##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from



Commission File No. 0-23311



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RADIOLOGIX, INC.

(Exact name of registrant as specified in its charter)



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



3600 JP Morgan Chase
Tower

2200 Ross Avenue

Dallas, Texas 75201-2776

(Address of principal executive offices, including zip code)



(214) 303-2776

(Registrants telephone number, including area code)



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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
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



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



|                                |  |                             
|------------------------------- |  | ----------------------------
|Class                           |  | Outstanding at July 31, 2004
|Common Stock, $0.0001 par value |  | 21,799,735 shares           



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##### Table of Contents

RADIOLOGIX, INC.



FORM 10-Q



INDEX



|                                 |  |                                                                                                             |  |   
|-------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | --
|                                 |  | Page                                                                                                       
|Part I.   
FINANCIAL INFORMATION |  |                                                                                                            
|                                 |  |                                                                                                            
|Item 1.                          |  | Financial Statements                                                                                        |  |   
|                                 |  |                                                                                                            
|                                 |  | Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003 (Audited)                 |  | 1 
|                                 |  |                                                                                                            
|                                 |  | Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2004 and 2003 |  | 2 
|                                 |  |                                                                                                            
|                                 |  | Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2004 and 2003           |  | 3 
|                                 |  |                                                                                                            
|                                 |  | Notes to Consolidated Financial Statements (Unaudited)                                                      |  | 4 
|                                 |  |                                                                                                            
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 20
|                                 |  |                                                                                                            
|Item 3.                          |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 29
|                                 |  |                                                                                                            
|Item 4.                          |  | Controls and Procedures                                                                                     |  | 29
|                                 | 
|Part II.  
OTHER INFORMATION     |  |                                                                                                            
|                                 |  |                                                                                                            
|Item 4.                          |  | Submission of Matters to a Vote of Security Holders                                                         |  | 30
|                                 |  |                                                                                                            
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                            |  | 30
|                                 | 
|SIGNATURES                       |  | 31                                                                                                         
|                                 | 
|INDEX TO EXHIBITS                |  | 32                                                                                                         





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##### Table of Contents

PART I: FINANCIAL INFORMATION



Item 1. Financial Statements



RADIOLOGIX, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                                               |  | June 30, 2004 |         |   | December 31, 2003 |  
|                                                                                                                                                                                                               |  | (Unaudited)   |         |   |                   |  
|ASSETS                                                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|CURRENT ASSETS:                                                                                                                                                                                                |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                                                      |  | $             | 47,079  |   |                   | $ | 36,766  |  
|Restricted cash                                                                                                                                                                                                |  |               | 4,000   |   |                   |   |        |  
|Accounts receivable, net of allowances                                                                                                                                                                         |  |               | 60,785  |   |                   |   | 58,746  |  
|Due from affiliates                                                                                                                                                                                            |  |               | 2,241   |   |                   |   | 4,104   |  
|Assets held for sale                                                                                                                                                                                           |  |               | 1,094   |   |                   |   | 251     |  
|Other current assets                                                                                                                                                                                           |  |               | 7,733   |   |                   |   | 7,571   |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                                                           |  |               | 122,932 |   |                   |   | 107,438 |  
|PROPERTY AND EQUIPMENT, net                                                                                                                                                                                    |  |               | 58,683  |   |                   |   | 62,655  |  
|INVESTMENTS IN JOINT VENTURES                                                                                                                                                                                  |  |               | 7,920   |   |                   |   | 10,665  |  
|GOODWILL                                                                                                                                                                                                       |  |               | 3,651   |   |                   |   | 20,110  |  
|INTANGIBLE ASSETS, net                                                                                                                                                                                         |  |               | 65,685  |   |                   |   | 67,917  |  
|DEFERRED FINANCING COSTS, net                                                                                                                                                                                  |  |               | 7,341   |   |                   |   | 8,151   |  
|OTHER ASSETS                                                                                                                                                                                                   |  |               | 1,663   |   |                   |   | 2,200   |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                                                                   |  | $             | 267,875 |   |                   | $ | 279,136 |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                           |  |               |         |   |                   |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                                                           |  |               |         |   |                   |   |         |  
|Accounts payable and accrued expenses                                                                                                                                                                          |  | $             | 13,771  |   |                   | $ | 14,598  |  
|Accrued physician retention                                                                                                                                                                                    |  |               | 9,442   |   |                   |   | 8,821   |  
|Accrued salaries and benefits                                                                                                                                                                                  |  |               | 8,767   |   |                   |   | 7,788   |  
|Current portion of long-term debt                                                                                                                                                                              |  |               | 243     |   |                   |   | 261     |  
|Current portion of capital lease obligations                                                                                                                                                                   |  |               | 401     |   |                   |   | 1,438   |  
|Other current liabilities                                                                                                                                                                                      |  |               | 420     |   |                   |   | 482     |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                                                      |  |               | 33,044  |   |                   |   | 33,388  |  
|DEFERRED INCOME TAXES                                                                                                                                                                                          |  |               | 328     |   |                   |   | 4,260   |  
|LONG-TERM DEBT, net of current portion                                                                                                                                                                         |  |               | 158,270 |   |                   |   | 160,000 |  
|CONVERTIBLE DEBT                                                                                                                                                                                               |  |               | 11,980  |   |                   |   | 11,980  |  
|CAPITAL LEASE OBLIGATIONS, net of current portion                                                                                                                                                              |  |               | 132     |   |                   |   | 376     |  
|DEFERRED REVENUE                                                                                                                                                                                               |  |               | 7,107   |   |                   |   | 7,312   |  
|OTHER LIABILITIES                                                                                                                                                                                              |  |               | 266     |   |                   |   | 319     |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                                                              |  |               | 211,127 |   |                   |   | 217,635 |  
|                                                                                                                                                                                                               |  |              
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                  |  |               |         |   |                   |   |         |  
|                                                                                                                                                                                                               |  |              
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                                                                                                                |  |               | 784     |   |                   |   | 817     |  
|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; 21,813,419 and 21,765,985 shares issued in 2004 and 2003, respectively, and
21,794,735 and 21,747,301 outstanding in 2004 and 2003, respectively |  |               | 2       |   |                   |   | 2       |  
|Treasury stock                                                                                                                                                                                                 |  |               | (180    | ) |                   |   | (180    | )
|Additional paid-in capital                                                                                                                                                                                     |  |               | 14,038  |   |                   |   | 13,942  |  
|Retained earnings                                                                                                                                                                                              |  |               | 42,104  |   |                   |   | 46,920  |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                                                     |  |               | 55,964  |   |                   |   | 60,684  |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                     |  | $             | 267,875 |   |                   | $ | 279,136 |  
|                                                                                                                                                                                                               |  |               |         |   |                   |   |         |  



See accompanying notes
to consolidated financial statements.



1



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##### Table of Contents

RADIOLOGIX, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                              |  | For the Three Months Ended June 30, |            |   | For the Six Months Ended June 30, |  
|                                                              |  | 2004                                |            |   | 2003                              |   |            | 2004 |  |   | 2003       |  
|SERVICE FEE REVENUE                                           |  | $                                   | 67,682     |   |                                   | $ | 62,041     |      |  | $ | 135,297    |   |  | $ | 123,467    |  
|COSTS AND EXPENSES:                                           |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Salaries and benefits                                         |  |                                     | 21,798     |   |                                   |   | 19,836     |      |  |   | 45,158     |   |  |   | 40,261     |  
|Field supplies                                                |  |                                     | 4,261      |   |                                   |   | 4,376      |      |  |   | 8,440      |   |  |   | 8,331      |  
|Field rent and lease expense                                  |  |                                     | 8,444      |   |                                   |   | 7,610      |      |  |   | 16,553     |   |  |   | 15,165     |  
|Other field expenses                                          |  |                                     | 11,461     |   |                                   |   | 10,420     |      |  |   | 22,387     |   |  |   | 20,392     |  
|Bad debt expense                                              |  |                                     | 5,553      |   |                                   |   | 5,312      |      |  |   | 11,249     |   |  |   | 10,573     |  
|Severance and other related costs                             |  |                                     |           |   |                                   |   | 311        |      |  |   |           |   |  |   | 1,280      |  
|Corporate general and administrative                          |  |                                     | 4,284      |   |                                   |   | 3,375      |      |  |   | 7,896      |   |  |   | 7,016      |  
|Impairment of goodwill and long-lived assets                  |  |                                     | 9,154      |   |                                   |   |           |      |  |   | 12,383     |   |  |   |           |  
|Depreciation and amortization                                 |  |                                     | 6,424      |   |                                   |   | 6,606      |      |  |   | 13,136     |   |  |   | 13,184     |  
|Gain on sale of operations                                    |  |                                     | (4,669     | ) |                                   |   |           |      |  |   | (4,669     | ) |  |   |           |  
|Interest expense, net                                         |  |                                     | 4,307      |   |                                   |   | 4,494      |      |  |   | 8,691      |   |  |   | 9,134      |  
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                                      |  |                                     | 71,017     |   |                                   |   | 62,340     |      |  |   | 141,224    |   |  |   | 125,336    |  
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|LOSS BEFORE EQUITY IN EARNINGS OF                             |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|INVESTMENTS, MINORITY INTERESTS IN                            |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|CONSOLIDATED SUBSIDIARIES, INCOME TAXES                       |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|AND DISCONTINUED OPERATIONS                                   |  |                                     | (3,335     | ) |                                   |   | (299       | )    |  |   | (5,927     | ) |  |   | (1,869     | )
|                                                              |  |                                     |            |  
|Equity In Earnings of Investments                             |  |                                     | 758        |   |                                   |   | 1,314      |      |  |   | 1,354      |   |  |   | 2,512      |  
|                                                              |  |                                     |            |  
|Minority Interests In Income of Consolidated Subsidiaries     |  |                                     | (189       | ) |                                   |   | (331       | )    |  |   | (444       | ) |  |   | (530       | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |  |                                     | (2,766     | ) |                                   |   | 684        |      |  |   | (5,017     | ) |  |   | 113        |  
|                                                              |  |                                     |            |  
|Income Tax Expense (Benefit)                                  |  |                                     | (1,387     | ) |                                   |   | 273        |      |  |   | (2,287     | ) |  |   | 45         |  
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                      |  |                                     | (1,379     | ) |                                   |   | 411        |      |  |   | (2,730     | ) |  |   | 68         |  
|                                                              |  |                                     |            |  
|Discontinued Operations:                                      |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Loss from discontinued operations before income taxes         |  |                                     | (1,216     | ) |                                   |   | (225       | )    |  |   | (3,477     | ) |  |   | (7,337     | )
|Income tax benefit                                            |  |                                     | (486       | ) |                                   |   | (90        | )    |  |   | (1,391     | ) |  |   | (2,935     | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Loss from discontinued operations                             |  |                                     | (730       | ) |                                   |   | (135       | )    |  |   | (2,086     | ) |  |   | (4,402     | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|NET INCOME (LOSS)                                             |  | $                                   | (2,109     | ) |                                   | $ | 276        |      |  | $ | (4,816     | ) |  | $ | (4,334     | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|INCOME (LOSS) PER COMMON SHARE                                |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from continuing operationsbasic                |  | $                                   | (0.06      | ) |                                   | $ | 0.02       |      |  | $ | (0.13      | ) |  | $ | 0.00       |  
|Income (loss) from discontinued operationsbasic              |  |                                     | (0.04      | ) |                                   |   | (0.01      | )    |  |   | (0.09      | ) |  |   | (0.20      | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)basic                                       |  | $                                   | (0.10      | ) |                                   | $ | 0.01       |      |  | $ | (0.22      | ) |  | $ | (0.20      | )
|Income (loss) from continuing operationsdiluted              |  | $                                   | (0.06      | ) |                                   | $ | 0.02       |      |  | $ | (0.13      | ) |  | $ | 0.00       |  
|Income (loss) from discontinued operationsdiluted            |  |                                     | (0.04      | ) |                                   |   | 0.00       |      |  |   | (0.09      | ) |  |   | (0.20      | )
|                                                              |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)diluted                                     |  | $                                   | (0.10      | ) |                                   | $ | 0.02       |      |  | $ | (0.22      | ) |  | $ | (0.20      | )
|                                                              |  |                                     |            |  
|WEIGHTED AVERAGE SHARES OUTSTANDING                           |  |                                     |            |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                         |  |                                     | 21,769,804 |   |                                   |   | 21,695,140 |      |  |   | 21,767,894 |   |  |   | 21,695,140 |  
|Diluted                                                       |  |                                     | 21,769,804 |   |                                   |   | 23,416,435 |      |  |   | 21,767,894 |   |  |   | 21,768,428 |  



See accompanying notes
to unaudited consolidated financial statements



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##### Table of Contents

RADIOLOGIX, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                  |  |                                  |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                  |  | For the Six MonthsEnded June 30, |        
|                                                                                                                  |  | 2004                             |         |   | 2003 |  
|                                                                                                                  |  | (Unaudited)                      |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                             |  |                                  |         |   |      |   |         |  
|Net loss                                                                                                          |  | $                                | (4,816  | ) |      | $ | (4,334  | )
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|Adjustments to reconcile net loss to net cash provided by operating activities including discontinued operations: |  |                                  |         |   |      |   |         |  
|Minority interests in income of consolidated subsidiaries                                                         |  |                                  | 444     |   |      |   | 530     |  
|Equity in earnings of investments                                                                                 |  |                                  | (1,354  | ) |      |   | (2,512  | )
|Depreciation and amortization                                                                                     |  |                                  | 13,375  |   |      |   | 13,860  |  
|Impairment of goodwill and long-lived assets                                                                      |  |                                  | 16,576  |   |      |   | 6,900   |  
|Gains on sales of operations                                                                                      |  |                                  | (5,351  | ) |      |   |        |  
|Deferred revenue                                                                                                  |  |                                  | (204    | ) |      |   | (204    | )
|Changes in operating assets and liabilities                                                                       |  |                                  |         |   |      |   |         |  
|Accounts receivable, net                                                                                          |  |                                  | (1,261  | ) |      |   | 3,720   |  
|Other assets                                                                                                      |  |                                  | 2,184   |   |      |   | (203    | )
|Accounts payable and accrued expenses                                                                             |  |                                  | (2,590  | ) |      |   | (7,655  | )
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|Net cash provided by operating activities                                                                         |  |                                  | 17,003  |   |      |   | 10,102  |  
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                             |  |                                  |         |   |      |   |         |  
|Increase in restricted cash                                                                                       |  |                                  | (4,000  | ) |      |   |        |  
|Purchases of property and equipment                                                                               |  |                                  | (13,410 | ) |      |   | (10,469 | )
|Net cash received on sales of operations                                                                          |  |                                  | 12,784  |   |      |   |        |  
|Contributions to joint ventures                                                                                   |  |                                  |        |   |      |   | (460    | )
|Distributions from joint ventures                                                                                 |  |                                  | 910     |   |      |   | 2,116   |  
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|Net cash used in investing activities                                                                             |  |                                  | (3,716  | ) |      |   | (8,813  | )
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                             |  |                                  |         |   |      |   |         |  
|Payments on long-term debt, primarily capital leases                                                              |  |                                  | (1,321  | ) |      |   | (2,007  | )
|Retirement of senior debt                                                                                         |  |                                  | (1,730  | ) |      |   |        |  
|Other items                                                                                                       |  |                                  | 77      |   |      |   | 3       |  
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|Net cash used in financing activities                                                                             |  |                                  | (2,974  | ) |      |   | (2,004  | )
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                              |  |                                  | 10,313  |   |      |   | (715    | )
|CASH AND CASH EQUIVALENTS, beginning of period                                                                    |  |                                  | 36,766  |   |      |   | 19,153  |  
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                                          |  | $                                | 47,079  |   |      | $ | 18,438  |  
|                                                                                                                  |  |                                  |         |   |      |   |         |  
|SUPPLEMENTAL CASH FLOW DISCLOSURE:                                                                                |  |                                  |         |   |      |   |         |  
|Cash paid for interest                                                                                            |  | $                                | 9,319   |   |      | $ | 8,620   |  
|Income taxes paid, net of refunds received                                                                        |  | $                                | 1,716   |   |      | $ | 763     |  



See accompanying notes
to unaudited consolidated financial statements.



3



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##### Table of Contents

RADIOLOGIX, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004

(Unaudited)



Note 1. Basis of Presentation



Radiologix,
Inc. (together with its subsidiaries, Radiologix or the Company), a Delaware corporation, is a leading national provider of diagnostic imaging services through its ownership and operation of free-standing, outpatient
diagnostic imaging centers. This quarterly report for Radiologix supplements our annual report to security holders on Form 10-K, as amended, for the fiscal year ended December 31, 2003. As permitted by the Securities and Exchange Commission for
interim reporting, we have omitted certain notes and disclosures that substantially duplicate those in the annual report on Form 10-K, accordingly, these consolidated financial statements do not include all disclosures associated with the annual
consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying consolidated financial statements and are of a normal recurring nature, other than those
adjustments related to impairment, discontinued operations and the sales of certain operations, which adjustments are discussed separately in the notes below. Interim results for the three and six-month periods ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year. Variability may be due to changes in modality mix and the volume of procedures performed, physician referral and vacation patterns, the impact of hospital and
physician-affiliated imaging centers that compete in our operating markets, the timing and negotiation of managed care and service contracts, the availability of technicians and other personnel resources, and trends in receivable collectibility,
including the ability of payors to convert to HIPAA electronic payment standards. For further information, refer to Managements Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial
statements and notes included in our annual report to security holders on Form 10-K, as amended, for the year ended December 31, 2003.



The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America and include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany transactions have been eliminated. Investments in entities that the Company does not control, but in which it has a
substantial ownership interest and can exercise significant influence, are accounted for using the equity method.



Certain previously reported amounts, including balances and results of operations related to subsequently discontinued operations, have been reclassified
to conform to the current years presentation. These reclassifications have no impact on total assets, liabilities, stockholders equity, net income (loss), or cash flows.



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



Note 2. Impairment of Goodwill and Long-Lived Assets



Goodwill is not subject to amortization; however it is subject to periodic valuation assessments. Under the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, the Company is required to perform at least an annual impairment test and to consider other indicators that may arise throughout the year to reevaluate carrying value. To the extent
book value exceeds fair value, at the date an impairment is determined, the Company reduces goodwill by recording a charge to operations.



Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), requires
impairment losses to be recognized for long-lived assets through operations when indicators of impairment exist and the underlying cash flows are not sufficient to support the assets carrying value. In addition, SFAS No. 144 requires that a
long-lived asset (disposal group) to be sold that meets certain recognition criteria be classified as held for sale and measured at the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also requires that a
long-lived asset subject to closure (abandonment) before the end of its previously estimated useful life continue to be classified as held and used until disposal with depreciation estimates revised to reflect the use of the asset over
its shortened useful life.



In June 2004, after performing an
extensive assessment of our Questar imaging center portfolio, management concluded that certain centers were not strategic to our future plans and would be unable to meet and sustain our profitability requirements going forward. That assessment
considered: location, contracting leverage, expected capital requirements, the single modality nature of most of these centers, current operating trends, and the sale of our most profitable Questar center on June 21, 2004. Plans for disposition were
enacted before June 30, 2004, with five centers reclassified to discontinued operations. Two other Questar centers were scheduled for closure.



4



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##### Table of Contents

The Companys decision to dispose of this group of imaging centers created an event that required us
to reassess the carrying value of the assets related to these centers, including goodwill at our Questar segment. This reassessment considered the impact on the value of the ongoing, deteriorating operating trends in these centers, as well as the
implications of disposing of individual centers versus operating those centers as part of an ongoing operating enterprise.



To assist us in that reassessment, we engaged an independent valuation firm to estimate the fair value of our combined Questar sites that currently remain
in continuing operations as of June 30, 2004. The valuation performed by this firm was based on a blending of: 1) discounted cash flows and an exit multiple for the business, 2) a market approach using public company information, discounted to
reflect the nature of the Questar operations, and 3) individual transactions experienced by Radiologix and similar companies in recent months. At managements recommendation, the valuation firm applied a high (70%) weighting factor to the
valuation derived under the individual transaction method described in (3) above.



Based on the independent valuation, Radiologix recognized an impairment charge to continuing operations of $8.7 million in the three months ended June 30, 2004 to reduce the Questar goodwill carrying value to
estimated fair value. This charge is in addition to the $5.5 million charge we recorded in the first quarter of 2004 related to Questar in connection with our annual assessment of goodwill. The first quarter valuation included the operating results
of our most profitable Questar Center and also gave equal weighting factors to an income and market approach. The balance of goodwill, which relates entirely to Questar, is approximately $3.7 million at June 30, 2004.



The Company regularly considers whether events or circumstances may affect
either the fair value of recorded intangible assets or their associated useful lives. At June 30, 2004, the combined operations of our remaining Questar centers are generating positive cash flow; and the Company does not believe there are any
additional indicators that the carrying values or the useful lives of these assets need to be adjusted. However, in the event we decide to dispose of any remaining Questar centers, additional charges may result depending on cash flow and market
conditions at the time of disposal.



The components of our
impairment charges are as follows (in thousands):



|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|--------------------------------------- |  | ---------------------------------- | ----- | -------------------------------- | - | ---- |  | - | ------ | - |  | - | -----
|                                        |  | For the Three MonthsEnded June 30, |       | For the Six MonthsEnded June 30,
|                                        |  | 2004                               |       | 2003                             |   | 2004 |  |   | 2003  
|Continuing Operations:                  |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|Impairment of goodwill                  |  | $                                  | 8,700 |                                  | $ |     |  | $ | 14,200 |   |  | $ |     
|Reclassification of goodwill impairment |  |                                    |      |                                  |   |     |  |   | (2,271 | ) |  |   |     
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|                                        |  |                                    | 8,700 |                                  |   |     |  |   | 11,929 |   |  |   |     
|Impairment of long-lived assets         |  |                                    | 454   |                                  |   |     |  |   | 454    |   |  |   |     
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|                                        |  | $                                  | 9,154 |                                  | $ |     |  | $ | 12,383 |   |  | $ |     
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|Discontinued Operations:                |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|Impairment of goodwill                  |  | $                                  | 1,719 |                                  | $ |     |  | $ | 1,759  |   |  | $ | 6,900
|Reclassification of goodwill impairment |  |                                    |      |                                  |   |     |  |   | 2,271  |   |  |   |     
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|                                        |  |                                    | 1,719 |                                  |   |     |  |   | 4,030  |   |  |   | 6,900
|Impairment of long-lived assets         |  |                                    | 163   |                                  |   |     |  |   | 163    |   |  |   |     
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      
|                                        |  | $                                  | 1,882 |                                  | $ |     |  | $ | 4,193  |   |  | $ | 6,900
|                                        |  |                                    |       |                                  |   |      |  |   |        |   |  |   |      



Note 3. Discontinued Operations



As noted above, in June 2004 management concluded that
five Questar centers would be designated as discontinued operations and two other centers would be closed. We also sold one center for $3.1 million in cash and recognized a gain on this sale of $682,000 ($.03 per dilutive share) which gain is
included in discontinued operations. The results of operations of imaging centers in discontinued operations are as follows (in thousands):



|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|                                          |  | 2004                               |        |   | 2003                             |   |       | 2004 |  |   | 2003   |  
|Service fee revenue                       |  | $                                  | 2,541  |   |                                  | $ | 4,228 |      |  | $ | 5,365  |   |  | $ | 8,415  |  
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Pre-tax loss from discontinued operations |  |                                    | (1,216 | ) |                                  |   | (225  | )    |  |   | (3,477 | ) |  |   | (7,337 | )
|Income tax benefit                        |  |                                    | (486   | ) |                                  |   | (90   | )    |  |   | (1,391 | ) |  |   | (2,935 | )
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Net loss from discontinued operations     |  | $                                  | (730   | ) |                                  | $ | (135  | )    |  | $ | (2,086 | ) |  | $ | (4,402 | )
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  



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##### Table of Contents

Assets and liabilities of discontinued operations as of June 30, 2004 and 2003 were as follows (in
thousands):



|                                      |  |      |       |      |   |       
|------------------------------------- |  | ---- | ----- | ---- | - | ------
|                                      |  | 2004 |       | 2003
|Assets                                |  | $    | 5,134 |      | $ | 15,020
|Liabilities                           |  |      | 1,278 |      |   | 3,635 
|                                      |  |      |       |      |   |       
|Net assets of discontinued operations |  | $    | 3,856 |      | $ | 11,385
|                                      |  |      |       |      |   |       



Note 4. Gain on Sale of Operations



Effective April 30, 2004, we completed the sale of our
operations in San Antonio, Texas. The purchase price was $10.5 million, resulting in a gain on sale of approximately $4.7 million or $3.1 million net of taxes ($0.14 per dilutive share). Net cash received was $9.7 million after purchase price
adjustments. The sale included (1) assets we owned and leased in our operation of M&S Imaging Partners, Inc., (2) a diagnostic imaging center, and (3) certain partnership interests, but did not include accounts receivable aggregating
approximately $4.7 million, which we retained.



Results of
operations for the San Antonio operations were as follows (in thousands):



|                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|------------------------------ |  | ---------------------------------- | ----- | -------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                               |  | For the Three MonthsEnded June 30, |       | For the Six MonthsEnded June 30,
|                               |  | 2004                               |       | 2003                             |   | 2004  |  | 2003
|Service fee revenues           |  | $                                  | 2,395 |                                  | $ | 3,885 |  | $    | 6,120 |  | $ | 7,826
|                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Interest                       |  |                                    | 28    |                                  |   | 96    |  |      | 114   |  |   | 199  
|Depreciation and amortization  |  |                                    | 138   |                                  |   | 355   |  |      | 510   |  |   | 713  
|Pre-tax income from operations |  |                                    | 694   |                                  |   | 1,261 |  |      | 1,564 |  |   | 2,532
|Income tax expense             |  |                                    | 236   |                                  |   | 429   |  |      | 532   |  |   | 861  
|                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      
|Net income from operations     |  | $                                  | 458   |                                  | $ | 832   |  | $    | 1,032 |  | $ | 1,671
|                               |  |                                    |       |                                  |   |       |  |      |       |  |   |      



Note 5. Revenue Recognition



Service fee revenue is comprised of billed charges for
both the technical and professional components of service, reduced by estimated contractual adjustments and by amounts retained by contracted radiology group practices under the service agreements. Revenue is recognized when services are rendered by
contracted radiology practices, the imaging centers, or both. Bad debt expense related to established charges is reflected as an operating expense rather than a reduction of revenue. Contractual adjustments and bad debt expense are estimated based
on historical collection experience. Because Radiologix has no financial controlling interest in the radiology practices, as defined in Emerging Issues Task Force Issue 97-2 (EITF 97-2), the Company does not consolidate the financial
statements of those practices in its consolidated financial statements.



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



|                                                                                                          |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                          |  | For the Three Months Ended June 30, |         |   | For the Six Months Ended June 30, |  
|                                                                                                          |  | 2004                                |         |   | 2003                              |   |         | 2004 |  |   | 2003    |  
|Revenue for contracted radiology practices and diagnostic imaging centers, net of contractual adjustments |  | $                                   | 94,300  |   |                                   | $ | 86,974  |      |  | $ | 188,056 |   |  | $ | 172,450 |  
|Less: amounts retained by contracted radiology practices                                                  |  |                                     | (26,618 | ) |                                   |   | (24,933 | )    |  |   | (52,759 | ) |  |   | (48,983 | )
|                                                                                                          |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  
|Service fee revenue                                                                                       |  | $                                   | 67,682  |   |                                   | $ | 62,041  |      |  | $ | 135,297 |   |  | $ | 123,467 |  
|                                                                                                          |  |                                     |         |   |                                   |   |         |      |  |   |         |   |  |   |         |  



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##### Table of Contents

The Companys service fee revenue is dependent upon the operating results of the contracted
radiology practices and diagnostic imaging centers. Where state law allows, service fees due under the service agreements for the contracted radiology practices are derived from two distinct revenue streams: (1) a negotiated percentage (typically
20% to 30%) of the professional revenues, reduced by certain expenses, as defined in the service agreements; and (2) 100% of the adjusted technical revenues as defined in the service agreements. In states where the law requires a flat fee structure,
Radiologix has negotiated a base service fee, which approximates the estimated fair market value of the services provided under the service agreements and which is renegotiated each year. Service fee revenue is comprised of the following (in
thousands):



|                       |  |                                     |        |                                   |   |        |  |      |         |  |   |        
|---------------------- |  | ----------------------------------- | ------ | --------------------------------- | - | ------ |  | ---- | ------- |  | - | -------
|                       |  | For the Three Months Ended June 30, |        | For the Six Months Ended June 30,
|                       |  | 2004                                |        | 2003                              |   | 2004   |  | 2003
|Professional component |  | $                                   | 12,170 |                                   | $ | 11,810 |  | $    | 24,244  |  | $ | 23,285 
|Technical component    |  |                                     | 55,512 |                                   |   | 50,231 |  |      | 111,053 |  |   | 100,182
|                       |  |                                     |        |                                   |   |        |  |      |         |  |   |        
|Service fee revenue    |  | $                                   | 67,682 |                                   | $ | 62,041 |  | $    | 135,297 |  | $ | 123,467
|                       |  |                                     |        |                                   |   |        |  |      |         |  |   |        



Note 6. Long-Term Debt



Senior Notes



The Companys $160.0 million senior notes due December 15, 2008 bear
interest at 10.5% payable semiannually in arrears on June 15 and December 15 of each year. The senior notes are redeemable on or after December 15, 2005 at various redemption prices, plus accrued interest to the date of redemption. These notes are
unsecured obligations, which rank senior in right of payment to all subordinated indebtedness and equal in right of payment with all other senior indebtedness. The senior notes are unconditionally guaranteed on a senior unsecured basis by certain
restricted existing and future subsidiaries. In the 2004 second quarter, the Company redeemed $1.73 million of these senior notes at a price equal to 103.25% of face value.



Convertible Junior Subordinated Note



The Company has a $12.0 million convertible junior subordinated note, which matures July 31, 2009, and bears interest,
payable quarterly in cash or payment in kind securities, at an annual rate of 8.0%. The note holder may convert borrowings under the note to common stock at $7.52 per share.



Master Lease Agreement



Radiologix maintains operating leases for certain imaging equipment under an Amended and Restated Master Lease Agreement with GE Healthcare Financial
Services (GE). Through this arrangement, GE has agreed to fund up to $60.0 million of equipment leases through December 31, 2006, and requires that at least two-thirds of the outstanding balance represent GE healthcare equipment.



In connection with the Master Lease Agreement, the Company is required to
provide additional cash collateral in a restricted account equal to 20% of the aggregate amounts outstanding under the Master Lease Agreement. The accompanying June 30, 2004 balance sheet includes $4.0 million of restricted cash under this
provision.



The Master Lease Agreement also contains certain
covenants related to financial leverage, fixed charge coverage, and total indebtedness to GE. Failure to comply with these covenants would restrict our ability to lease additional equipment under the Master Lease Agreement until the ratio
requirements are met. At June 30, 2004, Radiologix was in compliance with these covenants.



At June 30, 2004 applicable amounts outstanding under the Master Lease Agreement totaled $18.7 million; and $41.3 million remained available for future leases.



Revolving Credit Facility



The Company also maintains a revolving credit facility with GE, enabling the
Company to borrow up to 85% of eligible accounts receivable, as defined, with a maximum borrowing limit of $35.0 million. Borrowings under the credit facility are secured by substantially all of the Companys assets, including the capital stock
of our wholly owned subsidiaries. The credit facility expires December 31, 2008 and bears a commitment fee ranging from 0.50% to 0.75% of the unused balance, based on amounts borrowed.



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##### Table of Contents

Under the revolving credit facility, borrowings bear interest, at the option of the Company, either (i)
at a fixed rate comprised of LIBOR plus a margin ranging from 3.0% to 3.5%, depending on monthly amounts outstanding or (ii) at a variable rate based on prime plus a margin ranging from 1.75% to 2.25%, depending on monthly amounts outstanding.



At June 30, 2004, applicable amounts considered outstanding
under the revolving credit facility totaled $750,000 related to a letter of credit in connection with our high retention workers compensation program; and $34.2 million remained available for borrowings.



Note 7. Variable Interest Entities



In January 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 41 (FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical corrections and
address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, non-controlling interests and results of
activities of a VIE in its consolidated financial statements.



In general, a VIE is a corporation, partnership, limited liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses
or the right to receive returns generated by its operations. However, FIN 46 specifically excludes a VIE that is a business if the variable interest holder did not participate significantly in the design or redesign of the entity.



We adopted the provisions of FIN 46 as of March 31, 2004. We have reviewed
the Companys non-consolidated joint ventures under the provision and have determined that none of the joint ventures meets the definition of a variable interest entity at June 30, 2004.



Note 8. Stock-Based Awards



As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), the Company does not currently recognize compensation expense related to stock option grants to its employees under any of its stock award plans; however it does account for stock-based
compensation of non-employees under the provisions of SFAS 123. Option awards have generally been granted under the terms of the 1996 Stock Option Plan, as amended, and are priced at fair market value on the date granted. On July 15, 2004, the
Companys stockholders approved the adoption of the 2004 Long-Term Incentive Plan. As a result, all future grants will be made under the 2004 Plan and no more grants will be made under the 1996 Plan.



During the six months ended June 30, 2004, the Company granted 505,000
options to purchase the Companys common stock, primarily as employment inducements for key executives. Of these options, 305,000 vest over a five-year period, and 200,000 vest in specified increments, based on the performance (at stock prices
ranging from $5.00 to $17.50 per share) of the Companys common stock for consecutive 20-day periods applicable to the increment. None of these options have vested to date.



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##### Table of Contents

The summary below presents the pro-forma financial results that would have been reported if the Company
had applied the provisions of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (dollars are presented in thousands, except per share amounts):



|                                                                                                                           |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                           |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|                                                                                                                           |  | 2004                               |        |   | 2003                             |   |       | 2004 |  |   | 2003   |  
|Net income (loss), as reported                                                                                             |  | $                                  | (2,109 | ) |                                  | $ | 276   |      |  | $ | (4,816 | ) |  | $ | (4,334 | )
|Total stock-based compensation expensed in net loss, net of related tax effects                                            |  |                                    | 2      |   |                                  |   |      |      |  |   | 8      |   |  |   |       |  
|Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  |                                    | (224   | ) |                                  |   | (533  | )    |  |   | (777   | ) |  |   | (1,054 | )
|                                                                                                                           |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net loss                                                                                                         |  | $                                  | (2,331 | ) |                                  | $ | (257  | )    |  | $ | (5,585 | ) |  | $ | (5,388 | )
|                                                                                                                           |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Income (loss) per common share:                                                                                            |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Basicas reported                                                                                                          |  | $                                  | (0.10  | ) |                                  | $ | 0.01  |      |  | $ | (0.22  | ) |  | $ | (0.20  | )
|Basicpro forma                                                                                                            |  | $                                  | (0.11  | ) |                                  | $ | (0.02 | )    |  | $ | (0.26  | ) |  | $ | (0.25  | )
|                                                                                                                           |  |                                    |        |  
|Loss per share:                                                                                                            |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Dilutedas reported                                                                                                        |  | $                                  | (0.10  | ) |                                  | $ | 0.02  |      |  | $ | (0.22  | ) |  | $ | (0.20  | )
|Dilutedpro forma                                                                                                          |  | $                                  | (0.11  | ) |                                  | $ | (0.01 | )    |  | $ | (0.26  | ) |  | $ | (0.25  | )



The fair value of each
option grant is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for grants at June 30, 2004 and 2003, respectively: risk-free interest rate of 4.73% and 3.33%; expected life
of 5.4 and 5.4 years; expected volatility of 55.6% and 78.8%; and dividend yield of zero. The weighted-average grant-date fair value of new grants during the six months ended June 30, 2004 and 2003 was $2.23 per share and $1.98 per share,
respectively.



The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.



Note 9. Earnings Per Share



Basic earnings per share (EPS) is calculated by dividing income available to common stockholders by the weighted average number of common shares
outstanding during the period.



Diluted EPS includes options,
warrants, and other potentially dilutive securities, using the treasury stock method for options and warrants to the extent that these securities are not anti-dilutive. Diluted EPS also includes the effect of the convertible junior subordinated note
using the if converted method to the extent these securities are not anti-dilutive.



|                                                                              |  |                                     |            |                                   |   |            |  |      |            |  |   |           
|----------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                                              |  | For the Three Months Ended June 30, |            | For the Six Months Ended June 30,
|                                                                              |  | 2004                                |            | 2003                              |   | 2004       |  | 2003
|Weighted average shares for basic earnings per share                          |  |                                     | 21,769,804 |                                   |   | 21,695,140 |  |      | 21,767,894 |  |   | 21,695,140
|Effect of dilutive stock options                                              |  |                                     |           |                                   |   | 128,255    |  |      |           |  |   | 73,288    
|Effect of dilutive convertible junior subordinated note                       |  |                                     |           |                                   |   | 1,593,040  |  |      |           |  |   |          
|                                                                              |  |                                     |            |                                   |   |            |  |      |            |  |   |           
|Weighted average shares for diluted earnings per share                        |  |                                     | 21,769,804 |                                   |   | 23,416,435 |  |      | 21,767,894 |  |   | 21,768,428
|                                                                              |  |                                     |            |                                   |   |            |  |      |            |  |   |           
|Tax-effected interest savings related to convertible junior subordinated note |  | $                                   |           |                                   | $ | 143,000    |  | $    |           |  | $ |          
|                                                                              |  |                                     |            |                                   |   |            |  |      |            |  |   |           



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##### Table of Contents

For the three months ended June 30, 2004 approximately $146,000 of tax-effected interest and 1,593,040 of
weighted average shares related to the convertible junior subordinated note were not included in the computation of diluted EPS because to do so would be anti-dilutive. Also, for the three months ended June 30, 2004, 449,816 shares related to stock
options were not included in the computation of dilutive EPS because to do so would be anti-dilutive.



For the six months ended June 30, 2004 and 2003, approximately $288,000 of tax-effected interest and 1,593,040 of weighted average shares related to the
convertible junior subordinated note were not included in the computation of diluted EPS because to do so would be anti-dilutive. Also, for the six months ended June 30, 2004, 480,571 shares related to stock options were not included in the
computation of dilutive EPS because to do so would be anti-dilutive.



Note
10. Segment Reporting



The Companys primary
operations consist of owning and operating diagnostic imaging centers and providing administrative, management and information services to the contracted radiology practices that provide professional interpretation and supervision services in
connection with the Companys diagnostic imaging centers and to hospitals and radiology practices with which the Company operates joint ventures.



The Company previously reported its primary operations through four reportable segments comprised of its four designated regions of the United States of
America. As a result of an assessment of these operations, including how resources are allocated by members of our senior management team (the chief operating decision maker function), and because the four designated regions have: (1)
substantially all resources allocated to them, (2) similar economic characteristics, (3) similar operations and (4) similar regulatory environments, we have aggregated them into a single reportable operating segment.



Because of different characteristics from our primary operations, including
location, market concentration, contracting leverage, capital requirements, the single modality nature of most of the centers and the structure of the management service agreements with physicians related to the Companys Questar operations,
senior management makes resource allocation decisions separately for Questar and its primary operations.



The following table summarizes the operating results and assets of the primary and Questar operations (in thousands):



|                                                                                                                                                     |  |                                        |         |   |         |         |   |       |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ------- | ------- | - | ----- | - | ------- | -
|                                                                                                                                                     |  | For the Six Months Ended June 30, 2004 |        
|                                                                                                                                                     |  | PrimaryOperations                      |         |   | Questar |         |   | Total |  
|Service fee revenue                                                                                                                                  |  | $                                      | 128,818 |   |         | 6,479   |   |       | $ | 135,297 |  
|Total costs and expenses                                                                                                                             |  | $                                      | 105,550 |   |         | 18,496  |   |       | $ | 124,046 |  
|                                                                                                                                                     |  |                                        |         |   |         |         |   |       |   |         |  
|Income (loss) before equity in earnings of investments and minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  | $                                      | 23,268  |   |         | (12,017 | ) |       | $ | 11,251  |  
|Equity in earnings of investments                                                                                                                    |  | $                                      | 1,354   |   |         |        |   |       | $ | 1,354   |  
|Minority interests in income of consolidated subsidiaries                                                                                            |  | $                                      | (444    | ) |         |        |   |       | $ | (444    | )
|                                                                                                                                                     |  |                                        |         |   |         |         |   |       |   |         |  
|Income (loss) before income taxes from continuing operations                                                                                         |  | $                                      | 24,178  |   |         | (12,017 | ) |       | $ | 12,161  |  
|Loss before income taxes from discontinued operations                                                                                                |  | $                                      | (94     | ) |         | (3,383  | ) |       | $ | (3,477  | )
|                                                                                                                                                     |  |                                        |         |   |         |         |   |       |   |         |  
|Income (loss) before income taxes                                                                                                                    |  | $                                      | 24,084  |   |         | (15,400 | ) |       | $ | 8,684   |  
|Assets                                                                                                                                               |  | $                                      | 129,897 |   |         | 13,006  |   |       | $ | 142,903 |  
|Purchases of property and equipment                                                                                                                  |  | $                                      | 12,052  |   |         | 608     |   |       | $ | 12,660  |  



|                                                                                                                                                     |  |                                        |         |   |         |        |   |       |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ------- | ------ | - | ----- | - | ------- | -
|                                                                                                                                                     |  | For the Six Months Ended June 30, 2003 |        
|                                                                                                                                                     |  | PrimaryOperations                      |         |   | Questar |        |   | Total |  
|Service fee revenue                                                                                                                                  |  | $                                      | 116,585 |   |         | 6,882  |   |       | $ | 123,467 |  
|Total costs and expenses                                                                                                                             |  | $                                      | 100,770 |   |         | 6,683  |   |       | $ | 107,453 |  
|                                                                                                                                                     |  |                                        |         |   |         |        |   |       |   |         |  
|Income (loss) before equity in earnings of investments and minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  | $                                      | 15,815  |   |         | 199    |   |       | $ | 16,014  |  
|Equity in earnings of investments                                                                                                                    |  | $                                      | 2,512   |   |         |       |   |       | $ | 2,512   |  
|Minority interests in income of consolidated subsidiaries                                                                                            |  | $                                      | (489    | ) |         | (41    | ) |       | $ | (530    | )
|                                                                                                                                                     |  |                                        |         |   |         |        |   |       |   |         |  
|Income before income taxes from continuing operations                                                                                                |  | $                                      | 17,838  |   |         | 158    |   |       | $ | 17,996  |  
|Income (loss) before income taxes from discontinued operations                                                                                       |  | $                                      | 46      |   |         | (7,383 | ) |       | $ | (7,337  | )
|                                                                                                                                                     |  |                                        |         |   |         |        |   |       |   |         |  
|Income (loss) before income taxes                                                                                                                    |  | $                                      | 17,884  |   |         | (7,225 | ) |       | $ | 10,659  |  
|Assets                                                                                                                                               |  | $                                      | 157,760 |   |         | 39,560 |   |       | $ | 197,320 |  
|Purchases of property and equipment                                                                                                                  |  | $                                      | 7,958   |   |         | 2,284  |   |       | $ | 10,242  |  



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The following is a reconciliation of segment income before income taxes to consolidated loss before
income taxes (including continuing and discontinued operations) and purchases of property and equipment by the Companys reportable segments for the six months ended June 30, 2004 and 2003 (in thousands):



|                                                                              |  |                                   |        |   |      |   |        |  
|----------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                              |  | For the Six Months Ended June 30, |       
|                                                                              |  | 2004                              |        |   | 2003 |  
|Segment income before income taxes                                            |  | $                                 | 8,684  |   |      | $ | 10,659 |  
|Unallocated amounts:                                                          |  |                                   |        |   |      |   |        |  
|Corporate general and administrative                                          |  |                                   | (7,896 | ) |      |   | (7,016 | )
|Corporate severance and other related costs                                   |  |                                   |       |   |      |   | (1,027 | )
|Corporate depreciation and amortization                                       |  |                                   | (2,965 | ) |      |   | (3,165 | )
|Corporate interest expense                                                    |  |                                   | (6,317 | ) |      |   | (6,675 | )
|                                                                              |  |                                   |        |   |      |   |        |  
|Consolidated loss before income taxes, continuing and discontinued operations |  | $                                 | (8,494 | ) |      | $ | (7,224 | )
|                                                                              |  |                                   |        |   |      |   |        |  
|                                                                              |  |                                  
|                                                                              |  | 2004                              |        |   | 2003 |  
|Purchases of property and equipment                                           |  |                                   |        |   |      |   |        |  
|Segment amounts                                                               |  | $                                 | 12,660 |   |      | $ | 10,242 |  
|Corporate amount                                                              |  |                                   | 750    |   |      |   | 227    |  
|                                                                              |  |                                   |        |   |      |   |        |  
|Total purchases of property and equipment                                     |  | $                                 | 13,410 |   |      | $ | 10,469 |  
|                                                                              |  |                                   |        |   |      |   |        |  



Note 11. Supplemental Guarantor
Information



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



The non-guarantor subsidiaries include Advanced PET Imaging of Maryland,
L.P., Montgomery Community Magnetic Imaging Center Limited Partnership, Tower OpenScan MRI, and MRI at St. Joseph Medical Center LLC. The Subsidiary Guarantors include all wholly owned subsidiaries of Radiologix, Inc. (the Parent).



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Condensed consolidating financial statements for the Company and its subsidiaries including Radiologix,
Inc. (parent only), the combined Guarantor Subsidiaries and the combined Non-Guarantor Subsidiaries are as follows:



RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)



June 30, 2004

(In thousands)



|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|----------------------------------------------- |  | ------ | ------- | - | --------------------- | - | -------------------------- |  | - | ------------ | - |  | ------------------ | -------- | - |  | - | -------
|                                                |  | Parent |         |   | Subsidiary Guarantors |   | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | Total Consolidated
|Assets:                                         |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|Cash and cash equivalents                       |  | $      | 43,862  |   |                       | $ | 580                        |  | $ | 2,637        |   |  | $                  |         |   |  | $ | 47,079 
|Accounts receivable, net                        |  |        |        |   |                       |   | 58,863                     |  |   | 1,922        |   |  |                    |         |   |  |   | 60,785 
|Other current assets                            |  |        | 3,983   |   |                       |   | 18,472                     |  |   | (7,387       | ) |  |                    |         |   |  |   | 15,068 
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|Total current assets                            |  |        | 47,845  |   |                       |   | 77,915                     |  |   | (2,828       | ) |  |                    |         |   |  |   | 122,932
|Property and equipment, net                     |  |        | 2,749   |   |                       |   | 54,200                     |  |   | 1,734        |   |  |                    |         |   |  |   | 58,683 
|Investment in subsidiaries                      |  |        | 156,594 |   |                       |   |                           |  |   |             |   |  |                    | (156,594 | ) |  |   |       
|Intangible assets, net                          |  |        |        |   |                       |   | 64,918                     |  |   | 4,418        |   |  |                    |         |   |  |   | 69,336 
|Other assets                                    |  |        | 8,852   |   |                       |   | 8,235                      |  |   | (163         | ) |  |                    |         |   |  |   | 16,924 
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|                                                |  | $      | 216,040 |   |                       | $ | 205,268                    |  | $ | 3,161        |   |  | $                  | (156,594 | ) |  | $ | 267,875
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|Liabilities and stockholders equity:           |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|Accounts payable and accrued expenses           |  | $      | 6,746   |   |                       | $ | 24,476                     |  | $ | 758          |   |  | $                  |         |   |  | $ | 31,980 
|Current portion of long-term debt               |  |        | 63      |   |                       |   | 206                        |  |   | 375          |   |  |                    |         |   |  |   | 644    
|Other current liabilities                       |  |        | 47      |   |                       |   | 373                        |  |   |             |   |  |                    |         |   |  |   | 420    
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|Total current liabilities                       |  |        | 6,856   |   |                       |   | 25,055                     |  |   | 1,133        |   |  |                    |         |   |  |   | 33,044 
|Long-term debt, net of current portion          |  |        | 169,773 |   |                       |   | 86                         |  |   | 523          |   |  |                    |         |   |  |   | 170,382
|Other noncurrent liabilities                    |  |        | (16,553 | ) |                       |   | 32,113                     |  |   | (7,859       | ) |  |                    |         |   |  |   | 7,701  
|Minority interests in consolidated subsidiaries |  |        |        |   |                       |   |                           |  |   | 784          |   |  |                    |         |   |  |   | 784    
|Stockholders equity                            |  |        | 55,964  |   |                       |   | 148,014                    |  |   | 8,580        |   |  |                    | (156,594 | ) |  |   | 55,964 
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        
|                                                |  | $      | 216,040 |   |                       | $ | 205,268                    |  | $ | 3,161        |   |  | $                  | (156,594 | ) |  | $ | 267,875
|                                                |  |        |         |   |                       |   |                            |  |   |              |   |  |                    |          |   |  |   |        



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING BALANCE SHEET



December 31, 2003

(In thousands)



|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|----------------------------------------------- |  | ------ | ------- | - | --------------------- | - | --------------------------- |  | - | ------------ | - |  | ------------------ | -------- | - |  | - | -------
|                                                |  | Parent |         |   | Subsidiary Guarantors |   | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | Total Consolidated
|Assets:                                         |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|Cash and cash equivalents                       |  | $      | 31,625  |   |                       | $ | 3,856                       |  | $ | 1,285        |   |  | $                  |         |   |  | $ | 36,766 
|Accounts receivable, net                        |  |        |        |   |                       |   | 55,246                      |  |   | 3,500        |   |  |                    |         |   |  |   | 58,746 
|Other current assets                            |  |        | 1,034   |   |                       |   | 19,587                      |  |   | (8,695       | ) |  |                    |         |   |  |   | 11,926 
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|Total current assets                            |  |        | 32,659  |   |                       |   | 78,689                      |  |   | (3,910       | ) |  |                    |         |   |  |   | 107,438
|Property and equipment, net                     |  |        | 2,587   |   |                       |   | 57,465                      |  |   | 2,603        |   |  |                    |         |   |  |   | 62,655 
|Investment in subsidiaries                      |  |        | 152,103 |   |                       |   |                            |  |   |             |   |  |                    | (152,103 | ) |  |   |       
|Intangible assets, net                          |  |        |        |   |                       |   | 80,139                      |  |   | 7,888        |   |  |                    |         |   |  |   | 88,027 
|Other assets                                    |  |        | 12,227  |   |                       |   | 8,962                       |  |   | (173         | ) |  |                    |         |   |  |   | 21,016 
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|                                                |  | $      | 199,576 |   |                       | $ | 225,255                     |  | $ | 6,408        |   |  | $                  | (152,103 | ) |  | $ | 279,136
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|Liabilities and stockholders equity:           |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|Accounts payable and accrued expenses           |  | $      | 6,612   |   |                       | $ | 23,502                      |  | $ | 1,093        |   |  | $                  |         |   |  | $ | 31,207 
|Current portion of long-term debt               |  |        | 45      |   |                       |   | 1,145                       |  |   | 509          |   |  |                    |         |   |  |   | 1,699  
|Other current liabilities                       |  |        |        |   |                       |   | 482                         |  |   |             |   |  |                    |         |   |  |   | 482    
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|Total current liabilities                       |  |        | 6,657   |   |                       |   | 25,129                      |  |   | 1,602        |   |  |                    |         |   |  |   | 33,388 
|Long-term debt, net of current portion          |  |        | 171,506 |   |                       |   | 168                         |  |   | 682          |   |  |                    |         |   |  |   | 172,356
|Other noncurrent liabilities                    |  |        | (39,271 | ) |                       |   | 58,163                      |  |   | (7,001       | ) |  |                    |         |   |  |   | 11,891 
|Minority interests in consolidated subsidiaries |  |        |        |   |                       |   |                            |  |   | 817          |   |  |                    |         |   |  |   | 817    
|Stockholders equity                            |  |        | 60,684  |   |                       |   | 141,795                     |  |   | 10,308       |   |  |                    | (152,103 | ) |  |   | 60,684 
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        
|                                                |  | $      | 199,576 |   |                       | $ | 225,255                     |  | $ | 6,408        |   |  | $                  | (152,103 | ) |  | $ | 279,136
|                                                |  |        |         |   |                       |   |                             |  |   |              |   |  |                    |          |   |  |   |        



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



For the Three Months Ended June 30, 2004

(In thousands)



|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------ | - | -------------------- | - | ------ | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------ | -
|                                                                                                                                                  |  | Parent |        |   | SubsidiaryGuarantors |   |        | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|Service fee revenue                                                                                                                               |  | $      |       |   |                      | $ | 63,440 |                            |  | $ | 4,242        |   |                    | $ |  |  | $ | 67,682 |  
|Costs and expenses:                                                                                                                               |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Salaries and benefits                                                                                                                             |  |        |       |   |                      |   | 21,144 |                            |  |   | 654          |   |                    |   |  |  |   | 21,798 |  
|Field supplies                                                                                                                                    |  |        |       |   |                      |   | 3,942  |                            |  |   | 319          |   |                    |   |  |  |   | 4,261  |  
|Field rent and lease expense                                                                                                                      |  |        |       |   |                      |   | 8,104  |                            |  |   | 340          |   |                    |   |  |  |   | 8,444  |  
|Other field expenses                                                                                                                              |  |        |       |   |                      |   | 9,841  |                            |  |   | 1,620        |   |                    |   |  |  |   | 11,461 |  
|Bad debt expense                                                                                                                                  |  |        |       |   |                      |   | 5,280  |                            |  |   | 273          |   |                    |   |  |  |   | 5,553  |  
|Gain on sale of operations                                                                                                                        |  |        |       |   |                      |   | (4,669 | )                          |  |   |             |   |                    |   |  |  |   | (4,669 | )
|Corporate general and administrative                                                                                                              |  |        | 4,284  |   |                      |   |       |                            |  |   |             |   |                    |   |  |  |   | 4,284  |  
|Impairment of long-lived assets and goodwill                                                                                                      |  |        |       |   |                      |   | 8,700  |                            |  |   | 454          |   |                    |   |  |  |   | 9,154  |  
|Depreciation and amortization                                                                                                                     |  |        | 664    |   |                      |   | 5,565  |                            |  |   | 195          |   |                    |   |  |  |   | 6,424  |  
|Interest expense, net                                                                                                                             |  |        | 3,114  |   |                      |   | 1,163  |                            |  |   | 30           |   |                    |   |  |  |   | 4,307  |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Total costs and expenses                                                                                                                          |  |        | 8,062  |   |                      |   | 59,070 |                            |  |   | 3,885        |   |                    |   |  |  |   | 71,017 |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) before equity in earnings of investments, minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  |        | (8,062 | ) |                      |   | 4,370  |                            |  |   | 357          |   |                    |   |  |  |   | (3,335 | )
|Equity in earnings of investments                                                                                                                 |  |        |       |   |                      |   | 758    |                            |  |   |             |   |                    |   |  |  |   | 758    |  
|Minority interests in income of consolidated subsidiaries                                                                                         |  |        |       |   |                      |   |       |                            |  |   | (189         | ) |                    |   |  |  |   | (189   | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) before taxes and discontinued operations                                                                                            |  |        | (8,062 | ) |                      |   | 5,128  |                            |  |   | 168          |   |                    |   |  |  |   | (2,766 | )
|Income tax expense (benefit)                                                                                                                      |  |        | (3,225 | ) |                      |   | 1,771  |                            |  |   | 67           |   |                    |   |  |  |   | (1,387 | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                          |  |        | (4,837 | ) |                      |   | 3,357  |                            |  |   | 101          |   |                    |   |  |  |   | (1,379 | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Discontinued operations:                                                                                                                          |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Loss from discontinued operations                                                                                                                 |  |        |       |   |                      |   | (1,216 | )                          |  |   |             |   |                    |   |  |  |   | (1,216 | )
|Income tax benefit                                                                                                                                |  |        |       |   |                      |   | (486   | )                          |  |   |             |   |                    |   |  |  |   | (486   | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Loss from discontinued operations                                                                                                                 |  |        |       |   |                      |   | (730   | )                          |  |   |             |   |                    |   |  |  |   | (730   | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Net income (loss)                                                                                                                                 |  | $      | (4,837 | ) |                      | $ | 2,627  |                            |  | $ | 101          |   |                    | $ |  |  | $ | (2,109 | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



For the Six Months Ended June 30, 2004

(In thousands)



|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------- | -
|                                                                                                                                                  |  | Parent |         |   | Subsidiary Guarantors |   |         | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|Service fee revenue                                                                                                                               |  | $      |        |   |                       | $ | 126,475 |                            |  | $ | 8,822        |   |                    | $ |  |  | $ | 135,297 |  
|Costs and expenses:                                                                                                                               |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Salaries and benefits                                                                                                                             |  |        |        |   |                       |   | 43,764  |                            |  |   | 1,394        |   |                    |   |  |  |   | 45,158  |  
|Field supplies                                                                                                                                    |  |        |        |   |                       |   | 7,825   |                            |  |   | 615          |   |                    |   |  |  |   | 8,440   |  
|Field rent and lease expense                                                                                                                      |  |        |        |   |                       |   | 15,895  |                            |  |   | 658          |   |                    |   |  |  |   | 16,553  |  
|Other field expenses                                                                                                                              |  |        |        |   |                       |   | 19,294  |                            |  |   | 3,093        |   |                    |   |  |  |   | 22,387  |  
|Bad debt expense                                                                                                                                  |  |        |        |   |                       |   | 10,630  |                            |  |   | 619          |   |                    |   |  |  |   | 11,249  |  
|Gain on sale of operations                                                                                                                        |  |        |        |   |                       |   | (4,669  | )                          |  |   |             |   |                    |   |  |  |   | (4,669  | )
|Corporate general and administrative                                                                                                              |  |        | 7,896   |   |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | 7,896   |  
|Impairment of long-lived assets and goodwill                                                                                                      |  |        |        |   |                       |   | 8,700   |                            |  |   | 3,683        |   |                    |   |  |  |   | 12,383  |  
|Depreciation and amortization                                                                                                                     |  |        | 1,299   |   |                       |   | 11,420  |                            |  |   | 417          |   |                    |   |  |  |   | 13,136  |  
|Interest expense, net                                                                                                                             |  |        | 6,318   |   |                       |   | 2,306   |                            |  |   | 67           |   |                    |   |  |  |   | 8,691   |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Total costs and expenses                                                                                                                          |  |        | 15,513  |   |                       |   | 115,165 |                            |  |   | 10,546       |   |                    |   |  |  |   | 141,224 |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) before equity in earnings of investments, minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  |        | (15,513 | ) |                       |   | 11,310  |                            |  |   | (1,724       | ) |                    |   |  |  |   | (5,927  | )
|Equity in earnings of investments                                                                                                                 |  |        |        |   |                       |   | 1,354   |                            |  |   |             |   |                    |   |  |  |   | 1,354   |  
|Minority interests in income of consolidated subsidiaries                                                                                         |  |        |        |   |                       |   |        |                            |  |   | (444         | ) |                    |   |  |  |   | (444    | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                                                            |  |        | (15,513 | ) |                       |   | 12,664  |                            |  |   | (2,168       | ) |                    |   |  |  |   | (5,017  | )
|Income tax benefit                                                                                                                                |  |        | (6,205  | ) |                       |   | 4,785   |                            |  |   | (867         | ) |                    |   |  |  |   | (2,287  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) from continuing operations                                                                                                          |  |        | (9,308  | ) |                       |   | 7,879   |                            |  |   | (1,301       | ) |                    |   |  |  |   | (2,730  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Discontinued operations:                                                                                                                          |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Loss from discontinued operations                                                                                                                 |  |        |        |   |                       |   | (3,477  | )                          |  |   |             |   |                    |   |  |  |   | (3,477  | )
|Income tax benefit                                                                                                                                |  |        |        |   |                       |   | (1,391  | )                          |  |   |             |   |                    |   |  |  |   | (1,391  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Loss from discontinued operations                                                                                                                 |  |        |        |   |                       |   | (2,086  | )                          |  |   |             |   |                    |   |  |  |   | (2,086  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net income (loss)                                                                                                                                 |  | $      | (9,308  | ) |                       | $ | 5,793   |                            |  | $ | (1,301       | ) |                    | $ |  |  | $ | (4,816  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



For the Three Months Ended June 30, 2003

(In thousands)



|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------ | - | -------------------- | - | ------ | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------ | -
|                                                                                                                                                  |  | Parent |        |   | SubsidiaryGuarantors |   |        | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|Service fee revenue                                                                                                                               |  | $      |       |   |                      | $ | 57,390 |                            |  | $ | 4,651        |   |                    | $ |  |  | $ | 62,041 |  
|Costs and expenses:                                                                                                                               |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Salaries and benefits                                                                                                                             |  |        |       |   |                      |   | 19,136 |                            |  |   | 700          |   |                    |   |  |  |   | 19,836 |  
|Field supplies                                                                                                                                    |  |        |       |   |                      |   | 4,094  |                            |  |   | 282          |   |                    |   |  |  |   | 4,376  |  
|Field rent and lease expense                                                                                                                      |  |        |       |   |                      |   | 7,110  |                            |  |   | 500          |   |                    |   |  |  |   | 7,610  |  
|Other field expenses                                                                                                                              |  |        |       |   |                      |   | 8,971  |                            |  |   | 1,449        |   |                    |   |  |  |   | 10,420 |  
|Bad debt expense                                                                                                                                  |  |        |       |   |                      |   | 4,986  |                            |  |   | 326          |   |                    |   |  |  |   | 5,312  |  
|Severance and other related costs                                                                                                                 |  |        | 281    |   |                      |   | 30     |                            |  |   |             |   |                    |   |  |  |   | 311    |  
|Corporate general and administrative                                                                                                              |  |        | 3,375  |   |                      |   |       |                            |  |   |             |   |                    |   |  |  |   | 3,375  |  
|Depreciation and amortization                                                                                                                     |  |        | 744    |   |                      |   | 5,651  |                            |  |   | 211          |   |                    |   |  |  |   | 6,606  |  
|Interest expense, net                                                                                                                             |  |        | 3,260  |   |                      |   | 1,194  |                            |  |   | 40           |   |                    |   |  |  |   | 4,494  |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Total costs and expenses                                                                                                                          |  |        | 7,660  |   |                      |   | 51,172 |                            |  |   | 3,508        |   |                    |   |  |  |   | 62,340 |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) before equity in earnings of investments, minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  |        | (7,660 | ) |                      |   | 6,218  |                            |  |   | 1,143        |   |                    |   |  |  |   | (299   | )
|Equity in earnings of investments                                                                                                                 |  |        |       |   |                      |   | 1,314  |                            |  |   |             |   |                    |   |  |  |   | 1,314  |  
|Minority interests in income of consolidated subsidiaries                                                                                         |  |        |       |   |                      |   |       |                            |  |   | (331         | ) |                    |   |  |  |   | (331   | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) before taxes and discontinued operations                                                                                            |  |        | (7,660 | ) |                      |   | 7,532  |                            |  |   | 812          |   |                    |   |  |  |   | 684    |  
|Income tax expense (benefit)                                                                                                                      |  |        | (3,064 | ) |                      |   | 3,013  |                            |  |   | 324          |   |                    |   |  |  |   | 273    |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                          |  |        | (4,596 | ) |                      |   | 4,519  |                            |  |   | 488          |   |                    |   |  |  |   | 411    |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Discontinued operations:                                                                                                                          |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Loss from discontinued operations                                                                                                                 |  |        |       |   |                      |   | (225   | )                          |  |   |             |   |                    |   |  |  |   | (225   | )
|Income tax benefit                                                                                                                                |  |        |       |   |                      |   | (90    | )                          |  |   |             |   |                    |   |  |  |   | (90    | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Loss from discontinued operations                                                                                                                 |  |        |       |   |                      |   | (135   | )                          |  |   |             |   |                    |   |  |  |   | (135   | )
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  
|Net income (loss)                                                                                                                                 |  | $      | (4,596 | ) |                      | $ | 4,384  |                            |  | $ | 488          |   |                    | $ |  |  | $ | 276    |  
|                                                                                                                                                  |  |        |        |   |                      |   |        |                            |  |   |              |   |                    |   |   |  |   |        |  



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



For the Six Months Ended June 30, 2003

(In thousands)



|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------- | -
|                                                                                                                                                  |  | Parent |         |   | Subsidiary Guarantors |   |         | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|Service fee revenue                                                                                                                               |  | $      |        |   |                       | $ | 114,236 |                            |  | $ | 9,231        |   |                    | $ |  |  | $ | 123,467 |  
|Costs and expenses:                                                                                                                               |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Salaries and benefits                                                                                                                             |  |        |        |   |                       |   | 38,785  |                            |  |   | 1,476        |   |                    |   |  |  |   | 40,261  |  
|Field supplies                                                                                                                                    |  |        |        |   |                       |   | 7,757   |                            |  |   | 574          |   |                    |   |  |  |   | 8,331   |  
|Field rent and lease expense                                                                                                                      |  |        |        |   |                       |   | 14,157  |                            |  |   | 1,008        |   |                    |   |  |  |   | 15,165  |  
|Other field expenses                                                                                                                              |  |        |        |   |                       |   | 17,380  |                            |  |   | 3,012        |   |                    |   |  |  |   | 20,392  |  
|Bad debt expense                                                                                                                                  |  |        |        |   |                       |   | 9,904   |                            |  |   | 669          |   |                    |   |  |  |   | 10,573  |  
|Severance and other related costs                                                                                                                 |  |        | 1,027   |   |                       |   | 253     |                            |  |   |             |   |                    |   |  |  |   | 1,280   |  
|Corporate general and administrative                                                                                                              |  |        | 7,016   |   |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | 7,016   |  
|Depreciation and amortization                                                                                                                     |  |        | 1,487   |   |                       |   | 11,255  |                            |  |   | 442          |   |                    |   |  |  |   | 13,184  |  
|Interest expense, net                                                                                                                             |  |        | 6,675   |   |                       |   | 2,380   |                            |  |   | 79           |   |                    |   |  |  |   | 9,134   |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Total costs and expenses                                                                                                                          |  |        | 16,205  |   |                       |   | 101,871 |                            |  |   | 7,260        |   |                    |   |  |  |   | 125,336 |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) before equity in earnings of investments, minority interests in consolidated subsidiaries, income taxes and discontinued
operations |  |        | (16,205 | ) |                       |   | 12,365  |                            |  |   | 1,971        |   |                    |   |  |  |   | (1,869  | )
|Equity in earnings of investments                                                                                                                 |  |        |        |   |                       |   | 2,512   |                            |  |   |             |   |                    |   |  |  |   | 2,512   |  
|Minority interests in income of consolidated subsidiaries                                                                                         |  |        |        |   |                       |   |        |                            |  |   | (530         | ) |                    |   |  |  |   | (530    | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) before taxes and discontinued operations                                                                                            |  |        | (16,205 | ) |                       |   | 14,877  |                            |  |   | 1,441        |   |                    |   |  |  |   | 113     |  
|Income tax expense (benefit)                                                                                                                      |  |        | (6,482  | ) |                       |   | 5,951   |                            |  |   | 576          |   |                    |   |  |  |   | 45      |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Income (loss) from continuing operations                                                                                                          |  |        | (9,723  | ) |                       |   | 8,926   |                            |  |   | 865          |   |                    |   |  |  |   | 68      |  
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Discontinued operations:                                                                                                                          |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Loss from discontinued operations                                                                                                                 |  |        |        |   |                       |   | (7,337  | )                          |  |   |             |   |                    |   |  |  |   | (7,337  | )
|Income tax benefit                                                                                                                                |  |        |        |   |                       |   | (2,935  | )                          |  |   |             |   |                    |   |  |  |   | (2,935  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Loss from discontinued operations                                                                                                                 |  |        |        |   |                       |   | (4,402  | )                          |  |   |             |   |                    |   |  |  |   | (4,402  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net income (loss)                                                                                                                                 |  | $      | (9,723  | ) |                       | $ | 4,524   |                            |  | $ | 865          |   |                    | $ |  |  | $ | (4,334  | )
|                                                                                                                                                  |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)



For the Six Months Ended June 30, 2004

(In thousands)



|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|---------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------- | -
|                                                     |  | Parent |         |   | Subsidiary Guarantors |   |         | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES  |  | $      | (10,740 | ) |                       | $ | 28,238  |                            |  | $ | (495         | ) |                    | $ |  |  | $ | 17,003  |  
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Increase in restricted cash                          |  |        | (4,000  | ) |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | (4,000  | )
|Purchases of property and equipment                  |  |        | 1,868   |   |                       |   | (18,713 | )                          |  |   | 3,435        |   |                    |   |  |  |   | (13,410 | )
|Net cash received on sale of operations              |  |        |        |   |                       |   | 12,784  |                            |  |   |             |   |                    |   |  |  |   | 12,784  |  
|Joint ventures                                       |  |        |        |   |                       |   | 910     |                            |  |   |             |   |                    |   |  |  |   | 910     |  
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net cash provided by (used in) investing activities  |  |        | (2,132  | ) |                       |   | (5,019  | )                          |  |   | 3,435        |   |                    |   |  |  |   | (3,716  | )
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Payments on long-term debt, primarily capital leases |  |        |        |   |                       |   | (1,028  | )                          |  |   | (293         | ) |                    |   |  |  |   | (1,321  | )
|Retirement of senior debt                            |  |        | (1,730  | ) |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | (1,730  | )
|Due to/from parent/subsidiaries                      |  |        | 26,762  |   |                       |   | (25,467 | )                          |  |   | (1,295       | ) |                    |   |  |  |   |        |  
|Other items                                          |  |        | 77      |   |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | 77      |  
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net cash provided by (used in) financing activities  |  |        | 25,109  |   |                       |   | (26,495 | )                          |  |   | (1,588       | ) |                    |   |  |  |   | (2,974  | )
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |  |        | 12,237  |   |                       |   | (3,276  | )                          |  |   | 1,352        |   |                    |   |  |  |   | 10,313  |  
|CASH AND CASH EQUIVALENTS, beginning of period       |  |        | 31,625  |   |                       |   | 3,856   |                            |  |   | 1,285        |   |                    |   |  |  |   | 36,766  |  
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period             |  | $      | 43,862  |   |                       | $ | 580     |                            |  | $ | 2,637        |   |                    | $ |  |  | $ | 47,079  |  
|                                                     |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  



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RADIOLOGIX, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)



For the Six Months Ended June 30, 2003

(In thousands)



|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|--------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | -------------------------- |  | - | ------------ | - | ------------------ | - | - |  | - | ------- | -
|                                                    |  | Parent |         |   | Subsidiary Guarantors |   |         | Non- GuarantorSubsidiaries |  |   | Eliminations |   | Total Consolidated |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |  | $      | (12,108 | ) |                       | $ | 14,147  |                            |  | $ | 8,063        |   |                    | $ |  |  | $ | 10,102  |  
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Purchases of property and equipment                 |  |        | (1,378  | ) |                       |   | (1,974  | )                          |  |   | (7,117       | ) |                    |   |  |  |   | (10,469 | )
|Joint ventures                                      |  |        |        |   |                       |   | 1,656   |                            |  |   |             |   |                    |   |  |  |   | 1,656   |  
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net cash used in investing activities               |  |        | (1,378  | ) |                       |   | (318    | )                          |  |   | (7,117       | ) |                    |   |  |  |   | (8,813  | )
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Proceeds (payments) on long-term debt               |  |        | (39     | ) |                       |   | (1,630  | )                          |  |   | (338         | ) |                    |   |  |  |   | (2,007  | )
|Due to/from parent/subsidiaries                     |  |        | 13,732  |   |                       |   | (11,691 | )                          |  |   | (2,041       | ) |                    |   |  |  |   |        |  
|Other items                                         |  |        | 3       |   |                       |   |        |                            |  |   |             |   |                    |   |  |  |   | 3       |  
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |        | 13,696  |   |                       |   | (13,321 | )                          |  |   | (2,379       | ) |                    |   |  |  |   | (2,004  | )
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS           |  |        | 210     |   |                       |   | 508     |                            |  |   | (1,433       | ) |                    |   |  |  |   | (715    | )
|CASH AND CASH EQUIVALENTS, beginning of period      |  |        | 15,775  |   |                       |   | (381    | )                          |  |   | 3,759        |   |                    |   |  |  |   | 19,153  |  
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period            |  | $      | 15,985  |   |                       | $ | 127     |                            |  | $ | 2,326        |   |                    | $ |  |  | $ | 18,438  |  
|                                                    |  |        |         |   |                       |   |         |                            |  |   |              |   |                    |   |   |  |   |         |  

|
|



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



We are a leading national provider of diagnostic imaging services through our ownership and operation of free-standing, outpatient diagnostic imaging
centers. We utilize sophisticated technology and technical expertise to perform a broad range of imaging procedures, such as magnetic resonance imaging (MRI), computed tomography (CT), positron emission tomography (PET), nuclear medicine,
ultrasound, mammography, bone densitometry (DEXA), general radiography (X-ray) and fluoroscopy. For the six months ended June 30, 2004, we derived 82% of our service fee revenue from the ownership, management and operation of our imaging center
network and 18% of our service fee revenue from administrative, management and information services provided to contracted radiology practices. As of June 30, 2004, we owned, operated or maintained an ownership interest in imaging equipment at 94
locations. As of June 30, 2004, our imaging centers were located in 13 states, including markets in California, Florida, Kansas, Maryland and New York. Effective April 30, 2004, we sold our operations in San Antonio, Texas to Vanguard Health
Systems, Inc.



We focus on providing quality patient care and
service to ensure patient and referring physician satisfaction. We develop comprehensive radiology networks by investing in technologically advanced imaging equipment, and in high quality service. Our consolidation of diagnostic imaging centers in
certain markets improves response time, increases overall patient accessibility, permits us to standardize procedures and aids us in developing best practices. We seek the input and participation of the contracted radiology practices to which we
provide administrative, management and information services to improve productivity and the quality of services. By focusing on further improving and standardizing the operations of our diagnostic imaging centers, we believe that we can increase
patient and referring physician satisfaction, reduce our costs and increase utilization at our diagnostic imaging centers.



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



Service fee revenue
is comprised of billed charges for both the technical and professional components of service, reduced by estimated contractual adjustments and by amounts retained by contracted radiology group practices for their professional services, as outlined
in our service agreements. Revenue is recognized when services are rendered by contracted radiology practices, the imaging centers, or both. Bad debt expense related to established charges is reflected as an operating expense rather than a reduction
of revenue. Contractual adjustments and bad debt expense are estimated based on historical collection experience, including payor mix, managed care contract pricing and contract revenue and the aging of patient accounts receivable balances. As these
factors change, revisions are made as appropriate in the period known.



The Companys service fee revenue is dependent upon the operating results of the contracted radiology practices and diagnostic imaging centers. Where state law allows, service fees due under the service agreements for the contracted
radiology practices are derived from two distinct revenue streams: (1) a negotiated percentage (typically 20% to 30%) of the professional revenues, reduced by certain expenses, 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 approximates the estimated fair market value of the services provided under the
service agreements and which is renegotiated each year.



Our
diagnostic imaging centers are also principally dependent on our ability to attract referrals from primary care physicians, specialists and other healthcare providers. The referral often depends on the existence of a contractual arrangement with the
referred patients health benefit plan. The Company has contracts with health benefit plans representing many of the patients in the markets we serve.



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##### Table of Contents

Results of Operations



Our primary operations are in the Mid-Atlantic, Northeastern, Southeastern and Western areas of the United States. We completed the sale of our San
Antonio, Texas operations effective April 30, 2004. We also operate single modality imaging centers through our subsidiary, Questar. Our primary operations consist of owning and operating diagnostic imaging centers and providing administrative,
management, information, and other services to the contracted radiology practices which provide professional interpretation and supervision services to our diagnostic imaging centers and to hospitals and radiology practices with which we operate
joint ventures. Our services are designed to leverage our existing infrastructure and improve radiology practice or joint venture profitability, efficiency and effectiveness. Because of different characteristics from our primary operations,
including location, market concentration, contracting leverage, capital requirements, the single modality nature of most of the centers and the structure of the management service agreements with physicians related to the Companys Questar
operations, senior management makes resource allocation and decisions separately for Questar and its primary operations.



Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003



In the second quarter of 2004, our operations continued to show improvement, due to volume increases of 4.0% over volumes in
the second quarter of 2003 and ongoing improvements in our service mix. This resulted in an increase in service fee revenue of 9.1% over the second quarter of 2003. Effective April 30, 2004, we completed the sale of our San Antonio, Texas
operations. For the second quarter ended June 30, 2004, the San Antonio operations generated service fee revenue of $2.4 million and $694,000 of pre-tax income. Our results in the second quarter of 2004 compared to the second quarter of 2003,
excluding the San Antonio operations, reflected an increase in overall volumes of 4.5% and an increase in service fee revenue of 12.3%. The increase reflects the impact of our organic growth including the addition of new imaging centers and imaging
equipment placed into operations since June 30, 2003.



As noted
above, we completed the sale of our operations in San Antonio, Texas in the second quarter. The purchase price was $10.5 million, resulting in a gain on sale of approximately $4.7 million or $3.1 million net of taxes ($0.14 per dilutive share). Net
cash received was $9.7 million after purchase price adjustments. The sale included (1) assets we owned and leased in our operation of M&S Imaging Partners, Inc., (2) a diagnostic imaging center, and (3) certain partnership interests, but did not
include accounts receivable aggregating approximately $4.7 million, which we retained. We sold these operations due to market conditions and have no remaining interests in this market.



In June 2004, after performing an extensive assessment of our Questar imaging center portfolio, management concluded that
certain centers were not strategic to our future plans and would be unable to meet and sustain our profitability requirements going forward. That assessment considered: location, contracting leverage, expected capital requirements, the single
modality nature of most of these sites, current operating trends, and the sale of our most profitable Questar center on June 21, 2004. The Companys decision to dispose of this group of imaging centers created an event that required us to
reassess the carrying value of the assets related to these centers, including goodwill at our Questar segment. This reassessment considered the impact on the value of the ongoing, deteriorating operating trends in these centers, as well as the
implications of disposing of individual centers versus operating those centers as part of an ongoing operating enterprise. To assist us in that reassessment, we engaged an independent valuation firm to estimate the fair value of our combined Questar
sites that currently remain in continuing operations. As a result of our reassessment and the independent valuation, the Company recorded an $8.7 million pre-tax charge to continuing operations related to the impairment of Questar goodwill in June
2004.





We assess the viability of our imaging centers throughout the year. In the event we decide to dispose of one or more imaging centers, additional charges may result depending on cash flow and market conditions at the
time of our assessment.



In June 2004, the Company also
recorded a $454,000 pre-tax charge to continuing operations and a $163,000 pre-tax charge to discontinued operations related to the impairment of long-lived assets of certain Questar centers.



During the three months ended June 30, 2003, Radiologix recognized a $311,000
charge in connection with severance and expenses related to changes in the Companys senior management team. There were no such severance charges in the second quarter of 2004.



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##### Table of Contents

Other operating expenses, excluding (1) the $4.7 million gain on sale of operations, (2) the aggregate
$9.2 million in charges for impairment of goodwill and long-lived assets and (3) the $311,000 of severance and other related costs, show several positive trends, as outlined for the three months ended June 30, 2004 and 2003 below:



|                                           |  |      |        |      |   |                            |      |      |                                |  |      |                    |  |       |   |  |      |  
|------------------------------------------ |  | ---- | ------ | ---- | - | -------------------------- | ---- | ---- | ------------------------------ |  | ---- | ------------------ |  | ----- | - |  | ---- | -
|                                           |  | 2004 |        | 2003 |   | Percent Increase(Decrease) |      |      | Percent of Service Fee Revenue |  |      | Basis Point Change | 
|                                           |  |      |        | 2004 |   |                            | 2003 |      |                               
|Field expenses                             |  |      | 45,964 |      |   | 42,242                     |      | 8.8  |                                |  | 67.9 |                    |  | 68.1  |   |  | (20  | )
|Bad debt expense                           |  |      | 5,553  |      |   | 5,312                      |      | 4.5  |                                |  | 8.2  |                    |  | 8.6   |   |  | (40  | )
|Corporate, general and administrative      |  |      | 4,284  |      |   | 3,375                      |      | 26.9 |                                |  | 6.3  |                    |  | 5.4   |   |  | 90   |  
|Depreciation and amortization              |  |      | 6,424  |      |   | 6,606                      |      | (2.8 | )                              |  | 9.5  |                    |  | 10.6  |   |  | (110 | )
|Interest expense, net                      |  |      | 4,307  |      |   | 4,494                      |      | (4.2 | )                              |  | 6.4  |                    |  | 7.2   |   |  | (80  | )
|                                           |  |      |        |      |   |                            |      |      |                                |  |      |                    |  |       |   |  |      |  
|Total operating expense, excluding charges |  | $    | 66,532 |      | $ | 62,029                     |      | 7.3  | %                              |  | 98.3 | %                  |  | 100.0 | % |  | (170 | )
|                                           |  |      |        |      |   |                            |      |      |                                |  |      |                    |  |       |   |  |      |  



Results excluding San Antonio
operations:



|                                           |  |      |        |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  
|------------------------------------------ |  | ---- | ------ | ---- | ---- | --------------------------- |  | ---- | ------------------------------ |  | ---- | ------------------ |  | ----- | - |  | ---- | -
|                                           |  | 2004 |        | 2003 |      | Percent Increase (Decrease) |  |      | Percent of Service Fee Revenue |  |      | Basis Point Change | 
|                                           |  |      |        |      | 2004 |                             |  | 2003 |                                | 
|Field expenses                             |  |      | 44,891 |      |      | 40,472                      |  | 10.9 |                                |  | 68.8 |                    |  | 69.6  |   |  | (80  | )
|Bad debt expense                           |  |      | 5,113  |      |      | 4,757                       |  | 7.5  |                                |  | 7.8  |                    |  | 8.2   |   |  | (40  | )
|Corporate, general and administrative      |  |      | 4,284  |      |      | 3,375                       |  | 26.9 |                                |  | 6.6  |                    |  | 5.8   |   |  | 80   |  
|Depreciation and amortization              |  |      | 6,286  |      |      | 6,251                       |  | 0.6  |                                |  | 9.6  |                    |  | 10.7  |   |  | (110 | )
|Interest expense, net                      |  |      | 4,279  |      |      | 4,398                       |  | (2.7 | )                              |  | 6.6  |                    |  | 7.6   |   |  | (100 | )
|                                           |  |      |        |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  
|Total operating expense, excluding charges |  | $    | 64,853 |      | $    | 59,253                      |  | 9.5  | %                              |  | 99.3 | %                  |  | 101.9 | % |  | (260 | )
|                                           |  |      |        |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  



Our focus continues to
be on revenue growth and reducing field salaries and benefits expense as a percentage of service fee revenue. Field salaries and benefits as a percentage of service fee revenue from continuing operations for the second quarter of 2004 were 32.2%
compared to 32.0% in the second quarter of 2003. This increase resulted primarily from the on-going shortage of technologists, which required us to fill vacant positions with higher cost temporary labor. By the end of June 2004, the Company had
filled a significant number of these vacant technologist field openings. Field salaries and benefits costs were also impacted by new imaging centers placed into operations since June 30, 2003, internal recruiting costs to fill open technologist and
other employee positions and internal marketing costs related to new sales program initiatives. Field salaries and benefits as a percentage of service fee revenue from continuing operations for the second quarter of 2004, excluding the San Antonio
operations, were 32.8% compared to 32.7% in the second quarter of 2003. Management continues to evaluate our service offerings and patient flows to identify less costly methods of providing high quality patient care and continues to evaluate its
back office and support operations for new opportunities to gain economies of scale.



Field rent and lease expense increased in the second quarter of 2004 compared to the second quarter of 2003 due primarily to imaging center sites placed into operations since June 30, 2003 and decisions we made to
lease rather than buy certain imaging equipment.



Other field
expenses increased in the second quarter of 2004 compared to the second quarter of 2003 due primarily to system conversion, upgrade and outsourcing costs for our patient accounting systems, service and repair costs on imaging equipment and external
recruiting costs.



Corporate, general and administrative
expense increased in the second quarter of 2004 compared to the second quarter of 2003 due to filling vacant executive positions, relocation costs for our chief executive officer, costs relating to Sarbanes-Oxley Section 404 compliance efforts and
increased sales and marketing costs.



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##### Table of Contents

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



For the six months ended June 30, 2004, our operations continued to show
improvement, due to volume increases of 6.8% over volumes for the six months ended June 30, 2003 and ongoing improvements in our service mix. This resulted in an increase in service fee revenue of 9.6% over the six months ended June 30, 2003.
Effective April 30, 2004, we completed the sale of our San Antonio, Texas operations. For the six months ended June 30, 2004, the San Antonio operations generated service fee revenue of $6.1 million and $1.6 million of pre-tax income. Our results
for the six months ended June 30, 2004 compared to the six months ended June 30, 2003, excluding the San Antonio operations, reflected an increase in overall volumes of 7.3% and an increase in service fee revenue of 11.7%. The increase reflects the
impact of our improved organic growth including the addition of new imaging centers and imaging equipment placed into operations since June 30, 2003.



As noted above, we completed the sale of our operations in San Antonio, Texas in the second quarter. The purchase price was $10.5 million, resulting in a
gain on sale of approximately $4.7 million or $3.1 million net of taxes ($0.14 per dilutive share). Net cash received was $9.7 million after purchase price adjustments. The sale included (1) assets we owned and leased in our operation of M&S
Imaging Partners, Inc., (2) a diagnostic imaging center, and (3) certain partnership interests, but did not include accounts receivable aggregating approximately $4.7 million, which we retained.



In June 2004, after performing an extensive reassessment of our Questar
imaging center portfolio, management concluded that certain centers were not strategic to our future plans and would be unable to meet and sustain our profitability requirements going forward. That reassessment considered: location, contracting
leverage, expected capital requirements, the single modality nature of most of these sites, current operating trends, and the sale of our most profitable Questar center on June 21, 2004. The Companys decision to dispose of this group of
imaging centers created an event that required us to reassess the carrying value of the assets related to these centers, including goodwill at our Questar segment. This reassessment considered the impact on the value of the ongoing, deteriorating
operating trends in these centers, as well as the implications of disposing of individual centers versus operating those centers as part of an ongoing operating enterprise. To assist us in that reassessment, we engaged an independent valuation firm
to estimate the fair value of our combined Questar sites that currently remain in continuing operations. As a result of our reassessment and the independent valuation, the Company recorded an $8.7 million pre-tax charge to continuing operations
related to the impairment of Questar goodwill in June 2004. Additionally, in the first quarter of 2004 the Company recorded a $5.5 million charge related to Questar in connection with our annual assessment of goodwill. Of this $5.5 million, $2.3
million was reclassified to discontinued operations in the second quarter of 2004. Accordingly, for the six-months ended June 30, 2004, $11.9 million and $4.0 million of goodwill impairment charges were recorded in continuing operations and
discontinued operations, respectively.



In June 2004, the
Company also recorded a $454,000 pre-tax charge to continuing operations and $163,000 pre-tax charge to discontinued operations related to the impairment of long-lived assets of certain Questar centers.



During the six months ended June 30, 2003, Radiologix recognized a $1.3
million charge in connection with severance and expenses related to changes in the Companys senior management team. There were no such severance charges in the six-month period ended June 30, 2004.



Other operating expenses, excluding (1) the $4.7 million gain on sale of
operations, (2) the aggregate $12.4 million charge for impairment of goodwill and long-lived assets in the six months ended 2004 and (3) the $1.3 million of severance and other related costs in 2003, show several positive trends, as outlined for the
six months ended June 30, 2004 and 2003 below:



|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |      |   |  |      |  
|------------------------------------------ |  | ---- | ------- | ---- | ---- | --------------------------- |  | ---- | ------------------------------ |  | ---- | ------------------ |  | ---- | - |  | ---- | -
|                                           |  | 2004 |         | 2003 |      | Percent Increase (Decrease) |  |      | Percent of Service Fee Revenue |  |      | Basis Point Change | 
|                                           |  |      |         |      | 2004 |                             |  | 2003 |                                | 
|Field expenses                             |  | $    | 92,538  |      | $    | 84,149                      |  | 10.0 | %                              |  | 68.4 | %                  |  | 68.2 | % |  | 20   |  
|Bad debt expense                           |  |      | 11,249  |      |      | 10,573                      |  | 6.4  |                                |  | 8.3  |                    |  | 8.6  |   |  | (30  | )
|Corporate, general and administrative      |  |      | 7,896   |      |      | 7,016                       |  | 12.5 |                                |  | 5.8  |                    |  | 5.7  |   |  | 10   |  
|Depreciation and amortization              |  |      | 13,136  |      |      | 13,184                      |  | (.4  | )                              |  | 9.7  |                    |  | 10.7 |   |  | (100 | )
|Interest expense, net                      |  |      | 8,691   |      |      | 9,134                       |  | (4.9 | )                              |  | 6.4  |                    |  | 7.4  |   |  | (100 | )
|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |      |   |  |      |  
|Total operating expense, excluding charges |  | $    | 133,510 |      | $    | 124,056                     |  | 7.6  | %                              |  | 98.7 | %                  |  | 100  | % |  | (130 | )
|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |      |   |  |      |  



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##### Table of Contents

Results excluding San Antonio operations:



|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  
|------------------------------------------ |  | ---- | ------- | ---- | ---- | --------------------------- |  | ---- | ------------------------------ |  | ---- | ------------------ |  | ----- | - |  | ---- | -
|                                           |  | 2004 |         | 2003 |      | Percent Increase (Decrease) |  |      | Percent of Service Fee Revenue |  |      | Basis Point Change | 
|                                           |  |      |         |      | 2004 |                             |  | 2003 |                                | 
|Field expenses                             |  | $    | 89,585  |      | $    | 80,586                      |  | 11.2 | %                              |  | 69.4 | %                  |  | 69.7  | % |  | (30  | )
|Bad debt expense                           |  |      | 10,285  |      |      | 9,446                       |  | 8.9  |                                |  | 8.0  |                    |  | 8.2   |   |  | (20  | )
|Corporate, general and administrative      |  |      | 7,896   |      |      | 7,016                       |  | 12.5 |                                |  | 6.1  |                    |  | 6.1   |   |  |     |  
|Depreciation and amortization              |  |      | 12,626  |      |      | 12,471                      |  | 1.2  |                                |  | 9.8  |                    |  | 10.8  |   |  | (100 | )
|Interest expense, net                      |  |      | 8,577   |      |      | 8,935                       |  | (4.0 | )                              |  | 6.6  |                    |  | 7.7   |   |  | (110 | )
|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  
|Total operating expense, excluding charges |  | $    | 128,969 |      | $    | 118,454                     |  | 8.9  | %                              |  | 99.8 | %                  |  | 102.4 | % |  | (260 | )
|                                           |  |      |         |      |      |                             |  |      |                                |  |      |                    |  |       |   |  |      |  



Our focus continues to
be on revenue growth and reducing field salaries and benefits expense as a percentage of service fee revenue. Field salaries and benefits as a percentage of service fee revenue from continuing operations for the six months ended June 30, 2004 were
33.4% compared to 32.6% for the six months ended June 30, 2003. This increase resulted primarily from the on-going shortage of technologists, which required us to fill vacant positions with higher cost temporary labor. By the end of June 2004, the
Company had filled a significant number of these vacant technologist field openings. Field salaries and benefits costs were also impacted by new imaging centers placed into operations since June 30, 2003, internal recruiting costs to fill open
technologist and other employee positions and internal marketing costs related to new sales program initiatives. Field salaries and benefits as a percentage of service fee revenue from continuing operations for the six months ended June 30, 2004 and
2003 excluding the San Antonio operations were 34.0% and 33.4%, respectively. Management continues to evaluate our service offerings and patient flows to identify less costly methods of providing high quality patient care and continues to evaluate
its back office and support operations for new opportunities to gain economies of scale.



Field rent and lease expense increased in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 due primarily to imaging center sites placed into operations since June 30, 2003 and
decisions we made to lease rather than buy certain imaging equipment.



Other field expenses increased in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 due primarily to system conversion, upgrade and outsourcing costs for our patient accounting systems, service and repair
costs on imaging equipment and external recruiting costs.



Corporate, general and administrative expenses increased in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 due to filling vacant executive positions, relocation costs for our chief executive officer, costs
relating to Sarbanes-Oxley Section 404 compliance efforts and increased marketing costs.



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##### Table of Contents

Discontinued Operations



In June 2004, management concluded that five Questar centers would be designated as discontinued operations and two other Questar centers would be
closed. We also sold one center for $3.1 million in cash and recognized a gain on this sale of $682,000 ($0.03 per dilutive share) which gain is included in discontinued operations. The results of operations of imaging centers in discontinued
operations are as follows (in thousands):



|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|                                          |  | 2004                               |        |   | 2003                             |   |       | 2004 |  |   | 2003   |  
|Service fee revenue                       |  | $                                  | 2,541  |   |                                  | $ | 4,228 |      |  | $ | 5,365  |   |  | $ | 8,415  |  
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Pre-tax loss from discontinued operations |  |                                    | (1,216 | ) |                                  |   | (225  | )    |  |   | (3,477 | ) |  |   | (7,337 | )
|Income tax benefit                        |  |                                    | (486   | ) |                                  |   | (90   | )    |  |   | (1,391 | ) |  |   | (2,935 | )
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  
|Net loss from discontinued operations     |  | $                                  | (730   | ) |                                  | $ | (135  | )    |  | $ | (2,086 | ) |  | $ | (4,402 | )
|                                          |  |                                    |        |   |                                  |   |       |      |  |   |        |   |  |   |        |  



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



Liquidity for the six months ended June 30, 2004, was derived from cash and cash equivalents and net cash generated by
operating activities, as well as $9.7 million and $3.1 million in cash proceeds from the sales of our San Antonio, Texas operations and our Questar center in Exton, Pennsylvania, respectively. As of June 30, 2004, we had net working capital of $89.9
million, including cash and cash equivalents of $47.1 million. We had current assets of $122.9 million and current liabilities of $33.0 million, including current maturities of long-term debt and capital lease obligations of approximately $644,000.
For the six months ended June 30, 2004, we generated $17.0 million in net operating cash flow, invested $3.7 million and used cash of $3.0 million in financing activities.



Net cash from operating activities for the six months ended June 30, 2004 of $17.0 million increased from $10.1 million for
the same period in 2003. Our days sales outstanding on accounts receivable decreased from 69 days at June 30, 2003 to 61 days at June 30, 2004. We calculate days sales outstanding by dividing accounts receivable, net of allowances, by the
three-month average revenue per day. Our days sales outstanding were 60 at March 31, 2004. We are experiencing collection delays at certain sites as payors complete conversions to their systems to meet HIPAA electronic data interchange standards.



Net cash used in investing activities for the six months ended
June 30, 2004 and 2003 was $3.7 million and $8.8 million, respectively. Purchases of property and equipment during the six months ended June 30, 2004 and 2003 were $13.4 million and $10.5 million, respectively. In the second quarter of 2004, we
received $12.8 million in consideration for the sale of certain operations. Also in June 2004, we transferred $4.0 million to restricted cash in accordance with our Master Lease Agreement with GE Healthcare Financial Services as discussed below. We
expect to spend between $4.0 million to $5.0 million over the next six months on equipment lease buyouts.



Net cash flows used in financing activities for the six months ended June 30, 2004 and 2003 were $3.0 million and $2.0 million, respectively. At June 30,
2004, we had outstanding senior note borrowings of $158.3 million (after redeeming $1.73 million in senior notes in the second quarter); a $12.0 million convertible subordinated junior note and $776,000 in other debt obligations. At June 30, 2004,
amounts outstanding under the revolving credit facility totaled $750,000 with $34.2 million available for borrowings. Borrowings under this line are limited to 85% of eligible accounts receivable, as defined under the credit facility. Borrowings are
secured by substantially all of our assets and a pledge of the capital stock of our wholly owned subsidiaries.



As noted in our Form 8-K filing on July 9, 2004, we amended our master lease with GE Healthcare Financial Services (GE) under an Amended and Restated
Master Lease Agreement. Through this arrangement, GE has agreed to fund up to $60.0 million of equipment leases through December 31, 2006, and requires that at least two-thirds of the outstanding balance represent GE healthcare equipment. In
connection with the Master Lease Agreement, the Company is required to provide additional cash collateral in a restricted account equal to 20% of the aggregate amounts outstanding under the Master Lease Agreement. The accompanying June 30, 2004
balance sheet includes $4.0 million of restricted cash under this provision.



We operate in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expense of new diagnostic imaging centers
and the acquisition of additional centers and new diagnostic imaging equipment. We currently believe that our cash balances, the expected cash flow from operations and our borrowing capacity under our revolving credit facility and our master lease
line will be sufficient to fund our working capital, acquisitions and capital expenditure requirements for the immediately foreseeable future. Our long-term liquidity needs will consist of working capital and capital expenditure requirements, the
funding of future acquisitions and repayment of debt. We intend to fund these long-term liquidity needs from cash generated from operations, available borrowings under our revolving credit facility, our master lease line of credit, and future debt
and equity financings. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors. Many of these factors are beyond our control and cannot be anticipated at this time. To the
extent we are unable to generate sufficient cash from our operations, funds are not available under our revolving credit facility or our master lease line, we may be unable to meet our capital expenditure requirements. Furthermore, we may not be
able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all.



Critical Accounting Policies



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



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



| |  | revenue recognition and estimation of contractual allowances and bad debt of accounts receivable; and
| | - | -----------------------------------------------------------------------------------------------------



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| |  | evaluation of intangible assets, including goodwill, and long-lived assets for impairment.
| | - | ------------------------------------------------------------------------------------------



Revenue Recognition, Contractual Allowances and Allowances for Doubtful Accounts



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



Impairment of Goodwill, Intangible and Long-Lived Assets



Goodwill



Goodwill and other intangible assets
with an indefinite useful life are no longer amortized as expenses to operations, but rather are subject to at least annual assessments for impairment by applying a fair-value-based test as well as further review for indicators that may arise
throughout the year. We conduct our annual impairment test of goodwill during our first quarter of each year.



Long-Lived Assets



Impairment losses are recognized for long-lived assets through operations when indicators of impairment exist and the underlying cash flows are not sufficient to support the assets carrying value. Potential indicators of impairment
can include, but are not limited to the following:



a. History of operating losses or expected future losses



b. Significant adverse change in legal factors



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



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



e. Reductions or expected reductions of cash flow



Our service agreements, included in the consolidated balance
sheets as intangible assets, are not considered to have indefinite useful lives and will continue to be amortized over a useful life of 25 years. We regularly evaluate the carrying value and lives of the finite lived intangible assets in light of
any events or circumstances that we believe may indicate that the carrying amount or amortization period should be adjusted.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 41 (FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.



In general, a VIE is a corporation, partnership, limited liability
corporation, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group
of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. However, FIN 46
specifically excludes a VIE that is a business if the variable interest holder did not participate significantly in the design or redesign of the entity.



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Health Insurance Portability and Accountability Act



The administrative provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) direct the federal
government to adopt national electronic standards for automated transfer of certain healthcare data between healthcare payors, plans and providers. HIPAA is designed to enable the entire healthcare industry to communicate electronic data using a
single set of standards, thus eliminating all nonstandard formats currently in use. Our contracted radiology practices and diagnostic imaging centers are covered entities under HIPAA, and as such, must comply with the HIPAA electronic
data interchange mandates. The HIPAA requirements are scheduled by the federal government to be implemented over a multi-year timeframe. Implementation delays or difficulties by the Company, the federal government, or others with which we do
business could impact our future cash flow in a way we cannot currently predict.



Forward-Looking Statements



Throughout this
report we make forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements include words
such as may, will, would, could, likely, estimate, intend, plan, continue, believe, expect or anticipate
and other similar words and include all discussions about our acquisition and development plans. We do not guarantee that the transactions and events described in this report will happen as described or that any positive trends noted in this report
will continue. The forward-looking statements contained in this report are generally located in the material set forth under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations, but may
be found in other locations as well. These forward-looking statements generally relate to our plans, objectives and expectations for future operations and are based upon managements reasonable estimates of future results or trends. Although we
believe that our plans and objectives reflected in or suggested by such forward-looking statements are reasonable, we may not achieve such plans or objectives. You are cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in this report. You should read this report completely and with the understanding that actual future results may be materially different from what we expect. We will not update forward-looking statements even though our
situation may change in the future.



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



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



| |  | the highly competitive nature of the healthcare business;
| | - | ---------------------------------------------------------



| |  | a decline in patient referrals;
| | - | -------------------------------



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



| |  | the termination of our contracts with radiology practices;
| | - | ----------------------------------------------------------



| |  | the loss of a high percent of radiologists operating in our contracted radiology practices;
| | - | -------------------------------------------------------------------------------------------



| |  | the ability to recruit and retain technologists;
| | - | ------------------------------------------------



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



| |  | burdensome lawsuits against our contracted radiology practices and us;
| | - | ----------------------------------------------------------------------



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



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



| |  | changes in business strategy and development plans;
| | - | ---------------------------------------------------



| |  | changes in federal, state or local regulations affecting the healthcare industry;
| | - | ---------------------------------------------------------------------------------



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



| |  | risks related to our Senior Notes and healthcare securities generally;
| | - | ----------------------------------------------------------------------



| |  | interruption of operations due to severe weather or other extraordinary events.
| | - | -------------------------------------------------------------------------------



A more comprehensive list of such factors is set forth in the Companys Annual Report on Form 10-K, as amended, for
the year ended December 31, 2003, and our other filings with the Securities and Exchange Commission.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



The Companys exposure to market risk for changes in interest rates relates primarily to the Companys cash equivalents, credit facilities, and
its senior and convertible notes. At June 30, 2004, Radiologix had $750,000 considered outstanding under its revolving credit facility related to a letter of credit in connection with our high retention workers compensation program.
Radiologixs notes bear interest at fixed rates.



Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures.Based on their evaluation as of a date within 45 days of the filing date of this Quarterly Report on Form 10-Q, the Companys principal executive officer and principal financial
officer have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) are effective to ensure that
information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



There have been no significant changes in the Companys
internal controls or in other factors that have materially affected or are reasonably likely to materially affect its internal controls during our most recent fiscal quarter, including any corrective actions with regard to significant deficiencies
and material weaknesses. The Company instituted a formal Disclosure Review Committee function, effective with our second quarter ended June 30, 2004.



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



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PART II: OTHER INFORMATION



Item 4. Submission of Matters to a Vote of Security Holders.



Radiologixs 2004 annual stockholders meeting was held on July 15, 2004. The following individuals were elected as directors, the appointment of Ernst & Young LLP as independent auditors was ratified, and the
adoption of the 2004 Long-Term Incentive Compensation Plan was approved by the votes indicated below:



|                         |  |            |  |          
|------------------------ |  | ---------- |  | ---------
|Nominee                  |  | For        |  | Withheld 
|Marvin S. Cadwell        |  | 18,388,674 |  | 1,293,621
|Paul D. Farrell          |  | 18,388,171 |  | 1,294,124
|Stephen D. Linehan       |  | 18,625,851 |  | 1,056,444
|Joseph C. Mello          |  | 18,388,091 |  | 1,294,204
|Michael L. Sherman, M.D. |  | 18,624,774 |  | 1,057,521



Appointment of Ernst
& Young LLP:



|                |  |                  |  |                
|--------------- |  | ---------------- |  | ---------------
|For: 19,457,716 |  | Against: 155,043 |  | Abstain: 69,536



Adoption of the 2004
Long-Term Incentive Compensation Plan:



|               |  |                    |  |                
|-------------- |  | ------------------ |  | ---------------
|For: 8,201,932 |  | Against: 3,561,775 |  | Abstain: 77,357



Item 6. Exhibits and Reports on Form 8-K



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



| | (b) | Reports on Form 8-K. The registrant filed a current report on Form 8-K on May 7, 2004, announcing: (i) the sale of one wholly owned diagnostic imaging center and its
interests in five joint venture diagnostic imaging centers located in San Antonio, Texas, to an affiliate of Vanguard Health Systems, Inc. and (ii) the release of its financial results for the quarter ended March 31, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The registrant filed a current report on Form 8-K on July 12, 2004
announcing our Amended and Restated Master Lease line with GE Healthcare Financial Services on July 9, 2004, and our termination of an August 2003 letter of intent regarding the development of a joint venture partnership.



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SIGNATURES



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



|                     |  |                                                                                                    
|-------------------- |  | ---------------------------------------------------------------------------------------------------
|                     |  | RADIOLOGIX, INC.                                                                                   
|                     | 
|Date: August 5, 2004 |  | /S/ STEPHEN D. LINEHAN                                                                             
|                     |  | Stephen D. Linehan President and Chief Executive Officer (Principal Executive Officer)             
|                     | 
|Date: August 5, 2004 |  | /S/ RICHARD J. SABOLIK                                                                             
|                     |  | Richard J. Sabolik Senior Vice President and Chief Financial Officer (Principal Accounting Officer)



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INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                          
|3.2           |  | Amended and Restated Bylaws of Radiologix, Inc.*                                                                                                                                                                     
|              | 
|10.3          |  | Amended and Restated Service Agreement dated as of January 1, 2004, by and among Radiologix, Inc., Treasure Coast Imaging Partners, Inc., and Radiology Imaging Associates  Basilico,
Gallagher & Raffa, M.D., P.A.*
|              | 
|10.18         |  | Amendment No. 1 to Service Agreement dated as of January 1, 2004, by and among Radiologix, Inc., Community Imaging Partners, Inc., Community Radiology Associates, Inc., and Drs. Korsower and
Pion Radiology, P.A.* 
|              | 
|31.1          |  | Certification of Stephen D. Linehan pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                     
|              | 
|31.2          |  | Certification of Richard J. Sabolik pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                     
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 of Stephen D. Linehan. *                                                                      
|              | 
|32.2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 of Richard J. Sabolik. *                                                                      

---

|* | Filed herewith.
|- | ---------------



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