:
Basic ..................................... $ (0.82) $ (1.13) $ 0.83 $ 0.83
Diluted ................................... $ (0.82) $ (1.13) $ 0.80 $ 0.80
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
1996 1997 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital .................................... $ 2,029 $ 3,376 $ 19,378 $ 25,181
Total Assets ....................................... 2,578 62,766 156,639 244,840
Long-term Debt and Capital Lease Obligations ....... -- 55,865 120,211 164,840
Convertible Notes .................................. 3,500 -- -- 20,000
Stockholders' Equity (Deficit) ..................... (1,399) (24,035) 8,998 25,375
</TABLE>

18
<PAGE> 19

Summary of Operations by Quarter

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

<TABLE>
<CAPTION>
1998 QUARTER ENDED 1999 QUARTER ENDED
-------------------------------------------- -------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MAR. 31 JUNE 30 SEPT. 30 DEC. 31* MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Service fee revenue $32,720 $36,950 $38,603 $41,054 $43,232 $47,188 $52,169 $57,111
Income before
income taxes 5,122 5,470 5,489 5,901 6,265 6,920 6,355 6,863
Net income $ 3,073 $ 3,391 $ 3,408 $ 5,611 $ 3,884 $ 4,288 $ 3,835 $ 4,050

Net Income Per Share:
Basic $ 0.17 $ 0.18 $ 0.18 $ 0.30 $ 0.20 $ 0.22 $ 0.20 $ 0.21
Diluted $ 0.16 $ 0.17 $ 0.18 $ 0.29 $ 0.20 $ 0.22 $ 0.19 $ 0.19
Weighted Average Shares:
Basic 18,054 18,744 18,908 19,235 19,295 19,297 19,311 19,316
Diluted 18,841 19,449 19,356 19,679 19,730 19,738 21,246 22,054
</TABLE>

* See Note 7 to the financial statements for revision of income tax expense in
1998.

19
<PAGE> 20

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

OVERVIEW

The Company is a leading provider of radiology services in the United
States through (i) its ownership and operation of technologically advanced,
multi-modality diagnostic imaging centers, and (ii) its provision of
administrative, management and other information services to certain radiology
business partners. The Company derives the majority of its service fee revenue
from the production and management of the technical component of radiology
services performed at the Company's free-standing imaging facilities and
pursuant to the Company's outsourced hospital relationships. In addition, the
Company also derives service fee revenue from providing administrative,
management and information services to radiology practices pursuant to
long-term service agreements. For the year ended December 31, 1999, the Company
derived 73% of its service fee revenue from the ownership, management and
operation of its radiology and imaging center network and 27% of its service
fee revenue from the administrative, management and information services
provided to radiology practices. As of December 31, 1999, Radiologix owned,
operated or maintained an ownership interest in imaging equipment at 113
locations and provided management services to ten radiology practices
consisting of 280 physicians who provide professional radiology services at the
Company's radiology centers and at 58 hospitals. The Company has closed several
low-performing or duplicative imaging centers since its IPO in November 1997.
The costs for the closures were not material and were expensed as incurred. As
of December 31, 1999, Radiologix's imaging centers are located in 17 states,
with concentrated geographic coverage in markets located in California,
Florida, Illinois, Kansas, Maryland, New York, Texas, Virginia and Washington,
D.C.

In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," published by the Securities
and Exchange Commission, the acquisition of the assets and assumption of
certain liabilities for all of the initial radiology practices in 1997 pursuant
to the Reorganizations (as defined) was accounted for by the Company at the
transferors' historical cost basis with shares of Radiologix's Common Stock
issued in those transactions valued at the historical cost of the nonmonetary
assets acquired, net of liabilities assumed.

RESULTS OF OPERATIONS

During the year ended December 31, 1999 and 1998, the Company has focused
on the results of operations through the division of its radiology practices
into four designated regions of the United States: Mid-Atlantic, Northeastern,
Central,and Western regions. In addition, the Company focuses on the operations
of the imaging centers of Questar Imaging, Inc., Questar, initially acquired in
August 1999 as a separate operation. The Company's operations of the each of
the four designated regions, as well as Questar, are to provide administrative,
management and information services through its ownership and operation of
technologically advanced, multi-modality diagnostic imaging centers. The
Company has divided the operations into the four regions and Questar only for
purposes of the division of internal management responsibilities but does not
focus on each of these regions as a separate product line or make financial
decisions as if they are 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 the Company has with each of the radiology practices . In
addition, any imaging centers which are in the same market as the operations of
the radiology practices are not included in the service agreements of such
radiology practices.

The operating margin for the Mid-Atlantic of 34% and 32% for the twelve
months ended December 31, 1999 and 1998, respectively remained relatively
constant. The operating margin of the Northeastern region of 34% and 29% % for
the twelve months ended December 31, 1999 and 1998, respectively increased in
1999 as a result of the Company's investment in higher technology radiology
equipment which generally results in an increased operating margin. The
operating margin of the Central region of 34% and 41% for the twelve months
ended December 31, 1999 and 1998, respectively decreased as a result of a shift
from providing primarily only professional services to providing technical
services as well. The operating margin for the Western region of 30% remained
constant for the twelve months ended December 31, 1999 and 1998, respectively.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Service Fee Revenue

Service fee revenue increased to $199,700,000 in 1999 from $149,327,000 in
1998. Of the increase from 1998 to 1999, $30,909,000 resulted from increased
business within existing facilities (21.7% same store increase), which is
primarily due to increased procedure volume, a shift in the mix to "high-end"
procedures and the addition of new reading contracts and agreements

20
<PAGE> 21

with managed care organizations. Of the remaining increase from 1998 to 1999,
$15,722,000 resulted from facilities acquired and developed in 1998 and 1999,
and $3,742,000 resulted from "tuck-in" acquisitions of imaging centers during
the period.

Salaries and Benefits

Salaries and benefits increased to $52,826,000 in 1999 from $42,227,000 in
1998. Of the increase from 1998 to 1999, $4,619,000 resulted from existing
facilities representing an 11.5% same store increase. An increase of $3,998,000
resulted from facilities acquired and developed in 1998 and 1999, and the
remaining $1,982,000 increase resulted from "tuck-in" acquisitions of imaging
centers during the period. As a percentage of service fee revenue, these costs
were 26.5% and 28.3% in 1999 and 1998, respectively.

Field Supplies

Field supplies increased to $11,630,000 in 1999 from $8,865,000 in 1998. Of
the increase from 1998 to 1999, $1,349,000 resulted from existing facilities
representing a 16.3% same store increase. An increase of $825,000 resulted from
facilities acquired and developed in 1998 and 1999, and the remaining $591,000
resulted from "tuck-in" acquisitions of imaging centers during the period. As a
percentage of service fee revenue, these costs were 5.8% and 5.9% in 1999 and
1998, respectively.

Field Rent and Lease Expense

Field rent and lease expense increased to $18,444,000 in 1999 from
$11,532,000 in 1998. Of the increase from 1998 to 1999, $3,690,000 resulted
from existing facilities representing a 33.5% same store increase. This
increase is attributable to several MRI leases in the Northeast region that are
based on a per scan basis. As 1999 volume increased, equipment lease expense
increased due to per scan payment arrangements associated with these higher-end
modalities. An increase of $2,476,000 resulted from facilities acquired and
developed in 1998 and 1999 and the remaining $746,000 resulted from "tuck-in"
acquisitions of imaging centers in 1998 and 1999. As a percentage of service
fee revenue, these costs were 9.2% and 7.7% in 1999 and 1998, respectively.

Other Field Expenses

Other field expenses increased to $32,278,000 in 1999 from $25,311,000 in
1998. Of the increase from 1998 to 1999, $2,987,000 resulted from existing
facilities representing a 12.8% same store increase. An increase of $3,182,000
resulted from facilities acquired and developed in 1998 and 1999, and $798,000
resulted from "tuck-in" acquisitions of imaging centers in 1998 and 1999. As a
percentage of service fee revenue, these costs were 16.2% and 17.0% in 1999 and
1998, respectively. Other field expenses include repairs and maintenance,
service contracts, utilities and communication costs.

Bad Debt Expense

Bad debt expense increased to $18,838,000 in 1999 from $13,723,000 in 1998.
This increase was primarily due to the increase in service fee revenue. As a
percentage of service fee revenue, these expenses were 9.4% and 9.2% in 1999
and 1998, respectively.

Corporate General and Administrative

Corporate general and administrative expenses increased 16.6% to
$11,192,000 in 1999 from $9,597,000 in 1998. This increase was principally due
to the continued development of the Company's infrastructure, the addition of
staff related to the Questar Imaging, Inc. transaction (see Note 3 to the
consolidated financial statements), and to a limited extent, the expenses
associated with system modifications for Year 2000 compliance. As a percentage
of service fee revenue, these costs were 5.6% and 6.4% in 1999 and 1998,
respectively.

Depreciation and Amortization

Depreciation and amortization expense increased to $18,403,000 in 1999 from
$12,178,000 in 1998. This increase was principally due to amortization of
intangible assets resulting from the Company's acquisition of additional
facilities and practices. In addition, the Company has continued to buy new
equipment to replace older equipment, and this upgrade of equipment resulted in
increased depreciation expense. As a percentage of service fee revenue, these
costs were 9.2% and 8.2% in 1999 and 1998, respectively.

21
<PAGE> 22

Interest Expense, net

Interest expense, net increased to $12,357,000 in 1999 from $7,541,000 in
1998. As a percentage of service fee revenue, these costs were 6.2% and 5.1% in
1999 and 1998, respectively. The percentage increase is a result of the
Company's acquisitions throughout 1999, an increase in days sales outstanding
in accounts receivable and the issuance of $20,000,000 of convertible notes
(see Note 5 to consolidated financial statements) to fund the Questar Imaging,
Inc. transaction, all of which resulted in the Company carrying higher debt
levels.

Income Taxes

The Company's effective tax rate for 1999 increased to 39.2 %. The increase in
the effective tax rate is primarily attributed to acquisitions in which the
Company has acquired the stock of the target. In a stock purchase, the goodwill
associated with the transaction is not deductible for tax purposes and,
therefore, increases the effective tax rate. The Company recognized the income
tax benefit for operating losses incurred in 1997 and 1996 during 1998 thereby
resulting in a lower effective tax rate in 1998.

1999 ACQUISITIONS

The Company completed one material acquisition since the end of 1998. On
August 1, 1999, the Company acquired all the outstanding stock of Questar
Imaging, Inc. of Tampa, Florida ("Questar"), a private operator of primarily
MRI radiology centers. Questar offers magnetic resonance imaging (MRI) and
other diagnostic imaging services at 27 centers in 14 states, and is in the
process of developing 17 additional MRI centers. Of the seventeen centers under
development, three additional centers were acquired as of December 31, 1999.
The total 1999 consideration for the transaction was approximately $18,921,000
in cash, plus the assumption of $16,763,000 in liabilities. The consideration
for the developmental centers in 2000 will be approximately $7,000,000 plus the
assumption of certain liabilities. This transaction was accounted for using the
purchase method.

The total consideration for all other 1999 acquisitions was approximately
$6,485,000 in cash, 50,264 shares of the Company's Common Stock ($304,000),
plus the assumption of $3,193,000 in liabilities.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Radiologix, Inc. was incorporated on April 30, 1996, as American Physician
Partners, Inc., but conducted no significant operations until the initial
public offering (the "IPO") and closing of the acquisitions of the initial
radiology practices (the "Reorganizations") in November 1997. The Company's
1997 operating results reflect only 35 days of operations, therefore
comparative results of the periods are not meaningful.

Service Fee Revenue

Service fee revenue increased to $149,327,000 in 1998 from $9,545,000 in
1997. Prior to November 26, 1997, the Company had no significant operations
and, therefore, no service fee revenue was generated.

Salaries and Benefits

Salaries and benefits increased to $42,227,000 in 1998 from $2,922,000 in
1997. As a percentage of service fee revenue, these costs were 28.3% and 30.6%
in 1998 and 1997, respectively. The Company did not incur any salary and
benefit costs for practice-based employees prior to the Reorganizations. The
amounts paid to corporate employees during 1997 were recorded as corporate
general and administrative expenses.

Field Supplies

Field supplies increased to $8,865,000 in 1998 from $1,036,000 in 1997. As
a percentage of service fee revenue, these costs were 5.9% and 10.9% in 1998
and 1997, respectively. The decrease as a percentage of service fee revenue is
largely due to the Company's ability to negotiate and obtain favorably priced
radiology supplies.

Field Rent and Lease Expense

Field rent and lease expense increased to $11,532,000 in 1998 from $852,000
in 1997. As a percentage of service fee revenue, these costs were 7.7% and 8.9%
in 1998 and 1997, respectively.

22
<PAGE> 23

Other Field Expenses

Other field expenses increased to $25,311,000 in 1998 from $1,557,000 in
1997. As a percentage of service fee revenue, these costs were 17.0% and 16.3%
in 1998 and 1997, respectively. Other field expenses in 1998 include repairs
and maintenance, service contracts, utilities and communication costs.

Bad Debt Expense

Bad debt expense increased to $13,723,000 in 1998 from $862,000 in 1997.
This increase was primarily due to the increase in sales. As a percentage of
service fee revenue, these expenses were 9.2% and 9.0% in 1998 and 1997,
respectively.

Corporate General and Administrative

Corporate general and administrative expenses increased 95.5% to $9,597,000
in 1998 from $4,910,000 in 1997. As a percentage of service fee revenue, these
costs were 6.4% and 51.4% in 1998 and 1997, respectively. The decrease as a
percentage of service fee revenue is a result of the Company building
infrastructure throughout 1997.

Depreciation and Amortization

Depreciation and amortization expense increased to $12,178,000 in 1998 from
$888,000 in 1997. As a percentage of service fee revenue, these costs were 8.2%
and 9.3% in 1998 and 1997, respectively. Prior to the IPO, the Company did not
have any material depreciable assets.

Interest Expense, net

Interest expense, net increased to $7,541,000 in 1998 from $617,000 in
1997. As a percentage of service fee revenue, these costs were 5.1% and 6.5% in
1998 and 1997, respectively.

Income Taxes

The Company's effective tax rate for 1998 was 29.6%. The Company recognized
the income tax benefit for the operating losses incurred prior to the
Reorganizations during 1998.

1998 ACQUISITIONS

The Company completed ten transactions in 1998 with total consideration of
approximately $70,368,000 consisting of approximately $52,866,000 in cash and
$17,502,000 in the Company's common stock. These transactions are discussed in
greater detail in Note 3 to the Consolidated Financial Statements included
herewithin. All the transactions were accounted for using the purchase method
resulting in the creation of approximately $61,095,000 of intangible assets. On
an annual basis, the amortization costs related to the intangible assets
created through these acquisitions will result in a charge of approximately
$2,444,000 per year.

Liquidity and Capital Resources

At December 31, 1999, the Company had $25,181,000 in working capital, an
increase of $5,803,000 from December 31, 1998. The Company's principal sources
of liquidity consist of (i) cash and cash equivalents aggregating $4,302,000,
(ii) net accounts receivable of $61,762,000, and (iii) approximately
$17,500,000 in borrowing capacity under the Company's bank credit facility (the
"Credit Facility").

For the year ended December 31, 1999, the $1,462,000 used in operations was
primarily comprised of a $21,889,000 increase in accounts receivable and a
$15,102,000 increase in other receivables and other current assets which were
offset primarily by net income of $16,057,000 and depreciation and amortization
expense of $18,403,000. For the year ended December 31, 1998, $9,950,000 was
provided by operations, primarily as a result of $13,531,000 of net income and
$12,178,000 of depreciation expense offset by an increase in accounts
receivable of $10,379,000 and a decrease in other liabilities of $6,388,000.
For the year ended December 31, 1997, $5,333,000 was used in operations.

23
<PAGE> 24

Cash of $44,957,000 was used in investing activities in 1999, $31,458,000
of which related to the purchase of property and equipment and $25,406,000 was
related to certain acquisitions. These amounts were offset primarily by
$10,000,000 related to the sale of property and equipment. Cash of $63,501,000
was used in investing activities in 1998, $52,866,000 of which was related to
certain acquisitions, $12,651,000 related to the purchase of property and
equipment and $2,016,000 net was received from joint ventures. In 1997, cash of
$420,000 was used in investing activities, primarily for the purchase of
property and equipment.

Financing activities in 1999, 1998, and 1997 provided cash of $44,236,000,
$55,464,000, and $7,834,000, respectively, substantially all of which was
provided under the Credit Facility. In 1999, $20,000,000 was provided from
convertible debt.

On November 26, 1997, the Company entered into the Credit Facility. The
Credit Facility was amended May 19, 1998. The loan agreement provides for
revolving loans of up to $160,000,000 to be used by the Company for
acquisitions and general working capital needs. The Company may borrow, repay
and reborrow amounts during the first three years of the Credit Facility.
Amounts outstanding under the Credit Facility at the end of three years are
required to be repaid in quarterly installments of varying amounts commencing
September 30, 2000.

The Credit Facility expires and all loans thereunder mature on the sixth
anniversary of the closing date of the Credit Facility. Borrowings under the
Credit Facility at any time may not exceed the lesser of $160,000,000 or 3.25
times the consolidated EBITDA of the Company, giving pro forma effect to
acquisitions made with such borrowings. In accordance with the Credit Facility,
the Company's senior debt under all senior credit arrangements could not exceed
$185,900,000 at December 31, 1999. As of December 31, 1999, the Company had
outstanding borrowings of $142,500,000 under the Credit Facility and an
additional $22,340,000. At the Company's option, the interest rate is (i) an
adjusted LIBOR rate, plus an applicable margin which can vary from 1.5% to 2.5%
dependent on certain financial ratios or (ii) the prime rate, plus an
applicable margin which can vary from 0.5% to 1.5%. In each case, the
applicable margin varies based on financial ratios maintained by the Company.
The Credit Facility includes certain restrictive covenants including
prohibitions on the payment of dividends and the maintenance of certain
financial ratios (including minimum debt-service coverage and maximum
debt-to-EBITDA coverage, as defined). Borrowings under the Credit Facility are
secured by all service agreements, which the Company is, or becomes a party to,
and a pledge of the stock of the Company's subsidiaries. At December 31, 1999,
the Company is in compliance with the Credit Facility's restrictive covenants.

On July 30, 1999, the Company entered into a $20,000,000 convertible junior
subordinated note (the "Note") in connection with the Securities Purchase
Agreement for the Questar acquisition, dated August 1, 1999. The Note matures
July 31, 2009, and bears interest, payable quarterly in cash or payment in kind
securities, at 8.0%. The principal of the Note is convertible into the
Company's Common Stock at the price of $8.625 per share. If by the second
anniversary date of the Note the closing price of the Company's Common Stock
has not averaged $8.625 for 45 of the 60 days of the determination period (the
"Market Price Event"), the base conversion price will be reset at 87.19% of the
initial conversion price. If by the third or fourth anniversary date of the
Note, the Market Price Event has not occurred, the interest rate will be
increased to 8.25% and 8.5%, respectively.

The Securities Purchase Agreement includes certain restrictive covenants
including prohibitions on the payment of dividends, the reservation of unissued
common stock pending conversion or exercise of the convertible Note, and the
maintenance of certain financial ratios (including maximum interest coverage
and leverage ratios, as defined). At December 31, 1999, the Company is in
compliance with the Note's restrictive covenants.

The Company is currently discussing with its lenders various financing
options, including extending the dates of required quarterly principal
amortization (currently beginning September 30, 2000) and final maturity
(currently November, 2003) to future periods. In addition, the Company is
discussing with its lenders an increase in the total amount available under the
Credit Facility to facilitate its growth strategy for 2000 and beyond. The
Company believes that the extension and/or increase in the Credit Facility will
be completed in the second quarter of 2000. Although there can be no assurance
that these financing options will be finalized or be available on terms
acceptable to the Company, management believes that additional sources of
liquidity are available in the marketplace to meet its liquidity needs for the
foreseeable future.

YEAR 2000 ISSUE

Impact of Year 2000

The Year 2000 Issue existed because many computer systems and applications
used two-digit date fields to designate a year. As the century date occurred,
computer programs, computers and embedded microprocessors controlling equipment
with date-sensitive systems could have recognized Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may have

24
<PAGE> 25

resulted in computer system failures or miscalculations of critical financial
and operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related
issues, which could have lead to miscalculations or failures: (i) some older
systems' programming assigns special meaning to certain dates, such as 9/9/99
and (ii) the Year 2000 is a leap year.

Prior Cost Estimates

The Company's costs of assessment, renovation, testing and implementation
of its internal systems total approximately $270,000 as of March 15, 2000, and
is below the prior estimated range of $500,000 to $1,500,000. The major
components of these costs are: consultants, additional personnel costs,
programming, new software and hardware, software upgrades and travel expenses.
While there can be no assurance all Year 2000 issues have been resolved, the
Company believes no additional material costs will be incurred.

Affect on Results of Operations

As of March 25, 2000, there have been no significant business interruptions
or adverse effects within the Company resulting from Year 2000 issues within
the Company or its suppliers. Due to system conversions related to Year 2000
issues of certain health maintenance organizations and Medicare, the timeliness
of cash receipts related to the Company's accounts receivable were adversely
affected. The Company anticipates that collection rates will improve in 2000.

The aforementioned costs were expensed primarily through corporate general
and administrative expenses in 1998 and 1999.

The Company continues to monitor internal systems and equipment and is in
contact with related third parties regarding Year 2000 issues, including any
issues arising from leap year.

FORWARD-LOOKING STATEMENTS

This report contains or may contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 including
statements of the Company's and management's expectations, intentions, plans
and beliefs, including those contained in or implied by "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
These forward-looking statements, as defined in Section 21E of the Securities
Exchange Act of 1934, are dependent on certain events, risks and uncertainties
that may be outside of the Company's control. These forward-looking statements
may include statements of management's plans and objectives for the Company's
future operations and statements of future economic performance; the Company's
capital budget and future capital requirements, and the Company meeting its
future capital needs; and the assumptions described in this report underlying
such forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a
number of factors, including, without limitation, those described in the
context of such forward-looking statements.

RISK FACTORS

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

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

RISKS RELATING TO RADIOLOGIX

Reliance on Referrals

Radiologix's radiology services networks depend on referrals from third
parties. A substantial portion of these referrals are made by physicians who
have no contractual obligation to refer patients to Radiologix's networks.
Radiologix generates revenue from fees

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charged for technical services provided at its owned, operated or managed
imaging centers and from service fees that it receives from the radiology
practices. Neither Radiologix nor any of its radiology practices is dependent
on any single referral source for a material portion of its revenue. However,
if a sufficiently large number of physicians elected at any time to discontinue
referring patients to Radiologix's networks, Radiologix's business, financial
condition and results of operations would be materially adversely affected.

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

Limited Operating History; Reliance on Key Personnel

Prior to November 26, 1997, Radiologix conducted no significant operations
and had no revenue while incurring corporate overhead expenses associated with
building its management infrastructure. Radiologix's financial statements for
the fiscal year ended December 31, 1997, cover a period of only 35 days of
operating Radiologix's radiology services business. Although Radiologix now has
audited financial statements for the full 12-month periods ended December 31,
1998 and December 31, 1999, Radiologix's limited operating history prior to
1998 may limit Radiologix's ability to prepare accurate projections for future
periods, including projections of revenues and expenses. This brief operating
history also may limit Radiologix's ability to anticipate the effect that
changing economic conditions or other market conditions will have on
Radiologix's operations and finances. Radiologix's limited operating history
also may increase Radiologix's reliance on its senior executive management,
some of whom have extensive experience in managing health care services
companies or in developing Radiologix's current financial and operational
strategies. Because of the difficulty in finding adequate replacements for such
personnel, the loss of the services of any such personnel or Radiologix's
inability in the future to attract and retain management and other key
personnel could have a material adverse effect on Radiologix's business,
financial condition and results of operations. Radiologix does not maintain key
man insurance for any of its executive officers.

Potential Need for Additional Capital

Radiologix utilizes capital to purchase new imaging equipment and to
upgrade and replace existing equipment. During 1999, Radiologix expended
approximately $31.5 million to purchase, upgrade and replace imaging equipment
and related information systems. Radiologix also utilizes capital to expand
within its existing markets and to enter new markets. During 1999, Radiologix
expended approximately $25.4 million to make acquisitions and to enter into
outsourcing relationships. Radiologix's capital sources have consisted
primarily of income from operations, borrowings under Radiologix's credit
facility and the $20 million convertible junior subordinated promissory note
issued to BT Capital Partners SBIC, L.P. Radiologix's ability to accomplish its
goals and to execute its business strategy depend on Radiologix's continued
ability to access capital on appropriate terms. Radiologix's growth could be
limited and its existing operations impaired unless it is able to obtain
additional capital through subsequent debt or equity financings. There can be
no assurance that borrowing capacity under the credit facility will be
available to Radiologix when needed, that the credit facility will be renewed
or that Radiologix will be able to obtain additional financing or that, if
available, such financing will be on terms acceptable to Radiologix. As a
result, there can be no assurance that Radiologix will be able to implement its
business strategy successfully.

Dependence on Radiologists; Risk of Termination of Service Agreements

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

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<PAGE> 27

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

Uncertainty Regarding the Enforceability of Noncompetition Provisions

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

Risks Associated with Acquisitions and Expansion Strategy

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

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

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

Year 2000 Compliance

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Potential Liability and Insurance; Legal Proceedings

The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. Although Radiologix intends to structure
its relationships with the radiology practices under the service agreements in
a manner that will not constitute the practice of medicine, there can be no
assurance that claims, suits or complaints relating to services and products
provided by radiology practices will not be asserted against Radiologix in the
future. Additionally, Radiologix owns, operates and manages radiology
facilities, which exposes Radiologix to professional liability claims.
Radiologix maintains insurance policies with coverages that it believes are
appropriate in light of the risks attendant to its business. In addition,
pursuant to the service agreements, the radiology practices are required to
maintain professional liability insurance. Nevertheless, there can be no
assurance that successful malpractice or other claims will not be asserted
against the radiology practices or Radiologix that exceed the scope of coverage
or applicable policy limits or that could otherwise have a material adverse
effect on Radiologix's business, financial condition and results of operations.

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

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

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

Competition

Radiologix is under competitive pressure to acquire and retain the assets
of, and to provide management and administrative services to, additional
radiology services providers, radiology practices, MSOs and imaging centers.
There are a number of publicly-traded companies focused on owning or managing
imaging centers. Radiologix is aware of at least two privately-held physician
practice management companies focused on professional and technical radiology
services. Several companies, both publicly and privately held, that have
established operating histories and, in some instances, greater resources than
Radiologix are pursuing the acquisition of general and specialty physician
practices. Additionally, some hospitals, clinics, health care companies, HMOs
and insurance companies engage in activities similar to those of Radiologix.
There can be no assurance that Radiologix will be able to compete effectively
for the acquisition of, or affiliation with, radiology practices, that
additional competitors will not enter the market, that such competition will
not make it more difficult or expensive to acquire the assets of, and provide
management and administrative services to, radiology practices on terms
beneficial to Radiologix, or that competitive pressures will not otherwise
adversely affect Radiologix.

The radiology practices and Radiologix's owned, operated or managed imaging
centers compete with numerous local radiology and imaging service providers.
Radiologix believes that changes in governmental and private reimbursement
policies and other factors have resulted in increased competition among
providers for the provision of medical services to consumers. There can be no
assurance

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that the radiology practices and Radiologix's owned, operated or managed
imaging centers will be able to compete effectively in the markets they serve,
which inability to compete could materially and adversely affect Radiologix's
business, financial condition and results of operations.

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

Anti-Takeover Considerations

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 the Common Stock. These
provisions include the inability to remove directors except for cause and
Radiologix's ability to issue, without further stockholder approval, shares of
preferred stock with rights and privileges senior to the Common Stock.
Radiologix also is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with an "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder.

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

Terminations of Lock-ups

In connection with the transactions pursuant to which Radiologix acquired
the assets of the original related practices, the practices (or their
stockholders) received shares of Company Common Stock. Shares also were issued
to radiologist practices (or their stockholders) that consummated acquisition
transactions with Radiologix after the November 1997 initial public offering.
The holders of these shares were prohibited from transferring the shares until
a specified period of time elapsed after the transaction in which the shares
were issued. In November 1998, 3,161,612 shares were released from these
transfer restrictions. Restrictions expired during 1999 as follows: January,
254,754 shares; April, 108,416 shares; May, 3,161,612 shares; July, 254,754
shares; September, 89,844 shares; October, 108,416 shares; and November,
6,323,223 shares, for a total of 10,046,265 during 1999. An additional
1,021,004 shares and 25,132 shares will be released from transfer restrictions
during 2000 and 2001, respectively. There can be no assurance that holders of
these shares will continue to hold their shares. Moreover, Radiologix cannot
predict the effect that trades of substantial amounts of shares would have on
Radiologix's stock price from time to time or the effect that an increase in
the number of shares available to the public would have on Radiologix's stock
price from time to time.

RISKS RELATING TO RADIOLOGIX'S INDUSTRY

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

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

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

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

Several states have adopted laws similar to the federal anti-kickback and
Stark Law that cover patients in private programs as well as government
programs. All of the states in which the radiology practices are located have
adopted a form of anti-kickback law and almost all of those states have also
adopted a form of anti-referral law. The scope of these laws and the
interpretations thereof vary from state to state and are enforced by state
courts and regulatory authorities, each with broad discretion. A determination
of liability under any such law could have a material adverse effect on
Radiologix's business, financial condition and results of operations.

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 has used a
false record to get such a claim approved. Claims presented in violation of the
anti-kickback or Stark law may be considered a violation of the Federal False
Claims Act. Penalties include civil penalties of not less than $5,000 and not
more than $10,000, plus three times the amount of damages which the federal
government sustains because of the act of that person and the costs of a civil
action brought to recover any such penalty or damages. Radiologix believes that
it is in compliance with the rules and regulations to which the Federal False
Claims Act apply. However, there can be no assurances that Radiologix will not
be found to have violated certain rules and regulations resulting in sanctions
under the Federal False Claims Act, and if so, whether any sanctions imposed
could have a material adverse effect upon the operations and financial
condition of Radiologix.

Corporate Practice of Medicine; Fee Splitting

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

Licensing and Certification Laws

The ownership, construction, operation, expansion and acquisition of
imaging centers are subject to various federal and state laws, regulations and
approvals concerning the licensing of facilities, personnel, certificates of
need and other required certificates for certain types of health care
facilities and major medical equipment. Although the laws of certain states in
which the radiology practices are located do not subject imaging centers to
certificate of need or separate licensing requirements as stand-alone imaging

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centers, the laws of other states in which Radiologix operates limit to some
extent Radiologix's ability to acquire new imaging equipment or expand or
replace its equipment at imaging centers in other states. No assurances can be
given that the required regulatory approvals for any future acquisitions,
expansions or replacements will be granted to Radiologix, and the failure to
obtain such approvals could materially and adversely affect Radiologix's
business, financial condition and results of operations.

Compliance

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

Reform Initiatives; Increased Enforcement

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

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

Insurance Laws and Regulations

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

Reimbursement Trends and Cost Containment

Radiologix's revenue will be derived from service fees paid to Radiologix
by the radiology practices pursuant to the service agreements and through its
ownership, operation and management of imaging centers. Substantially all of
the revenue of the radiology practices and Radiologix's imaging centers is
currently derived from government sponsored health care programs (principally,
Medicare and Medicaid) and private third-party payors. During the year ended
December 31, 1999, approximately 22% of the service fee revenue was derived
from government approved health care programs and approximately 78% was derived
from private third-party payors. The health care industry is experiencing a
trend toward cost containment as government and private third-party payors seek
to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. Radiologix believes that these trends
will continue to result in a reduction from historical levels in per-patient
revenue for its radiology practices and imaging centers and that the results of
operations of the radiology practices are likely to continue to be affected by
lower reimbursement levels. Further reductions in payments of other changes in
reimbursement for health care services could have a material adverse effect on
Radiologix's business, financial condition and results of operations unless
Radiologix is otherwise able to offset such payment reductions.

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

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

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

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

Risks Associated with Managed Care Contracts and Capitated Fee Arrangements

During fiscal year 1999, approximately 92% of the service fee
revenue was derived from payments made on a fee-for-service basis by
patients and third-party payors (including government programs) and
approximately 8% was derived from capitated arrangements. Under capitated
or other risk-sharing arrangements, the health care provider typically is
paid a pre-determined amount per-patient per-month from the payor in
exchange for providing all necessary covered services to patients covered
under the arrangement. Such contracts pass much of the financial risk of
providing care, including the risk of over-utilization, from the payor to
the provider. Radiologix believes that its success will, in part, depend
on Radiologix's ability to effectively negotiate, on behalf of the
radiology practices and Radiologix's owned, operated or managed imaging
centers, contracts with HMOs, employer groups and other third-party
payors pursuant to which services will be provided on a risk-sharing or
capitated basis by some or all of such radiology practices or imaging
centers. Risk-sharing arrangements result in greater predictability of
revenue but greater unpredictability of expenses and, consequently,
profitability. There can be no assurance that Radiologix will be able to
negotiate, on behalf of its radiology practices or Radiologix's owned,
operated or managed imaging centers, satisfactory arrangements on a
capitated or other risk-sharing basis. In addition, to the extent that
patients or enrollees covered by such contracts require more frequent or
extensive care than is anticipated, Radiologix would incur unanticipated
costs not offset by additional revenue, which would reduce operating
margins. In the worst case, the revenue derived from such contracts may
be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect
on Radiologix's business, financial condition and results of operations.

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

32
<PAGE> 33

radiology practices at a competitive disadvantage and have a material
adverse effect on Radiologix's business, financial condition and results
of operations.

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

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

33
<PAGE> 34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

Consolidated Balance Sheets as of December 31, 1998 and 1999............................................ F-3

Consolidated Statements of Income for the Years
Ended December 31, 1997, 1998 and 1999............................................................. F-4

Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999....................................................... F-5

Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1998 and 1999............................................................. F-6

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

F-1
<PAGE> 35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Radiologix, Inc.:

We have audited the accompanying consolidated balance sheets of Radiologix,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998
(as revised - see Note 7), and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Radiologix, Inc. and
subsidiaries as of December 31, 1999 and 1998 (as revised), and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Dallas, Texas
February 7, 2000

F-2
<PAGE> 36

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 6,485 $ 4,302
Accounts receivable, net of allowances of $18,372 and $26,976 in
1998 and 1999, respectively ................................................ 36,789 61,762
Due from affiliates .......................................................... 2,683 9,671
Other current assets ......................................................... 1,564 9,812
--------- ---------
Total current assets ................................................... 47,521 85,547
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $69,497 and $79,092 in 1998 and 1999, respectively ........................ 37,002 60,405
INVESTMENTS IN JOINT VENTURES ................................................... 5,424 6,369
INTANGIBLE ASSETS, net .......................................................... 61,119 86,443
DEFERRED FINANCING COSTS, net ................................................... 3,408 3,942
OTHER ASSETS .................................................................... 2,165 2,134
--------- ---------
Total assets ........................................................... $ 156,639 $ 244,840
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses ........................................ $ 13,884 $ 16,902
Accrued physician retention .................................................. 6,319 8,642
Accrued salaries and benefits ................................................ 3,893 4,985
Current portion of long-term debt ............................................ 840 22,608
Current portion of capital lease obligations ................................. 1,677 5,484
Deferred income taxes ........................................................ 636 1,651
Other current liabilities .................................................... 894 94
--------- ---------
Total current liabilities .............................................. 28,143 60,366
DEFERRED INCOME TAXES ........................................................... 454 384
LONG-TERM DEBT, net of current portion .......................................... 113,807 141,992
CAPITAL LEASE OBLIGATIONS, net of current portion ............................... 3,887 14,756
OTHER LIABILITIES ............................................................... 243 717
--------- ---------
Total liabilities ...................................................... 146,534 218,215

Commitments and Contingencies

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES ................................. 1,107 1,250

STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
no shares issued and outstanding ........................................... -- --
Common stock, $.0001 par value; 50,000,000 shares authorized;
19,243,949 and 19,424,053 shares issued and outstanding in
1998 and 1999, respectively ................................................ 2 2
Additional paid-in capital ................................................... (910) (590)
Retained earnings ............................................................ 9,906 25,963
--------- ---------
Total stockholders' equity ............................................. 8,998 25,375
--------- ---------
Total liabilities and stockholders' equity ............................. $ 156,639 $ 244,840
========= =========
</TABLE>

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

F-3
<PAGE> 37

RADIOLOGIX, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
SERVICE FEE REVENUE ......................... $ 9,545 $ 149,327 $ 199,700

COSTS AND EXPENSES:
Salaries and benefits .................... 2,922 42,227 52,826
Field supplies ........................... 1,036 8,865 11,630
Field rent and lease expense ............. 852 11,532 18,444
Other field expenses ..................... 1,557 25,311 32,278
Bad debt expense ......................... 862 13,723 18,838
Corporate general and administrative ..... 4,910 9,597 11,192
Depreciation and amortization ............ 888 12,178 18,403
Interest expense, net .................... 617 7,541 12,357
------------ ------------ ------------
Total costs and expenses ............. 13,644 130,974 175,968
------------ ------------ ------------

INCOME (LOSS) BEFORE TAXES, MINORITY
INTERESTS IN CONSOLIDATED SUBSIDIARIES
AND EQUITY IN EARNINGS OF INVESTMENTS ....... (4,099) 18,353 23,732

EQUITY IN EARNINGS OF INVESTMENTS ........... 220 4,339 3,581

MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES ................................ (49) (710) (910)
------------ ------------ ------------

INCOME (LOSS) BEFORE TAXES .................. (3,928) 21,982 26,403

INCOME TAX EXPENSE .......................... -- 6,499 10,346
------------ ------------ ------------

NET INCOME (LOSS) ........................... $ (3,928) $ 15,483 $ 16,057
============ ============ ============

NET INCOME (LOSS) PER COMMON SHARE:
Basic ................................ $ (1.13) $ 0.83 $ 0.83
Diluted .............................. $ (1.13) $ 0.80 $ 0.80

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................ 3,450,948 18,739,106 19,304,771
Diluted .............................. 3,450,948 19,334,658 20,692,058
</TABLE>

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

F-4
<PAGE> 38

RADIOLOGIX, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 .................. 2,000,000 $ -- $ 250 $ (1,649) $ (1,399)
Cancellation of common stock ............. (1,000,000) -- -- -- --
Initial public offering, net ............. 3,000,000 -- 29,081 -- 29,081
Common stock issued to
initial radiology practices
in conjunction with the
Reorganizations ........................ 12,646,446 2 (713) -- (711)
Conversion of convertible notes
payable into common stock .............. 510,406 -- 3,500 -- 3,500
Payment of cash dividends to
initial radiology practices ............ -- -- (50,588) -- (50,588)
Exercise of stock options ................ 78,000 -- 10 -- 10
Net loss ................................. -- -- -- (3,928) (3,928)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 .................. 17,234,852 2 (18,460) (5,577) (24,035)
Common stock issued in
connection with acquisitions ........... 1,812,054 -- 17,502 -- 17,502
Exercise of stock options ................ 197,043 -- 48 -- 48
Net income ............................... -- -- -- 15,483 15,483
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 .................. 19,243,949 2 (910) 9,906 8,998
Common stock issued in
connection with acquisitions ........... 50,264 -- 304 -- 304
Exercise of stock options ................ 129,840 -- 16 -- 16
Net income ............................... -- -- -- 16,057 16,057
----------- ----------- ----------- ----------- -----------
BALANCE, December 31,1999 ................... 19,424,053 $ 2 $ (590) $ 25,963 $ 25,375
=========== =========== =========== =========== ===========
</TABLE>

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

F-5
<PAGE> 39

RADIOLOGIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (3,928) $ 15,483 $ 16,057
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Minority interests in consolidated subsidiaries ................. 49 710 910
Depreciation and amortization ................................... 888 12,178 18,403
Equity in earnings of investments ............................... (220) (4,339) (3,581)
Gain on sale of assets .......................................... (6) -- --
Changes in assets and liabilities:
Accounts receivable, net ...................................... (1,787) (10,379) (21,889)
Other receivables and other current assets .................... (3,908) 2,872 (15,102)
Other assets .................................................. (2,412) (2,118) 399
Accounts payable and accrued expenses ......................... 6,828 1,953 2,305
Accrued salaries and benefits ................................. (433) 2,380 1,091
Other current liabilities ..................................... (87) (450) (19)
Other liabilities ............................................. (317) (8,340) (36)
--------- --------- ---------
Net cash provided by (used in) operating activities ......... (5,333) 9,950 (1,462)
--------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property and equipment .................. 6 -- 10,000
Purchases of property and equipment, net .......................... (481) (12,651) (31,458)
Cash paid for acquisitions ........................................ -- (52,866) (25,406)
Contributions to joint ventures ................................... (100) (571) (115)
Distributions from joint ventures ................................. 155 2,587 2,022
--------- --------- ---------
Net cash used in investing activities ....................... (420) (63,501) (44,957)
--------- --------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net ..................... 49,600 59,814 47,095
Payment on debt of initial radiology practices .................... (23,420) -- --
Payment on capital leases ......................................... -- (3,282) (2,875)
Cash dividends to initial radiology practices ..................... (50,588) -- --
Cash received in the Reorganizations .............................. 3,188 -- --
Proceeds from the issuance of common stock, net ................... 29,081 -- --
Proceeds from the exercise of stock options ....................... 10 48 16
Advances to radiology practices and other ......................... (37) (1,116) --
--------- --------- ---------
Net cash provided by financing activities ................... 7,834 55,464 44,236
--------- --------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................................... 2,081 1,913 (2,183)

CASH AND CASH EQUIVALENTS, beginning of period ....................... 2,491 4,572 6,485
--------- --------- ---------

CASH AND CASH EQUIVALENTS, end of period ............................. $ 4,572 $ 6,485 $ 4,302
========= ========= =========

NON-CASH TRANSACTIONS DURING THE PERIOD:
Assets acquired from radiology practices .......................... $ 53,427 $ 16,677 $ 20
--------- --------- ---------
Liabilities and debt assumed from radiology practices ............. $ 54,138 $ 7,404 $ --
--------- --------- ---------
Common stock issued to radiology practices ........................ $ 151,757 $ 17,502 $ 304
--------- --------- ---------
Conversion of convertible notes payable into common stock ......... $ 3,500 $ -- $ --
--------- --------- ---------
</TABLE>

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

F-6
<PAGE> 40

RADIOLOGIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 (as revised) and 1999

1. DESCRIPTION OF BUSINESS:

Radiologix, Inc. (together with its subsidiaries, "Radiologix" or the
"Company"), a Delaware corporation, is a leading provider of radiology services
in the United States through (i) its ownership and operation of technologically
advanced, multi-modality diagnostic imaging centers, and (ii) its provision of
administrative, management and other information services to certain radiology
business partners. The Company was incorporated in 1996, but conducted no
significant operations until a reorganization and initial public offering in
November 1997. On November 26, 1997, the Company consummated an initial public
offering ("IPO") and simultaneously exchanged cash and shares of its common
stock for certain assets of and liabilities associated with seven radiology
practices (the "Reorganizations"). These exchanges were accounted for using the
historical cost basis with the stock being valued at the historical cost of the
net assets received by the Company. Cash consideration given in these exchanges
was treated for accounting purposes as a dividend from the Company.

As of December 31, 1999, Radiologix owns, operates or maintains an
ownership interest in imaging equipment at 113 locations and provides
management services to ten radiology practices consisting of 280 physicians who
provide professional radiology services at the Company's radiology centers and
at 58 hospitals. Radiologix's imaging centers are located in 17 states, with
concentrated geographic coverage in markets located in California, Florida,
Illinois, Kansas, Maryland, New York, Pennsylvania, Texas, Virginia and
Washington, D. C.

Physician services are provided at all of the Company's imaging centers
associated with its ten radiology practices under the terms of service
agreements, seven of which expire in November 2037, with the other three
expiring in 2038. Under the terms of the service agreements, the Company
provides management, administrative, technical and non-medical services to
radiology practices in return for service fees. The service agreements cannot
be terminated by either party without cause, consisting primarily of bankruptcy
or material default. However, under certain conditions, the Company can
terminate the service agreement if the number of physicians in a practice falls
below a certain percentage.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

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

Use of Estimates

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

Reclassification

Certain prior year amounts have been reclassified to conform to current
year presentation. For the year ended December 31, 1999, bad debt expense has
been included in costs and expenses. In order to conform the prior year
presentations with the current year presentation, the bad debt expense for the
years ended December 31, 1998 and 1997 has been reclassified from service fee
revenue to costs and expenses. These reclassifications have no effect on the
previously reported net income (loss), stockholders' equity, or cash flows.

F-7
<PAGE> 41

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable principally represent receivables from patients and
other third-party payors for medical services provided by the radiology
practices. Under the terms of the service agreements, the Company purchases the
accounts receivable at their estimated collectible value from the radiology
practices. Accounts receivable for services rendered at the radiology practices
have been recorded at their established charges and reduced by contractual
allowances and bad debts. An estimated allowance is provided on the accounts
receivable based on historical collection rates. These allowances are reviewed
periodically and adjusted based on changes in historical collection rates. Any
adjustment to the allowances would reduce the revenue of the radiology
practices and therefore, reduce the service fee recorded by the Company based
on the terms of the service agreement.

Other Current Assets

Other current assets consist primarily of other receivables (amounts due from
joint ventures and affiliated physician associations), prepaid expenses, and
other miscellaneous current assets. The following table sets forth the primary
components of other currents assets at December 31, 1998 and 1999:

<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Other receivables ............ $ 125 $1,143
Other current assets ......... 1,439 8,669
------ ------
Balance, end of period ....... $1,564 $9,812
====== ======
</TABLE>

Property and Equipment

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

Investments in Joint Ventures

Investments in joint ventures consist primarily of interests in entities
which own and operate diagnostic imaging centers. Such investments are
accounted for under the equity method.

The names, percentage ownership and 1999 financial information related to
the Company's significant joint ventures is as follows (in thousands):

<TABLE>
<CAPTION>
TOTAL TOTAL NET
NAME OWNERSHIP ASSETS LIABILITIES INCOME
---- --------- ------- ----------- -------
<S> <C> <C> <C> <C>
White Square Imaging Center 50% $ 4,214 $1,080 $ 2,632
Greater Baltimore Medical 50% 1,836 206 273
Magnetic Imaging of Baltimore 25% 3,267 369 2,164
</TABLE>

Intangible Assets

The value of intangible assets (consisting primarily of service agreements
and goodwill) is recorded at cost at the date of acquisition. Intangible assets
are being amortized on a straight-line basis over a 25-year period in
accordance with Accounting Principles Board ("APB") No. 17, "Intangible
Assets". The Company believes that the life of the core businesses acquired and
the delivery of radiology management services will exceed 25 years. As of
December 31, 1998 and 1999, accumulated amortization was approximately
$2,462,000 and $5,675,000, respectively.

F-8
<PAGE> 42

The service agreements consist of the costs of purchasing the rights to
manage radiology practices, net of assets acquired. Under the initial 40-year
term of the agreements, the radiology practices have agreed to provide medical
services on an exclusive basis only through facilities managed by the Company.
In the event a radiology practice breaches the service agreement, or if the
Company terminates with cause, the radiology practice is required to purchase
all related tangible and intangible assets, including the unamortized portion
of the service agreement intangible asset, at the then net book value. The
Company amortizes the service agreement costs over a 25-year period consistent
with accounting policies used by other companies in the Company's industry.

Impairment of Long-Lived Assets

Subsequent to an acquisition, the Company continually evaluates whether
events and circumstances have occurred that indicate that the remaining balance
of the intangible assets and property and equipment may not be recoverable or
that the remaining useful lives may warrant revision. The Company evaluates the
potential impairment of intangibles separately from property and equipment.
When factors indicate that intangible assets or property and equipment should
be evaluated for possible impairment, the Company uses an estimate of the
related radiology practices' undiscounted cash flows over the remaining lives of
the intangible assets or an estimate of the undiscounted cash flows over the
remaining lives of the property and equipment and compares it to the radiology
practices' intangible assets or property and equipment balances to determine
whether the intangible assets or property and equipment are recoverable or if
impairment exists, in which case an adjustment is made to the carrying value of
the related asset. When an adjustment is required, the Company evaluates the
remaining amortization periods using the factors outlined in APB No. 17. An
impairment loss recognized would be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company
recorded no impairment charges during 1997, 1998 or 1999.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 1998 and 1999,
consisted of the following (in thousands):

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accounts payable ............................ $ 5,895 $ 6,647
Patient refunds ............................. 3,396 1,320
Other payables and accrued expenses ......... 4,593 8,935
------- -------
$13,884 $16,902
======= =======
</TABLE>

Accrued Physician Retention

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

Revenue Presentation

The Financial Accounting Standards Board's Emerging Issues Task Force
issued its abstract, Issue 97-2, "Application of FASB Statement No. 94 and
Accounting Principles Board ("APB") Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Arrangements"
("EITF 97-2"). In 1997, the Company displayed physician group revenue in its
consolidated statements of income. Since the Company has not established a
"controlling financial interest" under EITF 97-2, the 1997 display has been
restated to reflect the service fees earned as revenues. This change had no
effect on the Company's financial position, results of operations, or
liquidity.

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

<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Physician groups revenue, net of contractual
allowances and estimated bad debts ............ $ 14,571 $ 222,706 $ 286,824
Less: amounts retained by physician groups ....... (5,026) (73,379) (87,124)
--------- --------- ---------
Service fee revenue, as reported ................. $ 9,545 $ 149,327 $ 199,700
========= ========= =========
</TABLE>

F-9
<PAGE> 43

Service Fee Revenue

Physician groups revenue is recorded when services are rendered by the
radiology practice based on established charges and reduced by contractual
allowances and estimated bad debt accounts. An estimated bad debt expense is
recorded based on historical collection rates. For the year ended December 31,
1999, bad debt expense has been included in costs and expenses. In order to
conform the prior year presentations with the current year presentation, the
bad debt expense for the years ended December 31, 1998 and 1997 has been
reclassified from service fee revenue to costs and expenses. Service fee
revenue represents radiology practices' revenue less amounts retained by
radiology practices. The amounts retained by radiology practices represents
amounts paid to the physicians pursuant to the service agreements between the
Company and the radiology practices. Under the service agreements, the Company
provides each physician group with the facilities and equipment used in its
medical practice, assumes responsibility for the management of the operations
of the practice, and employs substantially all of the non-physician personnel
utilized by the group. Although the Company assists in negotiating managed care
contracts for the radiology practices, it assumes no risk under these
arrangements.

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

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

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Professional component ................. $ 2,977 $ 39,637 $ 53,435
Technical component .................... 6,568 109,690 146,265
-------- -------- --------
$ 9,545 $149,327 $199,700
======== ======== ========
</TABLE>

For the year ended December 31, 1998 and 1999, four of the Company's
radiology practices each contributed 10% or more of the Company's service fee
revenue as follows (in thousands):

<TABLE>
<CAPTION>
1998 SERVICE 1999 SERVICE
PRACTICE FEE REVENUE FEE REVENUE
-------- ------------ ------------
<S> <C> <C>
Advanced Radiology, LLC $ 48,204 $ 55,823
Mid Rockland Imaging Associates, P.C 21,695 30,522
The Ide Group, P.C 21,352 26,330
Community Radiology Associates, Inc. 16,143 19,538
</TABLE>

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

Income Taxes

The Company accounts for income taxes under the liability method which
states that deferred taxes are to be determined based on the estimated future
tax effects of differences between the financial statement and tax bases of
assets and liabilities given the provisions of enacted tax laws. Deferred
income tax provisions and benefits are based on the changes to the asset or
liability from period to period. The Company and its subsidiaries file a
consolidated federal tax return. See Note 7 regarding a revision to the
Company's previously reported 1998 income tax expense.

F-10
<PAGE> 44

Net Income Per Share

The Company adopted the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share" ("EPS") effective December 31, 1997.
SFAS No. 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. Basic EPS is calculated by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period (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 included the effect of the convertible note
(see Note 5) using the "if converted" method. For the year ended December 31,
1999, under the "if converted" method, approximately $399,000 of tax-effected
interest savings and 947,483 weighted average shares were included in the
calculation of diluted EPS as an addition to net income and weighted average
shares outstanding, respectively. For the years ended December 31, 1998 and
1999, 595,592 and 439,803 shares, respectively, related to stock options were
included in diluted EPS.

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

Fair Value of Financial Instruments

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

Concentration of Credit Risk

The Company's accounts receivable consist primarily of service fee revenues
due from radiology practices and medical service revenues due from patients
funded through Medicare, Medicaid, commercial insurance and private payment.
The Company estimates that approximately 30% of the physician groups' revenue
in 1999 and 1998 is funded through the Medicare program. The Company and its
practices perform ongoing credit evaluations of their patients and generally
does not require collateral. The Company and its practices maintain allowances
for potential credit losses. Such losses have been within management's
expectation.

Cash Paid During Year

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

<TABLE>
<CAPTION>
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Interest ............................... $ 254 $ 8,653 $10,225
Income taxes ........................... -- 15,423 14,459
</TABLE>

3. ACQUISITIONS AND PRACTICE AFFILIATIONS:

1999 Acquisitions and Affiliations

On August 1, 1999, the Company acquired all the outstanding stock of
Questar Imaging, Inc. of Tampa, Florida ("Questar"), a private operator of
primarily MRI radiology centers. Questar currently offers magnetic resonance
imaging (MRI) and other diagnostic imaging services at 27 centers in 14 states,
and is in the process of developing 17 additional MRI centers. The total 1999
consideration for the transaction was $18,921,000 in cash, plus the assumption
of $16,763,000 in liabilities. The consideration for the developmental centers
in 2000 will be approximately $7,000,000 plus the assumption of certain
liabilities. This transaction was accounted for using the purchase method. The
amounts recorded for the acquisition are based on preliminary information and
are subject to final adjustment in 2000.

Pro-forma information is not presented for the Questar acquisition as it
does not materially affect the financial statements for the years presented.

F-11
<PAGE> 45

The total consideration for all other 1999 acquisitions and affiliations
was approximately $6,485,000 in cash, 50,264 shares of the Company's common
stock ($304,000), plus the assumption of $3,193,000 in liabilities.

1998 Acquisitions and Affiliations

During 1998, the Company completed affiliations with the following
practices. The consideration paid for entering into management service
agreements with each of the radiology practices and the purchase of the
non-medical assets and accounts were accounted for under the purchase method of
accounting. Operating results are included from the date of affiliation. The
Company has no contingent payments, options or commitments relating to these
transactions.

In January 1998, the Company completed its affiliation with Community
Radiology Associates, a ten-physician radiology practice based in Rockville,
Maryland. The Company also completed the acquisition of Community Radiology
Associates' seven imaging centers and the acquisition of four independent
imaging centers in the Greater Bay Area of Northern California. Total
consideration for these transactions was approximately $41,433,000, consisting
of the issuance of 1,019,018 shares of the Company's common stock valued at
approximately $10,700,000 (509,510 shares were issued in January 1999), cash
and assumed debt.

In April 1998, the Company completed its affiliation with Radiology Imaging
Associates, a ten-physician radiology practice based in Fort Pierce, Florida.
The Company also completed the acquisition of Radiology Imaging Associates'
imaging center and the acquisition of an independent imaging center in the
Hudson Valley Area of Southern New York. In June 1998, the Company completed
the acquisition of an independent imaging center in the Greater Bay Area of
Northern California. The total consideration for these transactions was
approximately $15,100,000, consisting of the issuance of 433,662 shares of the
Company's common stock valued at approximately $4,400,000, cash and assumed
debt.

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

In September 1998, the Company completed its affiliation with WB&A Imaging,
P.C. (formerly known as Drs. Wener, Boyle & Associates, P.A.), a 15-physician
radiology practice based in the Washington, D.C. Metropolitan Area. The Company
also completed the acquisition of WB&A Imaging, P.C.'s four imaging centers.
The total consideration for the transaction was approximately $9,067,000,
consisting of the issuance of 359,374 shares of the Company's common stock
valued at approximately $2,400,000, cash and assumed debt.

The Company's 1998 and 1999 acquisitions are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Assets acquired:
Accounts receivable $ 5,014 $ 3,034
Property and equipment 11,663 15,911
Liabilities assumed:
Debt assumed 6,172 16,252
Other liabilities 1,232 3,703
-------- --------
Net assets (liabilities) acquired $ 9,273 (1,010)
Total consideration exchanged
Cash 52,866 25,406
Common stock 17,502 304
-------- --------
Value assigned to intangible assets $ 61,095 $ 26,720
======== ========
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following at December 31, 1998 and
1999 (in thousands):

<TABLE>
<CAPTION>
USEFUL LIFE 1998 1999
----------- ---------- ---------
<S> <C> <C> <C>
Equipment (primarily medical equipment) 5-7 Years $ 92,067 $ 114,663
Leasehold improvements Remaining life of lease 12,567 21,286
Buildings 15 Years 1,865 3,548
--------- ---------
106,499 139,497
Less - Accumulated depreciation
and amortization (69,497) (79,092)
--------- ---------
Property and equipment, net $ 37,002 $ 60,405
========= =========
</TABLE>

F-12
<PAGE> 46

5. LONG-TERM DEBT:

Long-term debt consists of the following at December 31, 1998 and 1999 (in
thousands):

<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Note payable to a bank, interest at the Company's option at
LIBOR plus 2.0% (7.25% at December 31, 1999) or the prime
rate of a lending partner plus 1.0% (8.75% at
December 31, 1999), maturing in November 2003 $ 112,500 $ 142,500
Convertible note payable to a bank, interest at 8%, maturing
in July 2009 -- 20,000
Note(s) payable to bank(s), various interest rates, unsecured 2,147 2,100
--------- ---------
114,647 164,400

Less - Current portion of long-term debt (840) (22,608)
--------- ---------
Long-term debt, net of current portion $ 113,807 $ 141,992
========= =========
</TABLE>

On November 26, 1997, the Company entered into a bank credit facility (the
"Credit Facility"). The Credit Facility was amended on May 19, 1998. The loan
agreement provides for revolving loans of up to $160,000,000 to be used for
acquisitions and general working capital needs. The Company may borrow, repay
and reborrow amounts during the first three years of the Credit Facility.
Amounts outstanding under the Credit Facility at the end of three years are
required to be repaid in quarterly installments of varying amounts commencing
September 30, 2000. The Credit Facility expires and all loans thereunder mature
on the sixth anniversary of the closing date of the Credit Facility. Borrowings
under the Credit Facility at any time may not exceed the lesser of $160,000,000
or 3.00 times the consolidated EBITDA of the Company, giving pro forma effect
to acquisitions made with such borrowings. At December 31, 1999, the Company's
debt could not exceed $160,000,000 under the Credit Facility. The Company had
outstanding borrowings of $142,500,000 under the Credit Facility. At the
Company's option, the interest rate is (i) an adjusted LIBOR rate, plus an
applicable margin which can vary from 1.5% to 2.5% dependent on certain
financial ratios or (ii) the prime rate, plus an applicable margin which can
vary from 0.5% to 1.5%. In each case, the applicable margin varies based on
financial ratios maintained by the Company. The Credit Facility includes
certain restrictive covenants including prohibitions on the payment of
dividends and the maintenance of certain financial ratios (including minimum
debt-service coverage and maximum debt-to-EBITDA coverage, as defined).
Borrowings under the Credit Facility are secured by all service agreements,
which the Company is, or becomes a party to, and a pledge of the stock of the
Company's subsidiaries. At December 31, 1999, the Company is in compliance with
the Credit Facility's restrictive covenants.

On July 30, 1999, the Company entered into a $20,000,000 convertible junior
subordinated note (the "Note") in connection with the Securities Purchase
Agreement for the Questar acquisition, dated August 1, 1999. The Note matures
July 31, 2009, and bears interest, payable quarterly in cash or payment in kind
securities, at an annual rate of 8.0%. The principal of the Note is convertible
into the Company's Common Stock at the price of $8.625 per share. If by the
second anniversary date of the Note, the closing price of the Company's Common
Stock has not averaged $8.625 for 45 of the 60 days of the determination period
(the "Market Price Event"), the base conversion price will be reset at 87.19%
of the initial conversion price. If by the third or fourth anniversary date of
the Note, the Market Price Event has not occurred, the interest rate will be
increased to 8.25% and 8.5%, respectively.

F-13
<PAGE> 47

addition, the Company is discussing with its lenders an increase in the total
amount available under the Credit Facility to facilitate its growth strategy
for 2000 and beyond. The Company believes that the extension and/or increase in
the Credit Facility will be completed in the second quarter of 2000. Although
there can be no assurance that these financing options will be finalized or be
available on terms acceptable to the Company, management believes that
additional sources of liquidity are available in the marketplace to meet its
liquidity needs for the foreseeable future.

The maturities of long-term debt at December 31, 1999, are as follows (in
thousands):

<TABLE>
<S> <C>
2000 $ 22,608
2001 43,221
2002 50,040
2003 28,665
2004 and thereafter 20,066
---------
$ 164,600
=========
</TABLE>

As of December 31, 1998 and 1999, accumulated amortization of deferred
financing costs was approximately $661,000 and $1,438,000, respectively. Such
costs are being amortized over a straight-line method which approximates the
effective interest method.

6. STOCKHOLDERS' EQUITY:

Common Stock

In 1998 and 1999, the Company issued 1,812,054 and 50,264 shares of its
common stock in connection with acquisitions (See Note 3).

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

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

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

F-14
<PAGE> 48

Stock Option Plan

During 1996, the Company's Board of Directors approved the 1996 Stock
Option Plan (the "Plan") under which 3,000,000 options to purchase shares of
the Company's common stock may be granted to key directors, employees and other
health care professionals associated with the Company, as defined by the Plan.
The Plan was amended by stockholder vote at the 1999 Annual Stockholder
meeting. The amendment increased the number of options available under the Plan
to 4,000,000. 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, 1999 were at fair market value. Generally, options vest over a 5-year
period and are exercisable over a ten-year life. As of December 31, 1997, 1998
and 1999, 1,591,000, 2,117,000 and 2,204,525 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, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
--------------------- -------------------- --------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- ----------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,300 $ 0.70 1,591 $ 5.19 2,117 $ 7.14
Granted 663 $ 11.15 1,427 $ 9.24 414 $ 6.32
Exercised (78) $ 0.13 (197) $ 0.24 (130) $ 0.13
Cancelled (294) $ 0.13 (704) $ 8.99 (196) $ 7.11
------ ----------- ------ ----------- ------- ----------
Outstanding, end of year 1,591 $ 5.19 2,117 $ 7.14 2,205 $ 7.41
====== =========== ====== =========== ======= ==========
Exercisable, end of year 656 $ 4.10 718 $ 5.79 1,015 $ 7.20

Price Range $0.13 to $12.00 $0.13 to $12.00 $0.13 to $12.00
</TABLE>

The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
2,204,525 options outstanding as of December 31, 1999.

<TABLE>
<CAPTION>
WTD. AVG. WTD. AVG.
EXERCISE PRICE RANGE SHARES EXERCISE PRICE CONTRACTUAL LIFE (YRS)
-------------------- --------- -------------- ----------------------
<S> <C> <C> <C>
$0.13 - $6.99 573,725 $ 2.70 7.74
$7.00 - $8.49 453,266 $ 7.52 8.32
$8.50 - $12.00 1,177,534 $ 9.66 8.11
</TABLE>

The Company accounts for its employee stock-based compensation arrangements
under the provisions of APB No. 25, "Accounting for Stock Issued to Employees".
The Company accounts for stock-based compensation of non-employees under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". The
Company did not have any stock-based compensation to non-employees during 1997,
1998 or 1999. 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 based 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 1997,
1998 and 1999 are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported $ (3,928) $ 15,483 $ 16,057
Pro forma (5,599) 14,069 14,419
Net income (loss) per share (diluted):
As reported $ (1.13) $ 0.80 $ 0.80
Pro forma (2.80) 0.73 0.70
</TABLE>

The fair value of each option grant is estimated using the following
weighted-average assumptions for grants in 1997, 1998 and 1999, respectively:
risk-free interest rate of 5.1, 5.6 and 5.8 percent; expected life of 2.58,
2.81 and 2.81 years; expected volatility of

F-15
<PAGE> 49

125.0, 67.0 and 69.5 percent; and dividend yield of zero in 1997, 1998 and
1999. The weighted-average grant-date fair value of new grants in 1999, 1998
and 1997 were $5.02 per share, $6.34 per share and $9.59 per share,
respectively.

7. INCOME TAXES:

Income tax expense in 1997, 1998 and 1999 is composed of the following
amounts (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current income tax expense
Federal $ -- $ 8,418 $ 9,655
State and local -- 2,915 2,524
-------- -------- --------
-- 11,333 12,179
Deferred income tax benefit
Federal -- (4,459) (1,571)
State -- (375) (262)
-------- -------- --------
-- (4,834) (1,833)
-------- -------- --------
Income tax expense $ -- $ 6,499 $ 10,346
======== ======== ========
</TABLE>

The 1998 income tax expense reported above has been revised from those
amounts previously reported by the Company. The Company's previously reported
1998 income tax expense was $8,451,000. The Company has reduced this amount by
$1,952,000 to reflect the utilization of net operating loss carryforward from
1997 and 1996. Previously, that amount was fully reserved by a valuation
allowance. The accompanying 1998 consolidated financial statements and
disclosures have been revised accordingly.

A reconciliation between reported income tax expense and the amount
computed by applying the statutory federal income tax rate of 35% for 1997,
1998 and 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed at statutory rate $ (1,375) $ 7,694 $ 9,241
State income taxes, net of
Federal tax benefit -- 1,519 1,380
Utilization of net operating loss
carryforward -- (1,952) --
Change in valuation allowance 1,375 -- --
Other -- (798) (311)
Nondeductible amortization -- 36 36
-------- -------- --------
Income tax expense $ -- $ 6,499 $ 10,346
======== ======== ========
</TABLE>

The components of deferred income tax expense (benefit) in 1997, 1998 and
1999 are as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Amortization $ -- $ 542 $ 982
Depreciation -- (789) 531
Net operating loss carryforward (1,375) -- --
Change in valuation allowance 1,375 (1,952) --
Various accrued liabilities and other -- 669 529
Bad debts -- (1,044) (224)
Start-up costs -- (1,535) (6)
Cash to accrual adjustments -- (725) (3,645)
------- ------- -------
Deferred income tax benefit $ -- $(4,834) $(1,833)
======= ======= =======
</TABLE>

F-16
<PAGE> 50

The tax effects of temporary differences that give rise to the deferred
income taxes at December 31, 1998 and 1999, are presented below (in thousands):

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets
Start-up costs $ 1,535 $ 1,539
Various accrued liabilities and other 3,403 100
Bad debts 1,044 1,268
Utilization of net operating loss
carryforward 1,952 1,952
------- -------
7,934 4,859
Deferred tax liabilities
Cash to accrual adjustments (7,937) (4,293)
Amortization (542) (1,524)
Depreciation (545) (1,077)
------- -------
(9,024) (6,894)
------- -------
Total deferred tax liability $(1,090) $(2,035)
======= =======
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

Leases

The Company leases office space as well as certain equipment under capital
leases and noncancelable operating lease agreements, which expire at various
dates through 2011. At December 31, 1999, minimum annual rental commitments
under capital leases and noncancelable operating leases with terms in excess of
one year are as follows:

<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ -------- ---------
<S> <C> <C>
2000 $ 7,201 $ 13,983
2001 6,610 12,271
2002 5,315 11,226
2003 3,629 9,266
2004 1,580 6,738
Thereafter -- 7,032
-------- --------
Total minimum lease payments 24,335 $ 60,516
========
Less - Amount representing interest (4,095)
--------
Present value of minimum capital lease payments 20,240
Less - Current portion of capital lease obligations (5,484)
--------
Capital lease obligations, net of current portion $ 14,756
========
</TABLE>

Noncancelable lease expense was approximately $585,000, $5,619,000 and
$8,638,000 in 1997, 1998 and 1999, respectively.

On December 30, 1999, the Company, through its subsidiaries, entered into a
sale-leaseback transaction in which radiology equipment with a net book value
of approximately $9,973,000 was sold for $10,000,000 and leased back for five
years. The operating lease bears interest at 9.96%, and equal monthly payments
begin in July 2000.

Litigation

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

F-17
<PAGE> 51

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

9. SEGMENT REPORTING

The Company has five reportable segments: Mid-Atlantic Region, Northeastern
Region, Central Region, Western Region and Questar. The Company's reportable
segments are strategic business units defined by management's division of
responsibilities. Each owns and operates imaging centers and (except for
Questar) provides management services to the radiology facilities within their
respective segments.

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

FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
MID-ATLANTIC NORTHEASTERN CENTRAL WESTERN
REGION(1) REGION(2) REGION(3) REGION(4) QUESTAR(5) TOTAL
------------ ------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service fee revenue $ 81,993 $ 56,852 $ 24,499 $ 27,072 $ 9,284 $ 199,700
Total operating expenses 54,072 37,717 16,211 18,843 7,173 134,016
-------- -------- -------- -------- -------- ---------
Segment contribution 27,921 19,135 8,288 8,229 2,111 65,684
Contribution margin 34% 34% 34% 30% 23% 33%
Depreciation and
amortization expense 7,043 3,078 956 2,098 1,066 14,241
Interest expense 1,488 944 247 756 715 4,150
Segment profit 21,171 15,113 8,010 5,374 295 49,963
Segment assets 56,664 36,087 19,211 18,117 18,830 148,909
Expenditures for
segment assets 14,173 2,858 4,008 5,109 831 26,979
</TABLE>

FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
MID-ATLANTIC NORTHEASTERN CENTRAL WESTERN
REGION(1) REGION(2) REGION(3) REGION(4) TOTAL
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service fee revenue $ 66,421 $ 43,047 $ 18,377 $ 21,482 $ 149,327
Total operating expenses 45,392 30,543 10,754 14,969 101,658
-------- -------- -------- -------- ---------
Segment contribution 21,029 12,504 7,623 6,513 47,669
Contribution margin 32% 29% 41% 30% 32%
Depreciation and
amortization expense 5,068 2,015 666 2,012 9,761
Interest Expense 793 748 168 687 2,396
Segment Profit 16,945 9,741 8,641 3,814 39,141

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

(1) Includes the Mid-Atlantic Market.
(2) Includes the Finger Lakes and Hudson Valley Markets.
(3) Includes the South Texas, Treasure Coast and Northeast Kansas Markets.
(4) Includes the Bay Area Market.
(5) Includes 27 imaging centers purchased effective August 1, 1999.

F-18
<PAGE> 52

<TABLE>
<CAPTION>
RECONCILIATION OF PROFITS FOR THE YEARS ENDED
DECEMBER 31, 1998 1999
--------------------------------------------- -------- ---------
<S> <C> <C>
Segment profit $ 39,141 $ 49,963
Unallocated amounts:
Corporate general and administrative (9,597) (11,192)
Corporate depreciation and amortization (2,417) (4,162)
Corporate interest expense (5,145) (8,206)
-------- ---------
Income before taxes $ 21,982 $ 26,403
======== =========
</TABLE>

<TABLE>
<CAPTION>
RECONCILIATION OF ASSETS AND EXPENDITURES
FOR THE YEARS ENDED DECEMBER 31, 1998 1999
------------------------------------------- --------- ---------
<S> <C> <C>
Assets:
Segment amounts $ 90,356 $ 148,909
Corporate assets (including intangible assets) 66,283 95,931
--------- ---------
Total assets $ 156,639 $ 244,840
========= =========

Expenditures
Segment amounts $ 9,857 $ 26,979
Corporate expenditures 2,794 4,479
--------- ---------
Total expenditures $ 12,651 $ 31,458
========= =========
</TABLE>

F-19
<PAGE> 53

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Items 401 and 405 of Regulation S-K is
contained under the caption "Directors and Executive Officers" in the
registrant's proxy statement for the 2000 annual meeting of stockholders and is
incorporated herein by reference to such proxy statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 402 of Regulation S-K is contained under
the caption "Executive Compensation" in the registrant's proxy statement for
the 2000 annual meeting of stockholders and is incorporated herein by reference
to such proxy statement.

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

The information required by Item 403 of Regulation S-K is contained under
the caption "Security Ownership of Certain Beneficial Owners and Management" in
the registrant's proxy statement for the 2000 annual meeting of stockholders
and is incorporated herein by reference to such proxy statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 404 of Regulation S-K is contained herein
under the caption "Certain Transactions" in the registrant's proxy statement
for the 2000 annual meeting of stockholders and is incorporated herein by
reference to such proxy statement.

F-20
<PAGE> 54

PART IV

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

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and among American Physician Partners, Inc., Carroll
Imaging Associates, P.A., Diagnostic Imaging Associates, P.A.,
Drs. Copeland, Hyman and Shackman, P.A., Drs. Decarlo, Lyon,
Hearn & Pazourek, P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A.,
Harbor Radiologists, P.A., and Perilla, Syndler & Associates,
P.A.**

2.2 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., Radiology
and Nuclear Medicine, A Professional Association.**

2.3 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and Mid
Rockland Imaging Associates, P.C.**

2.4 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and
Rockland Radiological Group, P.C.**

2.5 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and
Advanced Imaging of Orange County, P.C.**

2.6 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and
Central Imaging Associates, P.C.**

2.7 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and Nyack
Magnetic Resonance Imaging, P.C.**

2.8 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and Pelham
Imaging Associates, P.C.**

2.9 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and
Women's Imaging Consultants, P.C.**

2.10 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and
Pacific Imaging Consultants, A Medical Group, Inc.**

2.11 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and Total
Medical Imaging, Inc.**

2.12 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and Valley
Radiologists Medical Group, Inc.**
</TABLE>

F-21
<PAGE> 55

<TABLE>
<S> <C>
2.13 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and The
Ide Group, P.C.**

2.14 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and M&S
X-Ray Associates, P.A.**

2.15 Agreement and Plan of Reorganization and Merger, dated June 27,
1997 by and between American Physician Partners, Inc., and South
Texas MR, Inc.**

2.16 Agreement and Plan of Exchange, dated June 27, 1997 by and
between American Physician Partners, Inc., and San Antonio MR,
Inc.**

2.17 Agreement and Plan of Exchange, dated June 27, 1997 by and among
American Physician Partners, Inc., Lexington MR, Ltd. and the
Sellers.**

2.18 Agreement and Plan of Exchange, dated June 27, 1997 by and among
American Physician Partners, Inc., Madison Square Joint Venture
and the Sellers.**

2.19 Agreement and Plan of Exchange, dated June 27, 1997 by and among
American Physician Partners, Inc., South Texas No. 1 MRI Limited
Partnership, a Texas limited partnership, and the Sellers.**

2.20 Agreement and Plan of Exchange, dated June 27, 1997 by and among
American Physician Partners, Inc., San Antonio MRI Partnership
No. 2 Ltd., a Texas limited partnership, and the Sellers**

2.21 Agreement and Plan of Exchange, dated June 27, 1997 by and
between American Physician Partners, Inc., and the Sellers**

2.22 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and among American
Physician Partners, Inc., Carroll Imaging Associates, P.A.,
Diagnostic Imaging Associates, P.A., Drs. Thomas, Wallop, Kim &
Lewis, P.A., Drs. Copeland, Hyman & Shackman, P.A., Drs. DeCarlo,
Lyon, Hearn & Pazourek, P.A., Harbor Radiologists, P.A., and
Perilla, Sindler & Associates, P.A.**

2.23 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Radiology and Nuclear Medicine, A
Professional Association.**

2.24 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Mid Rockland Imaging Associates,
P.C.**

2.25 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Rockland Radiological Group, P.C.**
</TABLE>

F-22
<PAGE> 56

<TABLE>
<S> <C>
2.26 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Advanced Imaging of Orange County,
P.C.**

2.27 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Central Imaging Associates, P.C.**

2.28 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Nyack Magnetic Resonance Imaging,
P.C.**

2.29 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Pelham Imaging Associates, P.C.**

2.30 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Women's Imaging Consultants, P.C.**

2.31 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Pacific Imaging Consultants, A
Medical Group, Inc.**

2.32 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Total Medical Imaging, Inc.**

2.33 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and Valley Radiologists Medical Group,
Inc.**

2.34 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and The Ide Group, P.C.**

2.35 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and M & S X-Ray Associates, P.A.**

2.36 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and South Texas MR, Inc.**

2.37 Amendment No. 1 to the Agreement and Plan of Reorganization and
Merger, dated as of September 30, 1997, by and between American
Physician Partners, Inc., and San Antonio MR, Inc.**

2.38 Amendment No. 1 to the Agreement and Plan of Exchange, dated
September 30, 1997, by and between American Physician Partners,
Inc., and Lexington MR, Ltd.**

2.39 Amendment No. 1 to the Agreement and Plan of Exchange, dated
September 30, 1997, by and between American Physician Partners,
Inc., and Madison Square Joint Venture.**
</TABLE>

F-23
<PAGE> 57

<TABLE>
<S> <C>
2.40 Amendment No. 1 to the Agreement and Plan of Exchange, dated
September 30, 1997, by and between American Physician Partners,
Inc., and South Texas No. 1 MRI Limited Partnership.**

2.41 Amendment No. 1 to the Agreement and Plan of Exchange, dated
September 30, 1997, by and between American Physician Partners,
Inc., and San Antonio MRI Partnership No. 2, Ltd.**

2.42 Asset Purchase Agreement, dated as of January 1, 1998, by and
among American Physician Partners, Inc., Community Radiology
Associates, Inc., Drs. Korsower and Pion Radiology, P.A., and the
Principal Stockholders****

2.43 Asset Purchase Agreement, dated as of January 12, 1998, by and
among American Physician Partners, Inc., Valley Imaging Partners,
Inc., Questar Imaging, Inc. and Questar Imaging VR, Inc.****

2.44 Asset Purchase Agreement, dated as of January 23, 1998, by and
among American Physician Partners, Inc., Valley Imaging Partners,
Inc., PAL Imaging Corp. and the Principal Stockholders****

2.45 Asset Purchase Agreement, dated as of April 1, 1998, by and among
American Physician Partners, Inc., Treasure Coast Imaging
Partners, Inc. and Radiology Imaging Associates, Basilico,
Gallagher and Raffa, M.D., P.A. and Robert F. Basilico, M.D.,
Edward Gallagher, M.D., R.J. Raffa, M.D., Joseph T. Charles,
M.D., Alex N. Vennos, M.D., and Robin J. Connolly, M.D.*****

2.46 Asset Purchase Agreement, dated as of April 1, 1998, by and among
American Physician Partners, Inc., Treasure Coast Imaging
Partners, Inc. and St. Lucie Imaging and Breast Center, Inc. and
Robert F. Basilico, M.D., Edward Gallagher, M.D., R.J. Raffa,
M.D., Joseph T. Charles, M.D., Alex N. Vennos, M.D., and Robin J.
Connolly, M.D.*****

2.47 Asset Purchase Agreement, dated as of April 28, 1998, by and
among American Physician Partners, Inc., Valley Imaging Partners,
Inc., LXL, Ltd. and the Partners of LXL, Ltd.*****

2.48 Asset Purchase Agreement, dated as of June 1, 1998, by and among
American Physician Partners, Inc., Mid Rockland Imaging Partners,
Inc., Empire State Imaging Partners, Inc., RF Management Corp.
and Modern Medical Modalities Corporation*****

2.49 Asset Purchase Agreement, dated as of June 23, 1998, by and among
American Physician Partners, Inc., Valley Imaging Partners, Inc.,
Brewster Imaging Center, Inc. and Each Principal Stockholder*****

2.50 Asset Purchase Agreement, dated as of June 29, 1998, by and among
American Physician Partners, Inc., Valley Imaging Partners, Inc.
and Bryan M. Shieman, M.D., a sole proprietorship d/b/a El Camino
Center for Osteoporosis and/or ECOO II*****
</TABLE>

F-24
<PAGE> 58

<TABLE>
<S> <C>
2.51 Stock Purchase Agreement, dated September 1, 1998, by and among
American Physician Partners, Inc., WB&A Imaging Partners, Inc.
and Vimla Bhooshan, M.D., John B. DeGrazia, M.D., Edwin
Goldstein, M.D., Paul T. Lubar, M.D., Calvin D. Neithamer, M.D.,
William P. O'Grady, M.D., Robert A. Olshaker, M.D., Stanley M.
Perl, M.D., Michael S. Usher, M.D., Alan B. Kronthal, M.D.,
Steven A. Meyers, M.D., Victor A. Bracey, M.D. and Larry W.
Busching******

2.52 Asset Purchase Agreement, dated September 1, 1998, by and among
American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
Magnetic Resonance Imaging Associates Limited Partnership and
Paul T. Lubar, Stanley M. Perl, Michael S. Usher, John B.
DeGrazia, Larry W. Busching, Vimla Bhooshan, William P. O'Grady,
Robert A. Olshaker, and Calvin D. Neithamer******

2.53 Asset Purchase Agreement, dated September 1, 1998, by and among
American Physician Partners, Inc., Ormond Imaging Partners, Inc.,
Duke Associates Limited Partnership and Paul T. Lubar, Stanley M.
Perl, Michael S. Usher, John B. DeGrazia, Larry W. Busching,
Vimla Bhooshan, William P. O'Grady, Edwin Goldstein, Robert A.
Olshaker, Calvin D. Neithamer and Alan J. Kronthal******

2.54 Stock Purchase Agreement effective as of August 1, 1999 by and
among American Physician Partners, Inc., Questar Imaging, Inc.
and the shareholders of Questar Imaging, Inc.********

3.1 Restated Certificate of Incorporation of American Physician
Partners, Inc.***

3.2 Amended and Restated Bylaws of American Physician Partners,
Inc.***

3.3 Amendment to Restated Certificate of Incorporation of American
Physician Partners, Inc.*********

3.4 Amendment to Restated Bylaws of American Physician Partners,
Inc.*********

4.1 Form of certificate evidencing ownership of Common Stock of
American Physician Partners, Inc.***

4.2 Form of Convertible Promissory Note of American Physician
Partners, Inc.**

4.3 Securities Purchase Agreement dated as of August 3, 1999 by and
between American Physician Partners, Inc. and BT Capital Partners
SBIC, L.P.********

4.4 Convertible Junior Subordinated Promisory Note dated August
1, 1999 issued to BT Capital Partners SBIC, L.P.********

10.1 American Physician Partners, Inc. 1996 Stock Option Plan.**

10.2 Employment Agreement between American Physician Partners, Inc.
and Gregory L. Solomon.**

10.3 Employment Agreement between American Physician Partners, Inc.
and Mark S. Martin.**
</TABLE>

F-25
<PAGE> 59

<TABLE>
<S> <C>
10.4 Employment Agreement between American Physician Partners, Inc.
and Sami S. Abbasi.**

10.5 Employment Agreement between American Physician Partners, Inc.
and Paul M. Jolas.**

10.6 Form of Indemnification Agreement for certain Directors and
Officers.***

10.7 Form of Registration Rights Agreement.**

10.8 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., APPI-Advanced Radiology, Inc. and
Carroll Imaging Associates, P.A., Diagnostic Imaging Associates,
P.A., Drs. Thomas, Wallop, Kim & Lewis, P.A., Drs. Copeland,
Hyman and Shackman, P.A., Drs. Decarlo, Lyon, Hearn & Pazourek,
P.A., Harbor Radiologists, P.A., Perilla, Sindler & Associates,
P.A.**

10.9 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Ide Admin Corp. and Ide Imaging Group,
P.C.**

10.10 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., M & S X-Ray Associates, P.A. and M&S
Imaging Associates, P.A.**

10.11 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Rockland Radiological Group, P.C. and
The Greater Rockland Radiological Group, P.C.**

10.12 Service Agreement dated November , by and among American
Physician Partners, Inc., Advanced Imaging of Orange County, P.C.
and The Greater Rockland Radiological Group, P.C.**

10.13 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Central Imaging Associates, P.C. and
The Greater Rockland Radiological Group, P.C.**

10.14 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Nyack Magnetic Resonance Imaging, P.C.
and The Greater Rockland Radiological Group, P.C.**

10.15 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Pelham Imaging Associates, P.C. and The
Greater Rockland Radiological Group, P.C.**

10.16 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., Women's Imaging Consultants, P.C. and
The Greater Rockland Radiological Group, P.C.**

10.17 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., APPI-Pacific Imaging Inc. and PIC
Medical Group, Inc.**

10.18 Service Agreement dated November 26, 1997, by and among
American Physician Partners, Inc., Radiology and Nuclear
Medicine, a Professional Association and RNM L.L.C.**
</TABLE>

F-26
<PAGE> 60

<TABLE>
<S> <C>
10.19 Service Agreement dated November 26, 1997, by and among American
Physician Partners, Inc., APPI-Valley Radiology, Inc. and Valley
Radiology Medical Associates, Inc.**

10.20 Consulting Agreement between American Physician Partners, Inc.
and Michael L. Sherman, M.D.***

10.21 Office Building Lease Agreement between Dallas Main Center
Limited Partnership and American Physician Partners, Inc.***

10.22 First Amendment to Office Building Lease Agreement between Dallas
Main Center Limited Partnership and American Physician Partners,
Inc.***

10.24 Consulting Agreement between American Physician Partners, Inc.
and Lawrence R. Muroff, M.D.***

10.25 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Lawrence Muroff, M.D.***

10.26 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Mark Martin.***

10.27 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Sami Abbasi.***

10.28 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Gregory L. Solomon.***

10.29 First Amendment to Consulting Agreement between American
Physician Partners, Inc. and Lawrence R. Muroff, M.D.***

10.30 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Michael Sherman, M.D.***

10.31 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Paul M. Jolas.***

10.32 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Derace Schaffer, M.D.***

10.33 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and John Pappajohn.***

10.34 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Mary Pappajohn.***

10.35 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Thebes Ltd.***

10.36 Side Letter dated November 12, 1997 by and between American
Physician Partners, Inc. and Halkis Ltd.***

10.37 Service Agreement dated January 1, 1998, by and among American
Physician Partners, Inc., Community Imaging Partners, Inc.,
Community Radiology Associates, Inc. and Drs. Korsower and Pion
Radiology, P.A.****
</TABLE>

F-27
<PAGE> 61

<TABLE>
<S> <C>
10.38 Service Agreement dated April 1, 1998, by and among American
Physician Partners, Inc., Treasure Coast Imaging Partners, Inc.
and Radiology Imaging Associates - Basilico, Gallagher & Raffa,
M.D., P.A.*****

10.39 First Amendment to Credit Agreement and Consent dated May 19,
1998, by and among American Physician Partners, Inc., General
Electric Capital Corporation and the other credit parties
signatory thereto*****

10.40 Employment Agreement between American Physician Partners, Inc.
and Mark L. Wagar*****

10.41 Service Agreement dated September 1, 1998, by and among American
Physician Partners, Inc., WB&A Imaging Partners, Inc. and WB&A
Imaging, P.C.******

10.42 Office Building Lease Agreement between The Equitable-Nissei
Dallas Company and Fibreboard Corporation******

10.43 Office Building Sublease Agreement by and between Fibreboard
Corporation and American Physician Partners, Inc.******

10.44 First Amendment to Employment Agreement between American
Physician Partners, Inc. and Mark L. Wagar*******

10.45 First Amendment to Employment Agreement between American
Physician Partners, Inc. and Mark S. Martin*******

10.46 First Amendment to Employment Agreement between American
Physician Partners, Inc. and Sami S. Abbasi*******

10.47 First Amendment to Employment Agreement between American
Physician Partners, Inc. and Paul M. Jolas*******

10.48 Amendment No. 1 to American Physician Partners, Inc. 1996 Stock
Option Plan********

21.1 Subsidiaries***********

23.1 Consent of Arthur Andersen***********

24.1 Power of Attorney (contained on the signature page of this Form
10-K)***********

27 Financial Data Schedule*

99.1 Press Release issued by Radiologix, Inc. on September 24, 1999
announcing its change of corporate name from American Physician
Partners, Inc.**********

99.2 Certificate of Ownership and Merger of Radiologix, Inc. with and
into American Physician Partners, Inc.**********
</TABLE>

---------

* Filed herewith.

F-28
<PAGE> 62

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

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

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

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

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

******* Incorporated by reference to the corresponding Exhibit number
to the registrant's Form 10-Q filed on May 17, 1999.

******** Incorporated by reference to the corresponding Exhibit number
to the Registrant's Form 8-K filed on August 3, 1999.

********* Incorporated by reference to the corresponding Exhibit number
to the Registrant's Form 10-Q filed on August 16, 1999.

********** Incorporated by reference to the corresponding Exhibit number
to the Registrant's Form 8-K filed on September 24, 1999.

*********** Incorporated by reference to the corresponding Exhibit number
to the Registrant's Form 10-K filed on March 30, 2000.

(b) Financial Statement Schedules.

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

F-29
<PAGE> 63

SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, Radiologix, Inc. has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on March 29, 2000.

RADIOLOGIX, INC.

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

POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Mark L. Wagar Chairman of the Board of Directors and March 29, 2000
------------------------------ Chief Executive Officer (Principal
Mark L. Wagar Executive Officer)

/s/ David W. Young Vice President of Finance, Treasurer and March 29, 2000
------------------------------ Controller (Principal Accounting Officer)
David W. Young

/s/ John Pappajohn Director March 29, 2000
------------------------------
John Pappajohn

/s/ Derace L. Schaffer, M.D. Director March 29, 2000
------------------------------
Derace L. Schaffer, M.D.

/s/ Michael L. Sherman, M.D. Director March 29, 2000
------------------------------
Michael L. Sherman, M.D.

/s/ John W. Colloton Director March 29, 2000
------------------------------
John W. Colloton

/s/ Less T. Chafen, M.D. Director March 29, 2000
------------------------------
Less T. Chafen, M.D
</TABLE>

<PAGE> 64

SCHEDULE II

RADIOLOGIX, INC
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD PROVISION OTHER WRITEOFFS PERIOD
----------- ---------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCES FOR BAD DEBT

For the Year Ended December 31, 1997 $ -- $ 862 $ 15,647 $ 69 $ 16,440

For the Year Ended December 31, 1998 16,440 13,723 977 12,768 18,372

For the Year Ended December 31, 1999 18,372 18,838 637 10,871 26,976
</TABLE>

Amounts in "Other" category represent allowance from new affiliations.

<PAGE> 65

INDEX TO EXHIBITS