10-K 1 primedex_10k-103102.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ___________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended October 31, 2002 Commission File Number 0-19019 ---------------- ------- PRIMEDEX HEALTH SYSTEMS, INC. ----------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) New York 13-3326724 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1510 Cotner Avenue Los Angeles, California 90025 ----------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (310) 478-7808 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $12,398,113 on January 21, 2003 based on the closing price for the common stock in the over-the-counter bulletin board bulletin board market on said date. The number of shares of the registrant's common stock outstanding on January 21, 2003 was 41,100,734 shares (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits are incorporated herein by reference as set forth in Item 14(b), Exhibits, in Part IV. PART I ITEM 1. BUSINESS ------- -------- BACKGROUND Primedex Health Systems, Inc. ["PHS" or the "Company"] is a New York corporation organized in 1985 with its executive offices located at 1510 Cotner Avenue, Los Angeles, California 90025 where its telephone number is 310-478-7808. Through its 58 California diagnostic imaging facilities (eight of which are wholly-owned by the Company's 91% owned Diagnostic Imaging Services, Inc. ["DIS"] subsidiary and three in partnerships or limited liability companies with radiologists who provide services at the partnership or limited liability company location), the Company operates a network of centers through its RadNet (R) Management, Inc. subsidiary which arranges for the non-medical aspects of medical imaging offering MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology to the public. CENTER MANAGEMENT The Company's wholly-owned subsidiary, RadNet (R) Management, Inc. ["RadNet (R)"], manages the Company's network of 58 medical imaging centers. 50 of the imaging centers are located in Southern California [with three centers located in Beverly Hills and known as the Tower Imaging Division] with the remaining eight centers located in northern California. At all the centers, except three, the Company provides the imaging center facilities and equipment as well as all non-medical operational, management, financial and administrative services. At the three partnership or limited liability company centers, RadNet (R) performs non-medical management services. At all of the Company's centers, the medical services and medical supervision are provided by various independent physicians and physician groups [at most of the centers, the medical services are provided by Beverly Radiology Medical Group ["BRMG"] [see "Item 13"]]. As compensation for its management and other services at the various centers, RadNet (R) receives a management fee. In connection with the imaging centers in which it is a partner, RadNet (R), in addition to a management fee, also shares in the entity's net income. DIAGNOSTIC IMAGING MODALITIES Diagnostic imaging involves the use of less-invasive techniques to generate representations of internal anatomy that can be recorded on film or digitized for display on a video monitor. Diagnostic imaging procedures facilitate the early diagnosis of diseases and disorders, often minimizing the cost and amount of care required for patients. Diagnostic imaging procedures include: magnetic resonance imaging (or MRI), computed tomography (or CT), positron emission tomography (or PET), nuclear medicine, ultrasound, mammography, general radiography (or x-ray) and fluoroscopy. The following are the principle medical diagnostic procedures performed on patients at the various imaging centers owned by the Company. The patient is normally referred to the center for such diagnostic procedures by his or her treating physician who may be independent or may be affiliated with an Independent Physician Association ["IPA"], a Health Maintenance Organization ["HMO"], a Preferred Provider Organization ["PPO"], or a similar organization which has contracted for such services. See "Marketing" herein. Not all of such procedures are performed at each center. X-ray and fluoroscopy are the most frequently used imaging modalities. DIAGNOSTIC RADIOLOGY OR X-RAY- X-ray employing x-ray radiation on two planes; including fluoroscopy and endoscopy. X-ray is the most common energy source used in imaging the body and is utilized in the following modalities (i) conventional x-ray typically used to image bones and contrast enhanced vasculature and organs; (ii) CT scanners utilize computers to produce cross-sectional images of particular organs or areas of the body; and (iii) digital x-ray systems add computer image processing capability to conventional x-ray systems. 2 COMPUTED AXIAL TOMOGRAPHY [CT] - CT is 100 times more sensitive than conventional x-ray. It is used to view inside any of the body's organs, including the brain, to detect abnormalities and disease. CT focuses an x-ray on a specific plane of the body, processes the image by computer, and constructs a picture on a monitor, and later on film. Tissues of various density appear as different shades of gray, bone [the most dense] as white, and air and fluid is black. The procedure is painless and takes between 15 minutes and 45 minutes per study; more than one study is often ordered on each patient. The patient simply lies on a special, monitored table which is guided into the scanner. Some CT studies involve the use of an injected contrast agent to better visualize anatomy and pathology. Although it is very unusual, some patients may develop a significant reaction to the contrast and in rare cases fatalities have resulted. To determine patients most likely to have an adverse reaction all patients are required to answer a questionnaire. Additionally, the Company primarily uses non-ionic CT contrast agents to minimize contrast reactions. A CT system costs in the range of $300,000 to $1,200,000, depending upon the specific performance characteristics of the system. MAGNETIC RESONANCE IMAGING [MRI] - Diagnostic imaging based on magnetism rather than radiation or conventional x-ray. MRI has become widely accepted as the standard diagnostic tool for a wide and fast-growing variety of clinical applications for soft tissue anatony (as found in the brain, spinal cord and interior ligaments of body joints such as the knee). MRI takes between 20 to 45 minutes per examination and is painless, requiring only that the patient lie still on a motorized table that slides into a long cylinder. On some MRI studies, an injected contrast agent is used, and some require the use of special "coils," permitting highly accurate scanning of a particular part of the body. MRI systems cost between $900,000 and $2,500,000 each, depending upon the system configuration, magnet design and field strength. There are no presently known hazards to the general population in connection with normal use of MRI (although the scanning of pregnant women is only done under limited circumstances and patients with cardiac pacemakers or ferrous clips used in surgical procedures are generally excluded from MRI procedures as well as the area surrounding the MRI). OPEN MRI - Technological advances in software and equipment technology for MRI systems have allowed open design equipment to offer significantly improved image quality. Most open MRI systems use permanent electromagnetic technology, which substantially lowers both sitting and service costs, but does not provide images as efficiently as high-field MRI systems. Recently, reliable high-field open MRI systems have also become available. The open design allows for studies not normally possible in conventional MRI systems, including exams of infants, pediatric patients, claustrophobic patients, large or obese patients and patients suffering from post-traumatic stress syndrome. Open MRI is also capable of conducting musculoskeletal exams that require the patient to move or flex, such as kinematic knee studies. A typical open MRI non-kinematic exam takes from 45 to 90 minutes. Open MRI systems are priced in the range of $600,000 to $1,500,000 each. POSITION EMISSION TOMOGRAPHY (PET). PET scanning involves the administration of a radiopharmaceutical agent with a positron-emitting isotope and the measurement for the distribution of that isotope to create images for diagnostic purposes. PET scans provide the capability to determine how metabolic activity impacts other aspects of physiology in the disease process by correlating the reading for the PET study with other studies such as CT or MRI. PET technology has been found highly effective and appropriate in certain clinical circumstances for the detection and assessment of tumors throughout the body, the evaluation of certain cardiac conditions and the assessment of epilepsy seizure sites. The information provided by PET technology often obviates the need to perform further highly invasive and/or diagnostic surgical procedures. Interest in PET scanning has increased recently due to several factors including: expansion of available hardware options through the introduction of dual head gamma camera coincidence detection; increased payor coverage and reimbursement; the availability of the isotopes without an in-house cyclotron; and a growing recognition by clinicians that PET is a powerful diagnostic tool that can be used to evaluate and guide management of a patient's disease. PET systems are priced in the range of $1,000,000 to $2,000,000 each. Distribution networks have been established across the United States to ensure consistent availability of and access to the isotopes. MAMMOGRAPHY - Mammography is a specialized form of radiology utilizing low dosage x-rays to visualize breast tissue and is the primary screening tool for breast cancer. Mammography procedures and related services assist in the diagnosis and treatment planning for breast cancer. 3 NUCLEAR MEDICINE - Nuclear medicine involves the use of a small amount of radioactive material and is used to obtain information about the anatomy and functioning of various organs. Nuclear medicine is based on the principle that organs absorb or concentrate scientific minerals or hormones. These substances are not visualized on conventional x-ray, but if they are made radioactive by the addition of a radioisotope, they can be seen. If an organ is not functioning properly, too little or too much of the substance will be taken up or concentrated in some parts of the organ, but not other parts. The organ will thus appear different on a screen. The amount of radiation is extremely low, and the isotope usually disappears from the body within a day or less. ULTRASOUND - Ultrasound imaging that uses sound waves and their echoes to visualize and locate internal organs. It is particularly useful in viewing soft tissues that do not x-ray well. Ultrasound is used in pregnancy to avoid x-ray exposure as well as in gynecological, urologic, vascular, cardiac and breast applications. BUSINESS STRATEGY The Company believes that the diagnostic imaging services industry will continue to grow as a result of: THE ESCALATING DEMAND FOR HEALTHCARE SERVICES FROM AN AGING POPULATION. There has been strong demand for healthcare services due to an aging population in the United States. According to the United States Census Bureau, one of the fastest growing segments of the population is the group over 65 years of age, which is expected to increase as much as 16% from 2000 to 2010. The Company believes the aging population will help drive the growth for diagnostic imaging procedures over the coming years because diagnostic imaging utilization tends to increase as a person ages. THE INCREASING ROLE OF DIAGNOSTIC IMAGING IN HEALTHCARE. Advanced imaging equipment and modalities are allowing physicians to diagnose a wide variety of diseases and injuries quickly and accurately without exploratory surgery or other surgical or invasive procedures, which are usually more expensive, involve greater risk to patients and result in longer rehabilitation time. The Company believes that future technological advances will continue to enhance the ability of radiologists to diagnose and influence treatment. In addition, advanced imaging systems are gaining wider acceptance among payors, as they are increasingly seen and accepted as a tool for reducing long-term healthcare costs. GREATER CONSUMER AWARENESS OF AND DEMAND FOR PREVENTIVE DIAGNOSTIC SCREENING. Diagnostic imaging is increasingly being used as a screening tool for preventative care. Consumer awareness of and demand for diagnostic imaging as a less-invasive and preventive screening method has added to the growth in diagnostic imaging procedures. Consumers are now more aware of the advanced procedures that area available to them and are requesting them as preventive procedures from their physicians and healthcare providers. The Company believes that, with increased technological advancements, there will be greater consumer awareness of and demand for diagnostic imaging procedures as preventive and less-invasive procedures for early diagnosis of diseases and disorders. AN INCREASED NUMBER OF HIGH-END PROCEDURES THAT UTILIZE ADVANCEMENTS IN TECHNOLOGY. Recent technological advancements include: magnetic resonance spectroscopic imaging, which can differentiate malignant from benign lesions; magnetic resonance angiography, which can produce three-dimensional images of body parts and assess the status of blood vessels; and enhancements in teleradiology systems, which permit the digital transmission of radiological images from one location to another for interpretation. Additional improvements in imaging technologies, contrast agents and scanning capabilities are leading to new, less invasive methods of diagnosing diseases and certain vascular abnormalities without exploratory surgery. 4 The Company's strategy is to further develop and expand its California regional diagnostic imaging network emphasizing quality of care, producing cost-effective diagnostic information and providing superior service and convenience to its customers. The strategy of the Company is focused on the following components: (i) to further participate in the consolidation occurring in the diagnostic imaging industry by continuing to build its market presence in its existing California diagnostic imaging networks through geographically disciplined acquisitions; (ii) to continue to market diagnostic imaging applications through its existing facilities to optimize and increase overall procedure volume; (iii) to further develop its network communication systems so as to efficiently transfer imaging data from one location to another as a tool in addressing the continuing radiologist shortage and improving the overall quality of care; and (iv) to strengthen and improve its marketing to managed care customers on a regional basis. Additionally, the Company will consider developing or acquiring additional regional networks outside California in strategic locations where the Company can offer a broad range of services to customers and realize increased economies of scale utilizing the management programs developed in California. RECENT IMAGING CENTER OPENINGS AND ACQUISITIONS In late November, 2001, the Company opened a new facility located in Burbank, California. The Company owns 75% of the facility with the radiologists providing services at the center owning the remaining 25%. The center offers MRI, Open MRI, CT, ultrasound and x-ray services. In January 2002, the Company opened a second facility located in Tarzana, California. The new center offers Open MRI, CT and PET. In May, 2002, the Company acquired Grove Diagnostic Imaging located in Rancho Cucamonga, California. The center offers MRI, CT, ultrasound, mammography and x-ray. In September, 2002, the Company opened two additional locations in Orange, California. One new center offers MRI, PET, nuclear medicine and x-ray. The second location, a Women's Center offers ultrasound and mammography. In December, 2002, the Company opened a new facility located in Rancho Bernardo, California. The Company owns 75% of the facility with the radiologists providing services at the center owning the remaining 25%. The center offers MRI, CT, ultrasound and x-ray services. 5 IMAGING CENTERS AND EQUIPMENT The following table indicates as of October 31, 2002, the quantity of principal diagnostic equipment available at each of the imaging centers in which the Company has a management and/or ownership interest.

Mammo- Ultra- Diagnostic Nuclear Center MRI Open MRI CT PET graphy sound Radiology Medicine ------ --- -------- -- --- ------ ----- --------- -------- Tower Division: Roxsan 1 - 1 - - - - 3 Wilshire 2 1 1 - - 3 4 - Women's - - - - 4 1 - - Antelope Valley 1 - - - - - - - Burbank 1 1 1 - - 2 1 - Camarillo* - - - - 1 2 2 - Chino 1 - - - - - - - Emeryville - 1 - - - - - - Fresno 1 - 1 - 1 2 3 - La Habra 1 - 1 - - - - - Lancaster [Four Sites] - 1 1 - 3 4 6 - Long Beach [Seven Sites] 1 - 1 - 2 6 10 - Modesto 1 - 1 - 2 4 3 - Northridge 1 - 1 - 1 3 3 1 Oceanside* [North County] 1 - 1 - - - - - Orange [Four Sites] 2 - 1 1 3 6 5 1 Oxnard - 1 - - 2 1 2 - Palm Desert [Three Sites] 1 - 1 - 1 2 4 - Palm Springs [Two Sites] - 1 - - 2 3 3 - Rancho Bernardo - 1 1 - - 1 1 - Rancho Cucamonga [Two Sites] 1 - 1 - 2 2 4 - Riverside* [Two Sites] 1 1 1 - 2 3 4 - Sacramento 1 - 1 - 1 1 2 - San Francisco - 1 - - - - - - San Gabriel Valley 1 - 1 - - 1 - - Santa Clarita - 1 1 - 2 1 1 - Santa Rosa 1 - 1 - - 1 - - Stockton - 1 1 - 1 2 2 - Tarzana [Two Sites] 1 1 - 1 - - - - Temecula* [Three Sites] 1 - 1 - 3 3 5 - Thousand Oaks* 1 - 1 - 2 3 2 2 Tustin - 1 - - - - 1 - Vacaville - 1 1 - 1 1 1 - Ventura [Four Sites] 1 - 1 1 3 5 8 1 Westchester 1 1 1 - 1 1 2 -

*Indicates a DIS facility The Company also has two mobile MRI's currently at locations near Westchester and Tarzana. 6 MANAGEMENT SERVICES AND COMPENSATION The Company has entered into management agreements with respect to its imaging centers with various physicians and physician groups [the "Physician Group"]. Pursuant to the typical management agreement, the Company makes available the imaging center facilities and all of the furniture and medical equipment at such facilities for use by the Physician Group and the Physician Group is responsible for staffing the center with qualified medical personnel. In addition, the Company provides management services and administration of the non-medical functions and services relating to the medical practice at the center including among other functions, provision of clerical and administrative personnel, bookkeeping and accounting services, billing and collection, provision of medical and office supplies, secretarial, reception and transcription services, maintenance of medical records, advertising, marketing and promotional activities and the preparation and filing of all forms, reports and returns required in connection with unemployment insurance, workers' compensation insurance, disability, social security and similar laws. As compensation for the services furnished under the management agreement, the Company is paid a management fee equal to an agreed percentage of the medical practice billings, as and when collected, varying between 70% to 85% of such collections. At the partnership and limited liability company imaging centers, RadNet has entered into a management agreement to provide management, administrative and billing and collection services for a management fee which is a percent of the gross monthly receipts received for services performed at the center. In addition, as a joint venture partner, the Company is entitled to 50% to 75% of income after a deduction of all expenses including amounts paid for medical services and medical supervision, varying based upon the Company ownership interest. At most of the Company's imaging centers, the medical services including medical supervision are supplied by Beverly Radiology Medical Group ["BRMG"]. BRMG is 99% owned by Dr. Howard Berger [see "Items 11, 12 and 13"]. RadNet (R) has a Management and Services Agreement with BRMG for a ten-year term until June 2012, terminable prior thereto at RadNet's election upon the occurrence of certain events including a change in BRMG's ownership such that Dr. Berger is no longer an owner in the aggregate of at least 60% of the equity ownership of BRMG. As compensation for its services furnished under the Management and Services Agreement, BRMG has agreed to pay a management fee to the Company equal to 74% of its medical practice receipts at the contracted centers, as and when collected. EQUIPMENT The most expensive types of diagnostic medical equipment found at the imaging centers owned or managed by the Company are the MRI, CT and PET systems. As set forth in the chart under "Imaging Centers and Equipment" above, 34 centers provide MRI services 25 centers provide CT services and three centers provide full PET services. The majority of the MRI systems, CT systems and PET systems at the Company's imaging centers are manufactured by General Electric. The acquisition of these systems as well as the acquisition of the other relatively expensive diagnostic medical equipment at the various imaging centers has been effected through various financing arrangements directly with the manufacturer involving the use of capital leases with purchase options at minimal prices at the end of the lease term, the issuance of long term installment notes and the use of operating leases with purchase options at substantial prices at the end of the lease term. At October 31, 2002, capital lease obligations totaled approximately $64 million through October 2009 including current installments totaling approximately $11.6 million. Also at October 31, 2002, installment notes payable totaled approximately $93 million through August 2008 including current installments of approximately $24.6 million [including line of credit balances of approximately $10 million]. Commitments under equipment operating leases at October 31, 2002, were approximately $8.0 million through July 2007 [excluding fair market value buyout options at the end of the lease term], including current obligations of approximately $2.3 million. To the extent additional imaging centers are opened or acquired, these obligations could materially increase. 7 The MRI, CT and PET systems and the other diagnostic medical equipment at the imaging centers owned or managed by the Company are subject to technological obsolescence as medical imaging is a field in which there is constant development of new techniques and technologies. As a result the Company continues to evaluate the mix of its equipment in response to changes in technology and to maximize utilization of its equipment. The overall competitiveness of the Company's equipment continually improves through upgrades, disposal and/or trade-in of older equipment and the purchase or leasing of new equipment. Timely, effective maintenance is essential for achieving high utilization rates of equipment. Most equipment is first covered by a one year warranty from the manufacturer. Thereafter, the Company maintains an agreement with GE Medical Systems ("GEMS") whereby GEMS has agreed to be responsible for the maintenance and repair of a majority of the Company's equipment based upon a percentage of the Company's revenues. The Company believes this to be an effective method for controlling this cost. MARKETING The patients who undergo diagnostic medical imaging procedures at the various Company owned or managed imaging centers are generally referred by individual independent physicians, by Independent Physician Associations ["IPAs"] consisting of groups of physicians, and by Health Maintenance Organizations ["HMOs"], Preferred Provider Organizations ["PPOs"], and similar organizations which enroll subscribers on a contractual basis to whom they deliver healthcare services. Such organizations attempt to control the cost of healthcare services by directing their enrollees to participating physicians and institutions and often through aggressive utilization review and limitations on access to physician specialists, attempt to further limit the cost of medical service delivery. Such organizations typically develop, on a regional basis, where an appropriate enrollee population and mix of participating physicians and institutions are available. The Company currently employs 15 full-time marketing and sales personnel who are compensated on a salary or salary plus commission basis and who periodically inform the medical community including individual physicians and the administrators of IPAs, HMOs, PPOs, and similar organizations throughout California as to the services provided at the Company's imaging centers. Patients are obtained by direct referral or through contract. Some contracts, referred to as "capitation contracts", provide for a fixed fee per organization member, which is paid to the medical service provider. Under a "capitation" contract, the provider agrees to provide specified services to the organization members for a fixed, predetermined payment per member for a specified time period [usually one year], regardless of how many times the member uses the service. No assurances can be given that any of the current or future "capitation" contracts will be profitable as there is a possibility that management could underestimate the number of times the services at its imaging centers will be used by the contracting organization's members during the contract term. COMPETITION The health care industry in general, and the market for diagnostic imaging services in particular, is highly competitive. The Company competes principally on the basis of its reputation for productive and cost-effective quality services. The Company's operations must compete with groups of radiologists, established hospitals and certain other independent organizations, including equipment manufacturers and leasing companies, that own and operate imaging equipment. The Company's major competitors include Radiologix, Inc., Alliance Imaging, Inc., HEALTHSOUTH Corporation, Insight Health Services and Syncor International Corporation. Many of the Company's direct competitors that provide contract diagnostic imaging services may have access to greater financial resources than the Company. In addition, in the past some non-radiologist physician practices have refrained from establishing their own diagnostic imaging centers because of the federal physician self-referral legislation. Final regulations issued in January 2001 clarify certain of the exceptions to the physician self-referral legislation, which may create opportunities for and encourage some physician practices to establish their own diagnostic imaging centers within their group practices which may compete with the Company. 8 COMPETITIVE STRENGTHS The Company believes that it is well-positioned to take advantage of favorable demographic and diagnostic imaging services industry trends by capitalizing on the following strengths: A LEADING MARKET POSITION IN SOUTHERN AND CENTRAL CALIFORNIA. The Company has a concentrated presence in its core Southern California and Central California markets, which enables it to offer patients, referring physicians and payors a higher degree of responsiveness and convenience than independent operators or hospitals. The Company provides flexible scheduling and convenient locations, as well as the expeditious delivery of radiology reports to referring physicians. The Company believes that payors contract with it because of its strong market presence, the high quality of services and its ability to provide a single point of contact and centralized administration. In addition, its leading position enables it to increase procedure volume, optimize equipment utilization, benefit from economies of scale in purchasing and negotiation of payor contracts and leverage its administrative and information technology infrastructure in its market. COMPREHENSIVE, LEADING-EDGE DIAGNOSTIC IMAGING SERVICES. The Company provides a broad range of diagnostic imaging services within its market. The Company's 58 centers enable it to offer one-stop shopping to patients, referring physicians and payors. In the Company's experience, referring physicians and payors prefer to enter into relationships with diagnostic imaging providers that offer a broad spectrum of services at convenient locations, benefiting referring physicians and patients who require more than one type of diagnostic imaging procedure. STRONG RELATIONSHIPS WITH LEADING RADIOLOGY PRACTICES. In each of the Company's markets, the Company contracts with leading radiology practices to provide professional radiology services in connection with its diagnostic imaging centers. Its close affiliation with Beverly Radiology Medical Group permits it to influence the employment of excellent radiologists by that Group. Additionally, the Company believes that its affiliation with these leading radiology practices enhances its reputation with referring physicians and their patients. In light of a recent shortage of radiologists, the Company believes that its contractual relationship with large, established radiology practices are important to maintaining its high quality services. Furthermore, the Company's acquisition of sophisticated communication equipment permits it to move professional interpretation services from a busy location to a less busy location and to effectively utilize preeminent specialist radiologists with respect to certain issues regardless of the location of the patients. EXPERIENCED MANAGEMENT TEAM. The Company has a highly experienced management team with an average in excess of 20 years of healthcare services experience. Management has successfully generated growth by increasing same center revenue and executing a disciplined expansion strategy. CUSTOMERS AND FEES The Company's operations are principally dependent on the Company's ability to attract referrals from physicians and other health care providers. The Company's eligibility to provide service in response to a referral is often dependent on the existence of a contractual arrangement with the referred patient's insurance carrier or other payor organization. The Company currently has in excess of 600 contracts with various payor organizations for diagnostic imaging services provided at the Company's centers primarily on a discounted fee-for-service basis. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. A significant decline in referrals and/or reimbursement rates would adversely affect the Company's business, financial condition and results of operations. In this regard, Medicare has determined to reduce its reimbursement rates for calendar year 2003 diagnostic imaging services on an average of 4.4% for the various procedures involved. The impact of this decrease will be offset to some extent by a significant increase in the practice expense for technical component services. A review of the reduction in relation to the services offered by the Company indicates that the impact on the Company will likely be about a 2% reduction in Medicare payments, although its exact impact cannot presently be determined. 9 REIMBURSEMENT OF HEALTH CARE COSTS MEDICARE AND MEDICAID REIMBURSEMENT PROGRAM. The Company's revenue is derived through its ownership, operation and management of diagnostic imaging centers and from service fees paid to it by contracted radiology practices. During the year ended October 31, 2002, approximately 15% of net revenue generated at the Company's diagnostic imaging centers was derived from government sponsored healthcare programs (principally, Medicare and Medicaid). As of January 2002, Medicare decreased reimbursement rates for physician and outpatient services, including diagnostic imaging services. In March 2003, the Centers for Medicare and Medicaid Services ("CMS"), formerly known as the Health Care Financing Administration, Department of Health and Human Services, will reduce reimbursement for certain diagnostic imaging services by up to approximately 4.4% depending on the type of diagnostic imaging services provided. The Company has reviewed the procedures involved and does not believe the reduction will have a material negative impact on the Company's revenues. The Company's centers are principally dependent on the Company's ability to attract referrals from primary care physicians, specialists and other healthcare providers. The referral often depends on the existence of a contractual agreement with the referred patient's health benefit plan. Any further change in Medicare or Medicaid rates or conditions for reimbursement could substantially reduce the amounts reimbursed to the Company or its contracted radiology practices for services provided. These reductions could have a significant adverse effect on Company revenue and financial results by creating downward pricing pressure. MANAGED CARE. Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs") attempt to control the cost of health care services. Managed care contracting has become very competitive and reimbursement schedules are at or below Medicare reimbursement levels. The development and expansion of HMOs, PPOs and other managed care organizations within the Company's network could have a negative impact on utilization of the Company's services and/or affect the revenue per procedure which the Company can collect, since such organizations will exert greater control over patients' access to diagnostic imaging services, the selections of the provider of such services and the reimbursement thereof. The Company also expects that the excess capacity of equipment in California may negatively impact operations because of the competition among health care providers for contracts with all types of managed care organizations. As a result of such competition, the term length of any contracts in which the Company may obtain, and the payment to the Company for such services, may also be negatively affected. PRIVATE INSURANCE. Private health insurance programs generally have authorized the payment for the Company's services on satisfactory terms and CMS has authorized reimbursement under the federal Medicare program for substantially all diagnostic imaging and treatment services currently being provided by the Company. However, if Medicare reimbursement is reduced, the Company believes that private health insurance programs will also reduce reimbursement in response to reductions in government reimbursement, which could have an adverse impact on the Company's business, financial condition and results of operations. CORPORATE LIABILITY AND INSURANCE The Company may be subject to professional liability claims including, without limitation, for improper use or malfunction of its diagnostic imaging equipment. The Company maintains insurance policies with coverages that it believes are appropriate in light of the risks attendant to its business and consistent with industry practice. The Company also requires the contracted radiology practices to maintain sufficient professional liability insurance consistent with industry practice. Currently, the Company and BRMG maintain medical malpractice coverage of $1,000,000 per claim per doctor and $3,000,000 in the aggregate, with a $10,000 deductible, with other non BRMG contracted radiologists required to carry at least similar coverage. However, adequate liability insurance may not always be available to the Company and the contracted radiology practices in the future at acceptable costs or at all. 10 Providing medical services entails the risk of professional malpractice and other similar claims. The physicians employed by the contracted radiology practices are from time to time subject to malpractice claims. The Company structures its relationships with the practices under its agreements with them in a manner that the Company believes does not constitute the practice of medicine by it nor subject the Company to professional malpractice claims for acts or omissions of physicians in the contracted radiology practices. Nevertheless, claims, suits or complaints relating to services provided by the contracted radiology practices may be asserted against the Company in the future, including malpractice. Any claim made against the Company not fully covered by insurance could be costly to defend against, result in a substantial damage award against the Company and divert the attention of management from operations, which could have an adverse effect on its financial performance. In addition, claims might adversely affect the Company's business or reputation. The Company maintains general liability and umbrella coverage in commercially reasonable amounts. Additionally, it maintains workers' compensation insurance on all employees. Coverage is placed on a statutory basis and responds to California's specific requirements. EMPLOYEES At October 31, 2002, the Company had a total of 913 full-time and 311 part-time or per-diem employees of whom 12 served in executive positions, 488 supplied technical and managerial services at the various imaging centers, and 724 provided administrative, transcription, clerical and similar services. None of the Company's employees are subject to a collective bargaining agreement nor had the Company experienced any work stoppages. The Company believes that its employee relations are good. GOVERNMENT REGULATION GENERAL. The healthcare industry is highly regulated, and the Company can give no assurance that the regulatory environment in which it operates will not change significantly in the future. The Company's ability to operate profitably will depend in part upon the Company, the contracted radiology practices and their affiliated physicians obtaining and maintaining all necessary licenses, and other approvals and operating in compliance with applicable healthcare regulations. The Company believes that healthcare regulations will continue to change. Therefore, the Company monitors developments in healthcare law and modifies its operations from time to time as the business and regulatory environment changes. Although the Company intends to continue to operate in compliance, it cannot ensure that it will be able to adequately modify its operations so as to address changes in the regulatory environment. LICENSING AND CERTIFICATION LAWS. Ownership, construction, operation, expansion and acquisition of diagnostic imaging centers are subject to various federal and state laws, regulations and approvals concerning licensing of centers and personnel. FEE-SPLITTING; CORPORATE PRACTICE OF MEDICINE. The law of California prohibits the Company from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting professional fees with physicians. A component of the Company's business has been to enter into service agreements with radiology practices. The Company provides management, administrative, technical and other non-medical services to the radiology practices in exchange for a service fee. The structure of the relationships with the radiology practices, including the purchase of diagnostic imaging centers, in a manner that the Company believes keeps it from engaging in the practice of medicine or exercising control over the medical judgments or decisions of the radiology practices or their physicians or violating the prohibitions against fee-splitting. State regulatory authorities or other parties may assert that the Company is engaged in the corporate practice of medicine or that the payment of service fees to it by the radiology practice of medicine or that the payment of service fees to it by the radiology practices constitutes fee-splitting. If such a claim were successfully asserted, the Company could be subject to civil and criminal penalties and could 11 be required to restructure or terminate the applicable contractual arrangements. This result or the Company's inability to successfully restructure its relationships to comply with these statutes could jeopardize the Company's business strategy. MEDICARE AND MEDICAID FRAUD AND ABUSE. Federal law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce (i) the referral of a person, (ii) the furnishing or arranging for the furnishing of items or services reimbursable under the Medicare, Medicaid or other governmental programs or (iii) the purchase, lease or order or arranging or recommending, purchasing, leasing or ordering of any item or service reimbursable under the Medicare, Medicaid or other governmental programs. Enforcement of this anti-kickback law is a high priority for the federal government, which has substantially increased enforcement resources and is scheduled to continue increasing such resources. The applicability of the anti-kickback law to many business transactions in the healthcare industry has not yet been subject to judicial or regulatory interpretation. Noncompliance with the federal anti-kickback legislation can result in exclusion from the Medicare, Medicaid or other governmental programs and civil and criminal penalties. The Company receives fees under its service agreements for management and administrative services, which include contract negotiation and marketing services. The Company does not believe it is in a position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs to radiology practices or their affiliated physicians or to receive referrals. However, the Company may be considered to be in a position to arrange for items or services reimbursable under a federal healthcare program. Because the provisions of the federal anti-kickback statutes are broadly worded and have been broadly interpreted by federal courts, it is possible that the government could take the position that the Company's arrangements with the contracted radiology practices implicate the federal anti-kickback statute. Violation of the law can result in monetary fines, civil and criminal penalties, and exclusion from participation in federal or state healthcare programs, any of which could have an adverse effect on the Company's business and results of operations. While the Company's service agreements with the contracted radiology practices will not meet a "safe harbor" to the federal anti-kickback statute, failure to meet a "safe harbor" does not mean that agreements violate the anti-kickback statute. The Company has sought to structure its agreements to be consistent with fair market administrative services rendered. For these reasons, the Company does not believe that service fees payable to it should be viewed as remuneration for referring or influencing referrals of patients or services covered by such programs as prohibited by statute. Significant prohibitions against physician referrals have been enacted by Congress. These prohibitions are commonly known as the "Stark Law." The Stark Law prohibits a physician from referring Medicare or Medicaid patients to an entity providing "designated health services," including, without limitations, radiology services, in which the physician has an ownership or investment interest or with which the physician has entered into a compensation arrangement. The penalties for violating the Stark Law include a prohibition on payment by these governmental programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a "circumvention scheme." The Company believes that, although it receives fees under its service agreements for management and administrative services, it is not in a position to make or influence referrals of patients. On January 4, 2001, the CMS, published final regulations to implement the Stark Law. Under the final regulations, radiology and certain other imaging services and radiation therapy services and supplies are services included in the designated health services subject to the self-referral prohibition. Under the final regulations, such services include the professional and technical components of any diagnostic test or procedure using x-rays, ultrasound or other imaging services, computerized axial tomography, MRI, radiation therapy and diagnostic mammography services (but not screening mammography services). The final regulations, however, exclude from designated health services: (i) x-ray, fluoroscopy or ultrasonic procedures that require the insertion of a needle, catheter, tube or probe through the skin or into a body orifice; (ii) radiology procedures that are integral to the performance of, and performed during nonradiological medical procedures; (iii) nuclear medicine procedures; and (iv) "invasive" or "interventional" radiology, because the radiology services in these procedures are merely incidental or secondary to another procedure that the physician has ordered. 12 The Stark Law provides that a request by a radiologist for diagnostic radiology services or a request by a radiation oncologist for radiation therapy, if such services are furnished by or under the supervision of such radiologist or radiation oncologist pursuant to a consultation requested by another physician, does not constitute a "referral" by a "referring physician." If such requirements are met, the Stark Law self-referral prohibition would not apply to such services. The effect of the Stark Law on the radiology practice, therefore, will depend on the precise scope of services furnished by each such practice's radiologists and whether such services derive from consultations or are self-generated. The Company believes that (other than self-referred patients) all of the services covered by the Stark Law provided by the contracted radiology practices derive from requests for consultation by non-affiliated physicians. Therefore, the Company believes that the Stark Law is not implicated by the financial relationships between it and the contracted radiology practices. In addition, the Company believes that it had structured its acquisitions of the assets of existing practices, and the Company intends to structure any future acquisitions, so as not to violate the anti-kickback and Stark Law and regulations. Specifically, the Company believes the consideration paid by it to physicians to acquire the tangible and intangible assets associated with their practices is consistent with fair market value in arms' length transactions and is not intended to induce the referral of patients. Should any such practice be deemed to constitute an arrangement designed to induce the referral of Medicare or Medicaid patients, then the Company's acquisitions could be viewed as possibly violating anti-kickback and anti-referral laws and regulations. A determination of liability under any such laws could have an adverse effect on the Company's business, financial conditions and results of operations. The federal government recently announced an initiative to audit all Medicare carriers, which are the companies that adjudicate and pay Medicare claims. These audits are expected to intensify governmental scrutiny of individual providers. An unsatisfactory audit of any of the Company's diagnostic imaging centers or contracted radiology practices could result in significant repayment obligations, exclusion from the Medicare, Medicaid, or other governmental programs and/or civil and criminal penalties. Federal regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules, including laws and regulations that govern the Company's activities and the activities of the radiology practices. The Company's or the radiology practices' activities may be investigated, claims may be made against the Company or the radiology practices and these increased enforcement activities may directly or indirectly have an adverse effect on the Company's business, financial conditions and results of operations. CALIFORNIA ANTI-KICKBACK AND PHYSICIAN SELF-REFERRAL LAWS. California has adopted a form of anti-kickback law and a form of Stark Law. The scope of these laws and the interpretations of them are enforced by California courts and regulatory authorities with broad discretion. Generally, California law covers all referrals by all healthcare providers for all healthcare services. A determination of liability under such laws could result in fines and penalties and restrictions on the Company's ability to operate. FEDERAL FALSE CLAIMS ACT. The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. The Federal False Claims Act further provides that a lawsuit thereunder may be initiated in the name of the United States by an individual who is an original source of the allegations. The government has taken the position that claims presented in violation of the federal anti-kickback law or Stark Law may be considered a violation of the Federal False Claims Act. Penalties include civil penalties of not less than $5,500 and not more than $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person. The Company believes that it is in compliance with the rules and regulations that apply to the Federal False Claims Act. However, the Company could be found to have violated certain rules and regulations resulting in 13 sanctions under the Federal False Claims Act, and if the Company is so found in violation, any sanctions imposed could result in fines and penalties and restrictions on and exclusion from participation in federal and California healthcare programs that are integral to the Company's business. HEALTHCARE REFORM INITIATIVES. Healthcare laws and regulations may change significantly in the future. The Company continuously monitors these developments and modifies its operations from time to time as the regulatory environment changes. The Company cannot be assured that it will be able to adapt its operations to address new regulations or that new regulations will not adversely affect the Company's business. In addition, although the Company believes that it is operating in compliance with applicable federal and state laws, neither the Company's current or anticipated business operations nor the operations of the contracted radiology practices has been the subject of judicial or regulatory interpretation. The Company cannot be assured that a review of its business by courts or regulatory authorities will not result in a determination that could adversely affect its operations or that the healthcare regulatory environment will not change in a way that restricts the Company's operations. HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996. In an effort to combat healthcare fraud, Congress enacted the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA, among other things, amends existing crimes and criminal penalties for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-governmental payors. Under HIPAA, a "healthcare benefit program" includes any private plan or contract affecting interstate commerce under which any medical benefit, item or services is provided. A person or entity that knowingly and willfully obtains the money or property of any healthcare benefit program by means of false or fraudulent representations in connection with the delivery of healthcare services is subject to a fine and/or imprisonment. In addition, HIPAA authorizes the imposition of civil money penalties against entities that employ or enter into contracts with excluded Medicare or Medicaid program participants if such entities provide services to federal health program beneficiaries. A finding of liability under HIPAA could have a material adverse effect on the Company's business, financial conditions and results of operations. Further, HIPAA requires healthcare providers and their business associates to maintain the privacy and security of individually identifiable health information. HIPAA imposes federal standards for electronic transactions with health plans, the security of electronic health information and for protecting the privacy of individually identifiable health information. The government recently published regulations to implement the privacy standards with an initial compliance date of April 14, 2003. The Company may encounter certain costs associated with complying with the primary provisions. A finding of liability under HIPAA's privacy or security provisions may also result in criminal and civil penalties, and could have a material adverse effect on the Company's business, financial condition, and results of operations. COMPLIANCE PROGRAM. The Company has implemented a program to monitor compliance with federal and state laws and regulations applicable to healthcare entities. The Company appointed a compliance officer who is charged with implementing and supervising the compliance program, which includes the adoption of (i) "Standards of conduct" for employees and affiliates and (ii) a process that specifies how employees, affiliates and others may report regulatory or ethical concerns to the Company's compliance officer. The Company believes that its compliance program meets the relevant standards provided by the Office of Inspector General of the Department of Health and Human Services. An important part of the compliance program consists of conducting periodic audits of various aspects of Company operations and that of the contracted radiology practices. The Company also conducts mandatory educational programs designed to familiarize employees with the regulatory requirements and specific elements of the compliance program. FDA. The U.S. Food and Drug Administration ("FDA") has issued the requisite premarket approval for all of the MRI and CT systems utilized by the Company. The Company does not believe that any further FDA approval is required in connection with equipment currently in operation or proposed to be operated; except under regulations issued by the FDA pursuant to the Mammography Quality Standards Act of 1992, all mammography facilities are required to be accredited by an approved non-profit organization or state agency. Pursuant to the accreditation process each facility providing mammography services must comply with certain standards including annual inspection. 14 Compliance with theses standards is required to obtain payment for Medicare services and to avoid various sanctions, including monetary penalties, or suspension of certification. Although all of the Company's facilities which provide mammography services are currently accredited by the Mammography Accreditation Program of the American College of Radiology and the Company anticipates continuing to meet the requirements for accreditation, the withdrawal of such accreditation could result in the revocation of certification. Congress has extended Medicare benefits to include coverage of screening mammography subject to the prescribed quality standards described above. The regulations apply to diagnostic mammography and image quality examination as well as screening mammography. RADIOLOGIST LICENSING. The radiologists with whom the Company enters into agreements to provide professional services are subject to licensing and related regulations by the State of California. As a result, the Company requires its radiologists to have and maintain appropriate licensure. The Company does not believe that such laws and regulations will either prohibit or require licensure approval of its business operations, although no assurances can be made that such laws and regulations will not be interpreted to extend such prohibitions or requirements to the Company's operations. CORPORATE PRACTICE OF MEDICINE. In California, a lay person or any entity other than a professional corporation is not allowed to practice any of the healing arts including by employing professional persons or have any ownership interest or profit participation in or control over any healing arts professional practice. This doctrine is commonly referred to as the prohibition on the "corporate practice" of medicine. The Company believes that arrangements for the management of medical practices have, in fact, become quite common in California, and have not generally been challenged with regard to the corporate practice issue. However, because these types of arrangements are not required to be reported, the Company cannot substantiate its belief. There can be no assurance that the Company's present arrangements with BRMG or the physicians providing medical services and medical supervision at the Company's imaging centers will not be challenged, and, if challenged, that they will not be found to violate the corporate practice prohibition, thus subjecting the Company to potential damages, injunction and/or civil and criminal penalties. The Company has not received a legal opinion from counsel with regard to the effect of the corporate practice prohibition on its business as described herein, and counsel has advised that such an opinion could not be given, because of the lack of court cases relevant to the issue. ENVIRONMENTAL. The facilities operated or managed by the Company generate hazardous and medical waste subject to federal and state requirements regarding handling and disposal. The Company believes that the facilities that it operates and manages are currently in compliance in all material respects with applicable federal, state and local statutes and ordinances regulating the handling and disposal of such materials. The Company does not believe that it will be required to expend any material amounts in order to remain in compliance with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive position. The Company has not received a legal opinion from counsel with regard to the effect of the prohibitions discussed above on its business as described herein, and counsel has advised that such an opinion could not be given, because of the fluid interpretation of the law relevant to the issue. 15 ITEM 2. PROPERTIES All of the imaging centers owned or managed by the Company are located in leased facilities or in owned facilities on leased land. Certain information with respect to the imaging centers is as follows:

Center ------ Wholly-Owned Approx. Sq. Ft. ------------ --------------- of Center Lease Expiration --------- ---------------- Tower Division: [Beverly Hills and Environs] Roxsan 10,774 Various through 2012 Women's 3,830 February 2014 Wilshire 13,778 September 2018 Antelope Valley 2,890 In negotiation Chino 2,700 June 2007 Emeryville 2,086 June 2003 Fresno 5,360 June 2008 La Habra 3,034 December 2007 Lancaster [four sites] 11,327 In negotiation Long Beach-Redondo [three sites] 6,000 In negotiation Long Beach-Los Coyotes [four sites] 10,338 Various through 2006 Modesto 17,852 December 2004 Northridge 7,800 March 2012 Orange [four sites] 15,955 Various through 2012 Oxnard 5,100 In negotiation Palm Desert [three sites] 11,082 Various through 2006 Palm Springs [two sites] 9,442 June 2008 Rancho Cucamonga [two sites] 12,518 May 2009 Sacramento 8,083 June 2003 San Francisco 1,240 In negotiation San Gabriel Valley 3,871 December 2004 Santa Clarita 5,782 June 2009 Santa Rosa 4,235 July 2011 Stockton 4,808 December 2006 Tarzana [three sites] 6,320 Various through 2009 Tustin 2,139 January 2004 Vacaville 5,927 March 2007 Ventura 12,032 July 2007 Ventura-Loma Vista [three sites] 1,449 In negotiation DIS Centers ----------- Camarillo 2,035 May 2002 Oceanside [North County] 2,314 November 2005 Riverside [two sites] 13,834 Various through 2007 Temecula [three sites] 10,175 Various through 2006 Thousand Oaks 8,300 November 2007 Partnership/LLC --------------- Burbank 5,787 March 2008 Westchester 6,763 July 2006 Rancho Bernardo 9,557 May 2012 Other Facilities ---------------- RadNet [Corp. offices] 16,500 June 2007 Warehouse/Other 33,447 Various

16 ITEM 3. LEGAL PROCEEDINGS ------- ----------------- The Company is involved in the following litigation: RADNET MANAGEMENT II, INC. V. HCT MODESTO, LLC Alameda County Superior Court Case No. RG 03080062 -------------------------------------------------- RADNET MANAGEMENT II, INC. V. US DIAGNOSTIC, INC. AND MODESTO IMAGING SERVICES, INC. American Arbitration Association No. 72 Y 115 99029 01EP -------------------------------------------------------- These matters arise out of RadNet Management II, Inc.'s acquisition of substantially all of the assets and liabilities of Modesto Imaging Center, Inc., including, without limitation, Modesto Imaging Center, a diagnostic radiology and imaging center. As of May 10, 2001, the date the acquisition closed, Modesto Imaging Center, Inc., its parent company, US Diagnostic Inc., and HCT Modesto LLC, the landlord under the lease for the property on which the Center is situated, which lease had been assumed by and assigned to RadNet Management II, Inc., had disclosed to RadNet Management II, Inc. that the lease had a present expiration date of December 31, 2004, subject to two three-year extensions in favor of the tenant. Two weeks after the acquisition closed, however, RadNet Management II, Inc. learned from a third party that a document purporting to extend the lease to December 31, 2014 (i.e., by ten years) had been in the possession of Modesto Imaging Center, Inc., US Diagnostic Inc. and HCT Modesto LLC at the time the improper disclosures were made to RadNet Management II, Inc. RadNet Management II, Inc. believes that the lease is substantially in excess of the fair rental value of the property. On or about September 14, 2001, RadNet Management II, Inc. commenced an arbitration proceeding against US Diagnostic Inc. and Modesto Imaging Center, Inc. before the American Arbitration Association, seeking to reduce the price of the acquisition by $1,000,000 pursuant to the Asset Purchase Agreement and Escrow Agreement entered into between and among the parties, and also seeking additional damages resulting from RadNet Management II, Inc.'s assumption of the lease. US Diagnostic Inc. subsequently filed a Chapter 11 bankruptcy petition in the United States District Court for the Southern District of Florida, and Modesto Imaging Center, Inc. is believed to have few or no assets available to pay an arbitration award. On or about January 23, 2003, RadNet Management II, Inc. filed a complaint in the Superior Court of the State of California, County of Alameda, seeking legal, equitable and declaratory relief as against HCT Modesto LLC. Among other things, RadNet Management II, Inc. seeks (1) cancellation of the document purporting to extend the present lease expiration date from December 31, 2004 to December 31, 2014, (2) a declaration that RadNet Management II, Inc. is not bound by the lease beyond December 31, 2004, and/or (3) damages in excess of $1,800,000. RadNet Management II, Inc. anticipates that HCT Modesto LLC will serve it with a Cross-Complaint seeking a declaration that RadNet Management II, Inc. is bound by the lease through December 31, 2014, and also seeking damages in an amount that is currently unknown. At this point, it is too early to predict how the matter will conclude. However, RadNet Management II, Inc. disputes any claim that it is bound to the lease beyond December 31, 2004 and/or that it is liable to HCT Modesto LLC for any amount of damages at all. It intends to pursue its claims vigorously against HCT Modesto LLC and to vigorously defend against the anticipated cross-complaint. 17 Additionally, the Company is engaged from time to time in the defense of lawsuits arising out of the ordinary course and conduct of its business and has insurance policies covering such potential insurable losses. The Company believes that the outcome of any such lawsuits will not have a material adverse impact on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------- --------------------------------------------------- The Company did not submit any matters to a vote of security holders during the fourth fiscal quarter of 2002. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON ------- ---------------------------------- STOCK AND RELATED STOCKHOLDER MATTERS PHS Common Stock is traded in the over-the-counter market on the OTC Bulletin Board [symbol, "PMDX"]. The following table indicates the high and low prices for PHS Common Stock for the periods indicated based upon information supplied by the National Quotation Bureau, Inc. Such quotations reflect interdealer prices without adjustment for retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Quarter Ended Low High ------------- --- ---- January 31, 2002 .95 1.45 April 30, 2002 1.10 1.91 July 31, 2002 .97 1.51 October 31, 2002 .49 1.20 January 31, 2001 .31 .56 April 30, 2001 .38 .60 July 31, 2001 .55 .78 October 31, 2001 .60 .95 The last reported closing high and low prices for PHS Common Stock on the OTC Bulletin Board on January 21, 2003, were $.48 and $.45, respectively. As of January 21, 2003, the number of holders of record of PHS Common Stock was 4,028. However, a substantial number of PHS' outstanding shares of Common Stock were owned of record on said date by "Cede & Co.," the nominee for Depository Trust Company, the clearing agency for most broker-dealers. Management believes that these shares are beneficially owned by customers of these broker-dealers and that the number of beneficial owners of PHS Common Stock is substantially greater than 4,028. CONVERTIBLE SUBORDINATED DEBENTURES ----------------------------------- The Company has $16,291,000 convertible subordinated debentures outstanding which mature June 30, 2003, and bears interest, payable quarterly, at an annual rate of 10%. The debentures are convertible into PHS common stock at a price of $10 per share. The Company plans to offer the debenture holders the right to extend the debenture for three (3) years in which event the conversion price would be reduced to $4. Remaining debentures will be required to be redeemed. The Company intends to utilize its financing resources to effect such redemption. There can be no guarantee those resources will be sufficient or available at all when required. 18 Recent Sales of Unregistered Securities --------------------------------------- During the fiscal year ended October 31, 2002, the following securities were sold by the Company pursuant to the exemption to registration provided under Section 4(2) of the Securities Act of 1933, as amended: (1) In November 2001, the Company issued to one individual, a 5 year warrant exercisable at a price of $.95 per share (the public market price closing price on the transaction date) to purchase 75,000 shares of the Company's common stock. (2) In February 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $1.26 per share (the public market price closing price on the transaction date) to purchase 500,000 shares of the Company's common stock. (3) In April 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $1.61 per share (the public market closing price on the transaction date) to purchase 30,000 shares of the Company's common stock. (4) In April 2002, an officer of the Company exercised an option to purchase 300,000 shares of common stock. As part of the transaction, the officer delivered to the Company 30,201 previously acquired shares of the Company's common stock with a value of $45,000 (based upon $1.49 per share public market closing price on the transaction date). (5) In May 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $1.45 per share (the public market closing price on the transaction date) to purchase 9,000 shares of the Company's common stock. (6) In June 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $1.10 per share (the public market closing price on the transaction date) to purchase 100,000 shares of the Company's common stock. (7) In September 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $1.09 per share (the public market closing price on the transaction date) to purchase 50,000 shares of the Company's common stock. (8) In September 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $0.80 per share (the public market closing price on the transaction date) to purchase 30,000 shares of the Company's common stock. (9) In October 2002, the Company issued to one individual, a 5 year warrant exercisable at a price of $0.79 per share (the public market closing price on the transaction date) to purchase 30,000 shares of the Company's common stock. 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ------- ------------------------------------ The following selected consolidated financial data presented as of and for the years ended October 31, 2002, 2001, 2000, 1999 and 1998 has been derived from the Company's consolidated financial statements and should be read in conjunction with such consolidated financial statements and related notes, and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this report.

YEARS ENDED OCTOBER 31, ---------------------------------------------------------------------- (000's except per share amounts) OPERATING DATA: 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Gross Revenues $ 378,942 $ 284,981 $ 229,598 $ 170,518 $ 132,595 Net Revenues after Contractual Allowances 139,281 111,837 87,965 72,258 58,821 Operating Expenses 127,965 92,735 73,368 70,359 75,329 Income [Loss] Before Extraordinary Items (5,552) 13,947 1,102 (10,627) (29,497) Extraordinary Items- Gain 1 554 1,512 1,556 955 Net Income [Loss] (5,551) 14,501 2,614 (9,071) (28,543) Income [Loss] Per Common share before (.14) .35 .03 (.27) (.75) Extraordinary Items Income [Loss] Per Common Share from .00 .01 .04 .04 .02 Extraordinary Item Net Income [Loss] Per Common Share (.14) .36 .07 (.23) (.73) BALANCE SHEET DATA: Cash and Cash Equivalents 36 40 36 3 59 Total Assets 151,639 128,429 90,625 72,247 62,656 Total Long-Term Liabilities 121,830 110,188 82,693 79,023 79,282 Total Liabilities 202,560 174,071 151,538 136,604 118,016 Working Capital [Deficit] (44,668) (26,987) (44,588) (38,007) (20,191) Stockholders' Equity [Deficit] (50,921) (45,642) (60,913) (64,357) (55,360)

20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Primedex Health Systems, Inc., through its wholly-owned subsidiary, Radnet Management, Inc. and its 91% owned subsidiary, Diagnostic Imaging Services, Inc., is a leading California provider of diagnostic imaging services through its ownership and operation of 58 outpatient diagnostic imaging centers. The Company utilizes sophisticated technology and technical expertise to perform a broad range of imaging procedures, such as magnetic resonance imaging (or MRI), computed tomography (or CT), position emission tomography (or PET), nuclear medicine, ultrasound, mammography, general radiography (or x-ray) and fluoroscopy. The Company's revenues are derived from the ownership, management and operation of its radiology and imaging center network. Professional medical services and supervision are provided through Beverly Radiology Medical Group ("BRMG") and through other independent physicians and physician groups with which the Company contracts. Inasmuch as BRMG is 99% owned by the majority stockholder and president of the Company its revenues are consolidated with that of the Company. As of October 31, 2002, the Company owned, operated or provided management services. The Company focuses on providing quality patient care and service to ensure patient and referring physician satisfaction. The Company's concentration in California permits it to invest in technologically advanced imaging equipment, including MRI, open MRI, spiral CT and PET and organize the Company's imaging centers into coordinated networks to improve response time, increase overall patient accessibility, and permits the Company to standardize certain customer relations procedures and permit the Company to develop "best practices" for its diagnostic imaging centers. The Company's coordinated programs allow it to provide administrative, management and information services to develop best practices and to improve productivity and the quality of services. By focusing on its communication systems the Company believes it can increase patient and referring physician satisfaction, which should lead to increased referrals and increased utilization of its diagnostic imaging centers. The Company contracts with radiology practices including BRMG to provide professional services, including the supervision and interpretation of diagnostic imaging procedures performed in its diagnostic imaging centers. In this regard, BRMG has begun assembling a group of physicians located at the Company's corporate offices who utilize adjusted communication equipment for the purposes of relieving radiologists located at the Company's centers who fall behind in interpreting medical imaging as well as providing a group of well recognized radiologists specializing in particular areas to provide backup for referring physicians requiring specialized review. The Company believes that it does not engage in the practice of medicine nor does it employ physicians. The radiology practices maintain full control over the provision of professional radiological services. Payment for diagnostic imaging services comes primarily from private payors (22% including Blue Cross, Blue Shield and Commercial insurance), managed care contract arrangements (21% including fee for service, hmo and ppo insurance), capitation arrangements (20%), and governmental payors (15% including Medicare and Medicaid). As of January 2002, Medicare decreased reimbursement rates for physician and outpatient services, including diagnostic imaging services. The Company's centers are principally dependent on its 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. 21 The Company's revenue is dependent upon the operating results of the diagnostic imaging centers. Service fees due under the service agreements for the contracted radiology practices are derived from two distinct revenue streams: (1) a negotiated percentage (typically 70% to 85%) of the center revenues as defined in the service agreements; and (2) 100% of the technical revenues as defined in the service agreements. The Company's operations are comprised of the ownership and operation of diagnostic imaging centers and the provision of administrative, management and information services to the contracted radiology practices that provide professional interpretation and supervision services in connection with the diagnostic imaging centers. The following information consists of issues you should consider in reviewing the financial information provided. In this regard, Westchester Imaging Group is a 50% owned Company partnership and both Burbank Advanced Imaging Center and Rancho Bernardo Advanced Imaging Center are 75% owned with the minority interests owned by the radiologists providing professional services in the respective facilities. The Company committed to a capital contribution of $750,000 to fund the building of a facility in Rancho Bernardo, California, which opened in December 2002. Westchester Imaging Group is consolidated with the Company based upon the criteria of both SFAS 94 and EITF 97-2. All intercompany transactions and balances have been eliminated in consolidation and combinations. 22 RESULTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2002 COMPARED TO THE YEAR ENDED OCTOBER 31, 2001 The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income bear to net revenue and the percentage dollar increase (decrease) of such items from period to period.

PERCENTAGE PERCENT OF NET REVENUE DOLLAR INCREASE YEARS ENDED OCTOBER 31, (DECREASE) --------------------------------------- --------------------- 2002 2001 `01 TO `02 ------------------- ------------------- --------------------- Revenue 272.1% 254.8 % 33.0% Less: Allowances (172.1) (154.8) 38.4 ------------------- ------------------- --------------------- Net revenue 100.0 100.0 24.5 Operating expense Operating expenses (75.7) (69.8) 35.2 Depreciation and amortization (11.0) (9.6) 43.0 Provision for bad debts (5.2) (3.6) 78.6 ------------------- ------------------- --------------------- Total operating expense (91.9) (82.9) 38.0 ------------------- ------------------- --------------------- Income from operations 8.1 17.1 (40.8) Interest expense, net (12.0) (12.2) 22.6 Gain (loss) on sale of assets or (.2) 3.1 (108.5) centers Other, net .4 0.2 187.1 ------------------- ------------------- --------------------- Income before provision for income (3.7) 8.2 (156.3) taxes, minority interest and extraordinary item Income tax benefit -- 4.6 (100.0) ------------------- ------------------- --------------------- Income before minority interest (3.7) 12.8 (136.1) and extraordinary item Minority interest (0.3) (0.3) 12.8 ------------------- ------------------- --------------------- Income before extraordinary item (4.0) 12.5 (139.8) Extraordinary item .0 .5 (99.8) ------------------- ------------------- --------------------- Net income (4.0) 13.0 (138.3) =================== =================== =====================

The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the year ended October 31, 2002 compared to the year ended October 31, 2001. 2002 2001 ---- ---- NET REVENUE $139,281,000 $ 111,837,000 ----------- Revenue of the contracted radiology practices and diagnostic imaging centers is recorded when services are rendered by the contracted radiology practices and diagnostic imaging centers based on established charges and reduced by contractual allowances. The Company utilizes historical collection experience in 23 estimating contractual allowances. The factors influencing the historical collection experience include the contracted radiology practices' and diagnostic imaging centers' patient mix, impact of managed care contract pricing and contract revenue and the aging of patient accounts receivable balances. As these factors change, the historical collection experience is revised accordingly in the period known. Net revenue increased approximately $27,444,000, or 24.5%, for the year ended October 31, 2002, compared to the same period in the previous year. Of the net revenue increase, 25% was due to three new sites which opened, Burbank [late November 2001] and Tarzana Advanced [January 2002], or were acquired, Grove Diagnostic [May 2002]. During fiscal 2002, 31% was due to the full effect of the acquisition of Modesto [May 2001] and Palm Springs and Palm Desert [June 2001], offset by a 2% decrease due to the sale of the Company's sole radiation oncology facility ("VROC") in March 2001. The remaining 46% increase was due to new contracts, renegotiation of existing contracts to more favorable rates, an improved economy with increasing population, and increased throughput at many sites due to the addition and continued upgrade of medical equipment. In particular were improvements at the following facilities primarily due to the entry into new capitation agreements coupled with the addition and upgrade of medical equipment increasing throughput at each of the sites: Riverside [HCIC] where net revenue increased approximately 43%, or $1,717,000, Temecula [TVIC] where net revenue increased approximately 99%, or $2,691,000, and Los Coyotes where net revenue increased approximately 50%, or $1,514,000. In addition, the expansion of Orange Imaging in late fiscal 2002 with the opening of Orange Advanced and Orange Women's Centers contributed to its increase in net revenue of approximately 13%, or $1,030,000. OPERATING EXPENSES 2002 2001 ------------------ ---- ---- OPERATING EXPENSES $ 105,473,000 $ 78,008,000 DEPRECIATION AND AMORTIZATION 15,309,000 10,705,000 PROVISION FOR BAD DEBTS 7,183,000 4,022,000 -------------- ------------- TOTAL OPERATING EXPENSES $ 127,965,000 $ 92,735,000 Operating expenses for the year ended October 31, 2002 increased approximately $27,465,000, or 35%, compared to the same period in the previous year. Of this increase, 46% was due to the full effect of five new sites acquired or opened during the previous two years including Modesto, Desert Advanced, Burbank, Tarzana Advanced and Grove coupled with the start-up costs associated with the planned opening of Rancho Bernardo [offset by a 1% decrease due to the sale of the VROC facility in March 2001]. The remaining 55% increase in operating expenses was primarily due to an increase in net revenue which effects the Company's percentage of revenue agreements relating to physician reading fees and the GE repair and maintenance expense which increased contracted fees from 3.22% to 3.64% of net revenue effective November 1, 2001. In addition, the Company had variable increases in expenditures for billing, medical supplies, office supplies, utilities and other expenses with the increase in business. Due to a shortage of qualified radiologists in the marketplace, BRMG experienced difficulty in hiring and retaining physicians at the individual sites during most of fiscal 2002. This required the engagement of independent contractors and locum tenens (part-time fill-in physicians) to interpret patient films. The cost of these individuals was double the salary of a regular BRMG full-time physician with additional costs for travel and lodging required. Recently, BRMG hired a new nationally prominent medical director who oversees physician recruitment and staffing. In order to reduce the substantial increased cost associated with part-time fill-in physicians, the new director has already arranged for BRMG to hire over twelve new physicians during the last two quarters of fiscal 2002. BRMG is working to solidify its physicians at the majority of the Company's 24 sites while increasing the volume of interpretations done by physicians at the Company's main offices utilizing the Company's computer and PACS systems. In solidifying its physician staff, the Company has revised some of its physician agreements from a fixed fee to a percentage of revenue arrangement. With these types of arrangements, future increases in net revenue increase the cost of physician reading fees proportionately and thereby negatively impact the Company's overall operating income. During the year ended October 31, 2002, the overall increase in physician reading fees was approximately $3.4 million compared to fiscal year 2001's average expense [net of the effect of the increase in net revenue in fiscal year 2002]. In addition, during the year ended October 31, 2002, the Company experienced significant increases in expenditures for insurance with carriers requesting greater fees upon renewal coupled with the significant growth the Company has recently experienced with increased revenue, staffing and additions of new equipment. General liability rates increased approximately 50% in October 2002, workers compensation rates increased approximately 45% in July 2002, and malpractice rates approximately 80% in September 2002. Medical insurance increases were somewhat offset with employees contributing more per pay period. The Company is reviewing various alternatives to reduce its expenditures for insurance and minimize the increases it may incur in the future. However, increases in insurance costs are being experienced by companies all over the United States and reductions are not likely for the foreseeable future. Included in operating expenses for the years ended October 31, 2002 and 2001 are approximately $62,389,000 and $44,765,000, respectively, for salaries and professional reading fees, approximately $8,799,000 and $7,344,000, respectively, for building and equipment rentals, and approximately $34,285,000 and $25,899,000, respectively, in general and administrative expenditures. The Company's general and administrative expenses include billing fees, medical supplies, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities and other expenses including marketing and travel. The majority of these expenses are variable and increase with net revenue. Net revenue for the year ended October 31, 2002 increased 24.5% and resulted in increases in general and administrative expenses of approximately $6.0 million. The remaining increase was primarily for insurance and repairs and maintenance, discussed above, and utilities [due to the increase in medical equipment]. Depreciation and amortization for the year ended October 31, 2002 increased approximately $4,604,000, or 43%, compared to the same period in the previous year. This increase was offset by approximately $1,354,000 due to the elimination of goodwill amortization with the implementation of Statement of Financial Accounting Standards No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets effective November 1, 2001. Of the increase in depreciation and amortization, 37% was due to the acquisition of equipment or improvement in leaseholds for same store facilities, and 64% was due to the full effect of the opening or acquisition of five sites during fiscal 2001 and fiscal 2002 [offset by a 1% decrease upon the sale of VROC in March 2001]. Provision for bad debt for the year ended October 31, 2002 increased approximately $3,161,000, or 79%, compared to the same period last year. The primary reason for the increase was due to the growth in revenue coupled with the write-off of approximately $850,000 in net accounts receivable primarily due to one contracted payor's dissolution and default on amounts due. 2002 2001 ---- ---- INTEREST EXPENSE, NET $ 16,693,000 $ 13,620,000 --------------------- 25 Net interest expense for the year ended October 31, 2002 increased approximately $3,073,000, or 23%, compared to the same period last year. The increase is primarily a result of acquisitions coupled with new equipment financing. During fiscal 2002, the Company acquired Grove Diagnostic Imaging for approximately $1,441,000 and entered into new capital lease obligations of approximately $30,846,000. 2002 2001 ---- ---- GAIN (LOSS) ON SALE OF SUBSIDIARIES, $(299,000) $ 3,520,000 ------------------------------------ DIVISIONS AND ASSETS -------------------- During fiscal 2002, the Company sold the land and building at Northridge (and leased it back), disposed of an MRI at Vacaville and disposed of a variety of other assets at various sites generating a loss on sale or disposal of equipment of approximately $299,000. During the year ended October 31, 2001, the Company sold its VROC facility for $4,000,000 cash and recognized a gain on the sale of approximately $3,527,000, and recognized losses on the sale or disposal of equipment of approximately $7,000. 2002 2001 ---- ---- OTHER INCOME, NET $ 511,000 $ 178,000 ----------------- Other income for the year ended October 31, 2002 increased approximately $333,000, or 187%. Other income consists primarily of professional reading fee income, rental income, record copying income and miscellaneous reimbursements. During fiscal 2002, the Company received approximately $240,000 in insurance reimbursements for its business interruption and general business liability policies for losses it sustained at its Tustin, Tower Roxsan and Northridge facilities due primarily to water leaks and water damage. 2002 2001 ---- ---- INCOME TAX BENEFIT $ -- $ 5,110,000 ------------------ For the year ended October 31, 2001, the Company recorded a deferred tax asset of $5,235,000 offset by an income tax payable of $125,000 (See Note 9 to the Company's Financial Statements). 2002 2001 ---- ---- MINORITY INTEREST $ (387,000) $ (343,000) ----------------- Minority interest in joint venture represents the minority investor's 50% share of the Westchester Imaging Group, 25% share of the Burbank Advanced Imaging Center LLC and 25% share of Rancho Bernardo Advanced LLC income for the period. Minority interest expense for the year ended October 31, 2002 increased approximately $44,000, or 13%, compared to the same period the previous year. The increase is primarily due to the increased earnings of Westchester Imaging Group. 2002 2001 ---- ---- EXTRAORDINARY ITEM $ 1,000 $ 554,000 ------------------ Extraordinary gains decreased $553,000 for the year ended October 31, 2002. Extraordinary gains represent the repurchase of subordinated bond debentures and the write-off or settlement of limited partner notes at a discount. During the year ended October 31, 2001, the Company was able to write-off a portion of its limited partner note obligations when they reached their statute of limitations for claim. In addition, as the subordinated bond debentures get closer to maturity in June 2003, the opportunity to repurchase them at a discount becomes less probable and little to no offers materialized during the year ended October 31, 2002. 26 RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2001 COMPARED TO THE YEAR ------------------------------------------------------------------------------- ENDED OCTOBER 31, 2000 ---------------------- The following table sets forth, for the periods indicated, the percentage that certain items in the statement of income bear to net revenue and the percentage dollar increase (decrease) of such items from period to period.

PERCENTAGE PERCENT OF NET REVENUE DOLLAR INCREASE YEARS ENDED OCTOBER 31, (DECREASE) --------------------------------------- --------------------- 2001 2000 `00 TO `01 ------------------- ------------------- --------------------- Revenue 254.8 % 261.0 % 24.1% Less: Allowances (154.8) (161.0) 22.2 ------------------- ------------------- --------------------- Net revenue 100.0 100.0 27.1 Operating expense Operating expenses (69.7) (70.7) 25.4 Depreciation and amortization (9.6) (9.8) 24.8 Provision for bad debts (3.6) (2.9) 55.8 ------------------- ------------------- --------------------- Total operating expense (82.9) (83.4) 26.4 ------------------- ------------------- --------------------- Income from operations 17.1 16.6 30.9 Interest expense, net (12.2) (14.9) 3.7 Other, net 3.3 (0.1) (3952.1) ------------------- ------------------- --------------------- Income before provision for income 8.2 1.6 574.5 taxes, minority interest and extraordinary item Income tax benefit 4.6 -- 100.0 Income before minority interest 12.8 1.6 950.0 and extraordinary item Minority interest (0.3) (0.3) 32.4 ------------------- ------------------- --------------------- Income before extraordinary item 12.5 1.3 1165.6 Extraordinary item 0.5 1.7 (63.4) ------------------- ------------------- --------------------- Net income 13.0 3.0 454.7 =================== =================== =====================

The following discussion explains in greater detail the consolidated operating results and financial condition of the Company for the year ended October 31, 2001 compared to the year ended October 31, 2000. 27 2001 2000 ---- ---- NET REVENUE $ 111,837,000 $ 87,865,000 ----------- Net revenue increased approximately $23,872,000, or 27.1%, for the year ended October 31, 2001, compared to the same period the previous year. Of the net revenue increase, 29% was due to the full effect of five new sites acquired in June 2000 [Chino, San Gabriel and Tarzana] and September 2000 [San Francisco and Emeryville], and 25% was due to the acquisition of three new sites in May 2001 [Modesto] and June 2001 [Palm Springs and Palm Desert], offset by a 6% decrease due to the sale of the VROC facility in March 2001. The remaining 52% of the increase was due to new contracts, renegotiation of existing contracts to more favorable rates, an improved economy with increasing population, and increased throughput at many sites due to the addition and continued upgrade of medical equipment. In particular were improvements at the Company's Riverside [HCIC] facility where net revenues increased approximately 113%, or $2,107,000, due to the entry into a new capitation agreement coupled with the addition and upgrade of medical equipment. OPERATING EXPENSES 2001 2000 ------------------ ---- ---- OPERATING EXPENSES $ 78,008,000 $ 62,207,000 DEPRECIATION AND AMORTIZATION 10,705,000 8,580,000 PROVISION FOR BAD DEBTS 4,022,000 2,581,000 ------------- ------------- TOTAL OPERATING EXPENSES $ 92,735,000 $ 73,368,000 Operating expenses for the year ended October 31, 2001 increased approximately $15,801,000, or 25%, compared to the same period the previous year. Of this increase, 19% was due to the full effect of five new sites acquired in June 2000 and September 2000, 31% was due to the acquisition of three new sites in May 2001 and June 2001 and the start-up costs associated with the future openings of Burbank Advanced and Tarzana Advanced, offset by a 4% decrease due to the sale of the VROC facility in March 2001. The remaining 54% of the increase in operating expenses was primarily due to an increase in the net revenues including a 34% increase in salaries and professional reading fees, a 7% increase for the impact of a repair and maintenance contract agreement entered into on March 1, 2000 which resulted in increased fees from 2.82% to 3.22% of net revenue effective November 1, 2000, a 5% increase in outside services including legal, accounting, billing, labor and transcription services, and an 8% increase in other expenses including utilities, insurance and business taxes. Even with the 27.1% increase in net revenue, medical supply expenditures increased only 16.8% from the same period last year primarily due to additional acquisitions of filmless digital equipment at many of the sites and increased purchase discounts. Included in operating expenses for the years ended October 31, 2001 and 2000 are approximately $44,765,000 and $35,402,000, respectively, for salaries and professional reading fees, approximately $7,344,000 and $6,334,000, respectively, for building and equipment rentals, and approximately $25,899,000 and $20,471,000, respectively, in general and administrative expenditures. The Company's general and administrative expenses include billing fees, medical supplies, office supplies, repairs and maintenance, insurance, business tax and license, outside services, utilities and other expenses including marketing and travel. The majority of these expenses are variable and increase with net revenue. Net revenue for the year ended October 31, 2001 increased 27.1% and resulted in increases in general and administrative expenses of approximately $5.5 million. Depreciation and amortization for the year ended October 31, 2001 increased approximately $2,125,000, or 25%, compared to the same period the previous year. Of this increase, 29% was due to the acquisition of equipment, 46% was due to the full effect of the acquisition of five new sites during fiscal 2000, and 29% was due to the acquisition of three new sites in fiscal 2001, offset by a 4% decrease upon the sale of VROC in March 2001. 28 Provision for bad debt for the year ended October 31, 2001 increased approximately $1,441,000, or 56%, compared to the same period the previous year. The primary reason for the increase was due to the growth in revenue coupled with the Company's overall bad debt percentage increasing from 1.79% of the contractual adjustments during fiscal 2000 to 2.27% of the contractual adjustments during fiscal 2001. 2001 2000 ---- ---- INTEREST EXPENSE, NET $ 13,620,000 $ 13,140,000 --------------------- Net interest expense for the year ended October 31, 2001 increased approximately $480,000, or 4%, compared to the same period the previous year. The increase is primarily a result of acquisitions coupled with new equipment financing offset by decreases in line of credit interest charges with the corresponding reductions in the lines of credit balances and the prime interest rate during the respective periods. 2001 2000 ---- ---- OTHER INCOME (LOSS), NET $ 3,698,000 $ (96,000) ------------------------ Other income (loss) for the year ended October 31, 2001 increased approximately $3,794,000 compared to the same period in the previous year. During the year ended October 31, 2001, the Company sold its VROC facility for $4,000,000 cash and recognized a gain on the sale of approximately $3,527,000, recognized losses on the sale or disposal of equipment of approximately $7,000 and generated other income, net of other expense, of approximately $178,000. During the year ended October 31, 2000, the Company recognized losses on the sale or disposal of equipment of approximately $335,000 and generated other income, net of other expense, of approximately $239,000. 2001 2000 ---- ---- INCOME TAX BENEFIT $ 5,110,000 $ -- ------------------ For the year ended October 31, 2001, the Company recorded a deferred tax asset of $5,235,000 offset by an income tax payable of $125,000 (See Note 9). 2001 2000 ---- ---- MINORITY INTEREST $ (343,000) $ (259,000) ----------------- Minority interest in joint venture represents the minority investor's 50% share of the Westchester Imaging Group and 25% share of the Burbank Advanced Imaging Center LLC income for the period. Minority interest expense for the year ended October 31, 2001 increased approximately $84,000, or 32%, compared to the same period the previous year. The increase is due to the increased earnings of Westchester Imaging Group. 2001 2000 ---- ---- EXTRAORDINARY ITEM $ 554,000 $ 1,512,000 ------------------ Extraordinary gains represent the repurchase of subordinated bond debentures and the write-off or settlement of limited partner notes at a discount. 29 SUMMARY OF OPERATIONS BY QUARTER -------------------------------- The following table presents unaudited quarterly operating results for each of the Company's last eight fiscal quarters. The Company believes that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.

2001 Quarter Ended 2002 Quarter Ended (000's except per share amounts) (000's except per share amounts) Jan 31 Apr 30(a) Jul 31 Oct 31(b) Jan 31 Apr 30 Jul 31(c) Oct 31 ------ --------- ------ --------- ------ ------ --------- ------ Statement of Income Data: Net Revenue $24,110 $26,104 $29,464 $32,159 $32,441 $33,722 $35,580 $37,538 Operating Expenses $19,897 $21,122 $24,121 $27,595 $28,104 $28,989 $35,765 $35,107 Income (Loss) before Extraordinary Item $918 $5,107 $2,081 $5,841 $917 $836 ($5,123) ($2,182) Extraordinary Item $5 $108 $0 $441 $0 $0 $1 $0 Net Income (Loss) $923 $5,215 $2,081 $6,282 $917 $836 ($5,122) ($2,182) Basic Earnings Per Share: Income (loss) before Extraordinary $0.02 $0.12 $0.05 $0.14 $0.02 $0.02 (0.12) (0.05) Item Extraordinary Item $0.00 $0.00 $0.00 $0.01 $0.00 $0.00 0.00 0.00 Basic Earning Per Share $0.02 $0.12 $0.05 $0.16 $0.02 $0.02 (0.12) (0.05) Diluted Earnings Per Share: Income (loss) before Extraordinary $0.02 $0.11 $0.04 $0.13 $0.02 $0.02 (0.12) (0.05) Item Extraordinary Item $0.00 $0.00 $0.00 $0.01 $0.00 $0.00 0.00 0.00 Diluted Earning Per Share $0.02 $0.11 $0.04 $0.14 $0.02 $0.02 (0.12) (0.05) Weighted Average Shares Outstanding: Basic 39,284 40,133 40,147 40,306 40,733 40,760 41,001 41,006 Diluted 40,164 46,133 47,593 44,171 41,435 45,664 41,001 41,006

(a) Net income for the quarter ended April 30, 2001 includes a $3.5 million gain from the sale of VROC to an unaffiliated third party. (b) Net income for the quarter ended October 31, 2001 includes a $5.1 million gain from the recording of a deferred tax asset. (c) Net income for the quarter ended July 31, 2002 includes a $850,000 expense for the write-off of accounts receivable upon the dissolution of a contract and a $220,000 loss for the disposal of equipment. 30 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash decreased for the year ended October 31, 2002 by $4,000 and increased for the year ended October 31, 2001 by $4,000. Cash used by investing activities for the years ended October 31, 2002 was $6,176,000 compared to $2,833,000 for the same period in 2001. For the years ended October 31, 2002 and 2001, the Company purchased property and equipment for approximately $7,815,000 and $7,469,000, respectively, received proceeds from the sale of centers or trade-in of equipment for $1,700,000 and $5,050,000, respectively, paid loan fees of $22,000 and $20,000, respectively, and loaned $39,000 and $233,000, respectively, to related parties. In addition, during the year ended October 31, 2001, the Company invested $100,000 in VROC, purchased 59,000 shares of DIS common stock for approximately $30,000, and acquired some of the assets of Sadler Radiology for approximately $31,000. Cash used for financing activities for the years ended October 31, 2002 was $7,524,000 compared to $10,749,000 for the same period in 2001. For the years ended October 31, 2002 and 2001, the Company made principal payments on capital leases and notes payable of approximately $20,675,000 and $16,764,000, respectively, received proceeds from borrowing under existing lines of credit and refinancing arrangements of approximately $12,295,000 and $3,883,000, respectively, purchased subordinated debentures for approximately $10,000 and $36,000, respectively, increased its cash disbursements in transit by $809,000 and $1,771,000, respectively, received joint venture proceeds of $250,000 and $400,000, respectively, made joint venture distributions of $275,000 and $100,000, respectively, and received proceeds from the issuance of common stock of approximately $82,000 and $97,000, respectively. At October 31, 2002, the Company had a working capital deficit of $44,668,000 as compared to a working capital deficit of $26,987,000 at October 31, 2001, representing an increased deficit of $17,681,000. Over the past several years, management has been addressing the issues that have led to these deficiencies, and the results of management's plans and efforts have been positive in two of the last three years. However, the results of this last fiscal period show that continued effort is needed in the future to allow the Company to return to profitable operations. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. o In late November 2001, the Company opened a new center in Burbank, California o In January 2002, the Company opened a new center in Tarzana, California o In May 2002, the Company acquired Grove Diagnostic Imaging in Rancho Cucamonga, California o In December 2002, the Company opened its Rancho Bernardo joint venture facility. o Increase revenue by expanding existing facilities or opening new locations close to existing sites. In order to obtain certain new large contracts, nearby x-ray offices may be acquired to meet the increase in patient volume. In addition, the Company may consolidate certain procedures into one location predominately with women's centers offering mammography and ultrasound services. 31 o In September 2002, the Company opened Orange Advanced Imaging Center and Orange Women's Center across the street from its existing Orange Imaging Center. o Effective January 1, 2002, the Company entered into a new capitation agreement for approximately 62,000 lives primarily benefiting the Company's Temecula facility ["TVIC"]. The Company opened two additional smaller facilities in Sun City and Lake Elsinore, California which will provide x-ray services to support the new contract. Subsequent to year end, the Company plans to relocate its Lake Elsinore location to nearby Wildomar, California. o In June 2002, the Company entered into a new capitation contract for approximately 25,000 lives primarily benefiting the Company's Los Coyotes' facility. To service the contract, the Company assumed the offices of three x-ray facilities in nearby cities. o In October 2001 and July 2002, the Company entered into two separate capitation agreements for approximately 80,000 lives and 15,000 lives, respectively, primarily benefiting the Company's Desert Advanced facilities. To service these contracts, the Company opened three adjacent x-ray facilities in Palm Springs, Indio and Bermuda Dunes, California. o In August 2002, the Company entered into a new capitation contract for approximately 53,000 lives primarily benefiting the Company's new Grove facility in Rancho Cucamonga, California. To service the contract, the Company assumed a nearby facility providing x-ray services. o Increase revenue by renegotiating existing capitation and managed care contracts for additional services and more favorable terms. Effective November 1, 2002, the Company renegotiated one of its existing capitation contracts primarily benefiting the Company's Orange facilities increasing its reimbursement by approximately 15%, or $500,000. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursement falls short of the Company's costs. In November 2002, the Company ceased doing business under one capitation contract in Orange County where renewal reimbursement would have fallen short of cost. o Continue to evaluate all facilities' operations and trim excess operating and general and administrative costs where it is feasible to do so including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. Due to a shortage of qualified radiologists in the marketplace, BRMG experienced difficulty in hiring and retaining physicians at the individual sites during most of fiscal 2002. This required the engagement of independent contractors and locum tenens (part-time fill-in physicians) to interpret patient films. The cost of these individuals was double the salary of a regular BRMG full-time physician with additional costs for travel and lodging required. Recently, BRMG hired a new nationally prominent medical director who oversees physician recruitment and staffing. The new director has already arranged for BRMG to hire over twelve new physicians during the last two quarters of fiscal 2002. BRMG is working to solidify its physicians at the majority of the Company's sites while increasing the volume of interpretations done by physicians at the Company's main offices utilizing the Company's computer and PACS systems. 32 o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. In the past two years, the Company has replaced or upgraded the majority of its equipment and increased throughput at most of its locations. o Continue to work with lessors and lenders to extend terms of leases and financing to accommodate cash flow requirements for ongoing agreements and upon the expiration of leases and notes. The Company has demonstrated continued success in renegotiation of many of its existing notes payable and capital lease obligations by extending payment terms, reducing interest rates, reducing or eliminating monthly payments and creating long-term balloon payments. The Company's long-term relationships with its lenders and their continued confidence in their extensions of credit is critical to the Company's success. o During the year ended October 31, 2002, the Company renegotiated several notes payable with DVI to obtain working capital of $2,000,000 and extend payment terms. o During the year ended October 31, 2002, the Company financed previously accrued maintenance charges with General Electric for approximately $1,108,000 with payment terms of 35 months at 9.5%. o During the third quarter of fiscal 2002, the Company obtained $17 million in working capital from DVI to provide a secured source of financing in advance of the June 30, 2003 date for retirement of the remaining $16,291,000 of the Company's 10% Series A Convertible Subordinated Debentures. Initially, the funds were utilized to reduce outstanding revolving credit lines improving the negative effect on the Company's working capital position when the debentures became current liabilities in June 2002. o Continue to settle historical notes payable, subordinated bond debentures and other debt at discounts. The Company plans to offer the debenture holders the right to extend the debenture for three (3) years, in which event the conversion price would be reduced to $4. Any remaining debentures shall be redeemed on their due date of June 30, 2003. The Company intends to utilize its financing lines to effect the majority of the redemptions. o Depending on price, market circumstances and strategic buyers, the Company may look to liquidate non core assets. In March 2001, the Company sold its only radiation therapy center ("VROC") for $4,000,000, resulting in a gain of approximately $3,527,000. Notwithstanding the continued working capital deficiency, doubt about the entity's ability to continue as a going concern is alleviated by mitigating factors. Those mitigating factors include the aforementioned actions and plans by management combined with the positive cash flow from operations and the continued willingness of existing lenders to offer alternative debt financing and payment plans. 33 The Company's future obligations for existing notes payable, equipment under capital lease, lines of credit, subordinated bond debentures and equipment and building operating leases for the next five years and thereafter include (numbers in thousands):

There- 2003 2004 2005 2006 2007 after Total ---- ---- ---- ---- ---- ----- ----- Notes payable $ 14,434 $ 14,588 $ 15,104 $ 22,358 $ 10,864 $ 5,357 $ 82,705 Interest $ 8,348 $ 6,734 $ 5,141 $ 2,920 $ 1,504 $ 584 $ 25,231 --------- --------- --------- --------- --------- --------- --------- Total $ 22,782 $ 21,322 $ 20,245 $ 25,278 $ 12,368 $ 5,941 $107,936 Capital leases $ 11,644 $ 12,199 $ 12,541 $ 11,354 $ 8,573 $ 8,093 $ 64,404 Interest $ 5,724 $ 4,567 $ 3,375 $ 2,184 $ 1,199 $ 547 $ 17,596 --------- --------- --------- --------- --------- --------- --------- Total $ 17,368 $ 16,766 $ 15,916 $ 13,538 $ 9,772 $ 8,640 $ 82,000 ========= ========= ========= ========= ========= ========= ========= Lines of credit $ 10,200 $ -- $ -- $ -- $ -- $ -- $ 10,200 ========= ========= ========= ========= ========= ========= ========= Bond debentures $ 16,291 $ -- $ -- $ -- $ -- $ -- $ 16,291 ========= ========= ========= ========= ========= ========= ========= Operating Leases: Building $ 6,977 $ 5,974 $ 5,497 $ 5,157 $ 4,111 $ 16,294 $ 44,010 Equipment $ 2,300 $ 2,168 $ 1,906 $ 1,247 $ 402 $ 19 $ 8,042 --------- --------- --------- --------- --------- --------- --------- Total $ 9,277 $ 8,142 $ 7,403 $ 6,404 $ 4,513 $ 16,313 $ 52,052 ========= ========= ========= ========= ========= ========= =========

The Company's line of credit with Coast Business Credit, due December 2003, is classified as a current liability primarily because it is collateralized by account receivable and the eligible borrowing base is also classified as a current asset. On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. While the FDIC has agreed that the Company's facility shall continue through its December 2003 term, it has reduced the amount available from $22 million to $15 million. The Company intends to seek an alternate lending source. While the Company has not been fully utilizing its Coast line, nevertheless, the reduction may impact future liquidity. The Company believes it will be able to obtain a replacement for the Coast line before December, but there can be no assurance a replacement will be available for the full $22 million or at all. Accordingly, the Company has entered into discussions with a third party for sale of four of the Company's facilities (three in northern California and one southern California hospital site location) which the Company considers non core locations. The Company anticipates the sale will result in a net cash increase of approximately $10 million. The discussions are preliminary in nature and there can be no assurance of their success. Effective March 1, 2000, the Company entered into an agreement with GE Medical Systems for the maintenance of the majority of its medical equipment for a fee based upon a percentage of net revenues with minimum aggregate net revenue requirements. In August 2001, the agreement was amended and expires on October 31, 2005. The service fee ranges from 2.82% to 3.74% of net revenue [less provisions for bad debt] and the aggregate minimum net revenue ranges from $85,000,000 to $125,000,000 during the term of the agreement. For the year ended October 31, 2002, the monthly service fees were 3.64% of net revenue and will increase to 3.74% of net revenue in fiscal 2003. On August 31, 2001, the Company entered into a sale-leaseback transaction in which it sold its Orange Imaging facility for $2,250,000 and leased it back for 10 years. Rental commenced at $18,750 per month and increases by 3% per annum 34 each year. The Company has an option to repurchase the property at any time prior to August 31, 2006, at fair market value (but not less than $2,350,000 nor more than $2,550,000). On March 18, 2002, the Company entered into a sale-leaseback transaction in which it sold its Northridge Imaging facility for $1,700,000 and leased it back for 10 years. Rental commenced at $13,458 per month and increases to $14,167 in 2003 to $14,167 in 2004 to $14,875 in 2005 to $15,583 in 2006 and thereafter based upon a cost of living adjustment. The Company has an option to repurchase the property from 2004 until 2007 at an exercise price commencing at $1,775,000 and increasing by $25,000 in the next year and an additional $50,000 in the third year. The Company's working capital needs currently are provided under two lines of credit. Under one agreement with Coast Business Credit, due December 31, 2003, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, the prior four months' cash collections, or $15,000,000. In any scenario, the Company may borrow up to the aggregate collection of receivables in the prior four months as long as the collections in any one month do not decrease by more than 25% from the prior month. Interest on outstanding borrowings is payable monthly at the greater of 8% or the bank's prime rate plus 2.5%, with a minimum interest paid each month of $30,000. At October 31, 2002 approximately $8,454,000 was outstanding under this line. The lender holds a first lien position on substantially all of Radnet's assets. The president and C.E.O. of the Company has personally guaranteed $10,000,000 of the line. The line is further secured by a $5,000,000 life insurance policy on the life of the president and C.E.O.. Under the second agreement with DVI Business Credit, the Company may borrow the lesser of 110% of eligible accounts receivable or $5,000,000. Interest on the outstanding balance is payable monthly at the bank's prime rate plus 1%. At October 31, 2002, approximately $1,746,000 was outstanding on this line. This line of credit is on a month-to-month basis. This credit line is collateralized by approximately 80% of the Tower division's eligible accounts receivable. A third line with the same lender was eliminated during the year ended October 31, 2001 by restructuring two of the lender's existing notes payable with the Company distributing the combined balances over 72 months. The banks prime rate at October 31, 2002 was 4.75%. The total funds available for borrowing under the two lines are approximately $8,746,000 at October 31, 2002. For the year ended October 31, 2001 and 2002, the weighted average interest rate on short-term borrowings was 9.0% and 7.6%, respectively. The Company's convertible subordinated debentures mature in June 2003. The aggregate balance due at the time will be $16,698,275 (including quarterly interest). The Company intends to offer each debenture holder the right to extend the term by three years together with a reduction in the conversion rate from $10 per share to $4 per share. The Company believes it will have sufficient funds under its available financing resources to purchase the majority of the debentures, if necessary, but such action will severely affect the Company's liquidity. The Company operates in a capital intensive, high fixed-cost industry that requires significant amounts of capital to fund operations, particularly the initial start-up and development expense of new diagnostic imaging centers and the acquisition of additional centers and new diagnostic imaging equipment. To the extent the Company is unable to generate sufficient cash from operations, or the Company is unable to structure or obtain operating leases, it may be unable to meet its capital expenditure requirements. Furthermore, the Company 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 it, if at all. 35 CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires the use of judgments and estimates. The Company's critical accounting policies are described below to provide a better understanding of how the Company develops judgments about future events and related estimations and how they can impact the financial statements. A critical accounting policy is one that requires the Company's most difficult, subjective or complex estimates and assessments and is fundamental to the Company's results of operations. The Company has identified its most critical accounting policies to be: - estimation of contractual allowances and bad debts of accounts receivable; and - evaluation of intangible and long-lived asset for impairment. CONTRACTUAL ALLOWANCES AND BAD DEBT Revenue of the contracted radiology practices and diagnostic imaging centers is recorded when services are rendered by the contracted radiology practice and diagnostic imaging center based on established charges and reduced by estimated contractual allowances. Service fee revenue is recorded net of estimated contractual allowances and amounts retained by the contracted radiology practices under the terms of the service agreements. The Company estimates contractual allowances based on the patient mix at each diagnostic imaging center, impact of managed care contract pricing, and historical collection information. The Company operates 58 facilities, each of which has multiple managed care contracts and a differing patient mix. The Company reviews monthly the estimated contractual allowance rates for each diagnostic imaging center. The contractual allowance rate is adjusted as changes to the factors discussed above become known. The Company records bad debt expenses based on historical collection rates and its evaluation of each diagnostic imaging center. IMPAIRMENT OF INTANGIBLE AND LONG-LIVED ASSETS Subsequent to an acquisition, the Company continually evaluates whether events and circumstances have occurred that indicate the remaining balance of the intangible assets and property and equipment may not be recoverable or that the remaining useful lives may warrant revision. The Company evaluates the potential impairment of intangibles separately from property and equipment. When factors indicate that intangible assets or property and equipment should be evaluated for possible impairment, the Company determines whether the intangible assets or property and equipment are recoverable or if impairment exists, in which case an adjustment is made to the carrying value of the related asset. In making this determination, the Company uses an estimate of the related diagnostic imaging services' undiscounted cash flows over the remaining lives of the intangible assets of the property and equipment and compare it to the diagnostic imaging centers' intangible assets or property and equipment balances. When an adjustment is required, the Company evaluates the remaining amortization periods. An impairment loss recognized would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company recorded no impairment charges during 2000, 2001 or 2002. NEW AUTHORITATIVE PRONOUNCEMENTS -------------------------------- During 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147 ("Acquisitions of Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"), No. 146 ("Accounting for Costs Associated with Exit or Disposal Activities") and No. 145, ("Rescission of FAS Nos. 4, 44, and 64, 36 Amendment of FAS 13, and Technical Corrections as of April 2002"). SFAS No. 147 is effective for acquisitions on or after October 1, 2002. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 145 is effective for financial statements issued after May 15, 2002. Management does not believe the adoption of SFAS 145, SFAS 146, and SFAS 147 will have material impact on the financial statements. In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"), which amends SFAS No. 123. SFAS No. 148, for which certain provisions are effective for fiscal years ending after December 15, 2002, provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock based employee compensation and amends certain disclosure provisions of SFAS No. 123. Management does not believe the adoption of SFAS No. 148 will have a material impact on the financial statements. INFLATION --------- To date, inflation has not had a material effect on the Company's operations. SPECIFIC FACTORS THAT MIGHT CAUSE ACTUAL RESULTS TO DIFFER FROM EXPECTATIONS, ----------------------------------------------------------------------------- INCLUDE, BUT ARE NOT LIMITED TO: -------------------------------- - economic, competitive demographic, business and other conditions in the Company's markets; - a decline in patient referrals; - change in the rates or methods of third-party reimbursement for diagnostic imaging services; - the termination of contracts with third party payers; - the availability of additional capital to fund capital expenditure requirements; - burdensome lawsuits against contracted radiology practices and the Company; - reduced operating margins due to managed care contracts and capitated fee arrangements; - any failure on the Company's part to comply with state and federal anti-kickback and anti-self-referral laws or any other applicable healthcare regulations; - the Company's substantial indebtedness, debt service requirements and liquidity constraints and the Company's inability to obtain a replacement lender for its Coast Business Credit line or the failure of the Company to sell some of its assets to reduce its credit line dependence; - risks related to convertible subordinated debentures and healthcare securities generally; - unforeseen technological changes; and - other factors discussed elsewhere in this report. 37 All future written and verbal forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------- -------------------------------------------------------- The Company sells its services exclusively in the United States and receives payment for its services exclusively in United States dollars. As a result, the financial results are unlikely to be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. The majority of the Company's interest expense is not sensitive to changes in the general level of interest in the United States because the majority of the Company's indebtedness has interest rates which were fixed when the Company entered into the note payable or capital lease obligation. None of the Company's long-term liabilities have variable interest rates. Only the Company's lines of credit, classified as current liabilities on the Company's financial statements, is interest expense sensitive to changes in the general level of interest because it is based upon the current prime rate plus a factor. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------- ------------------------------------------- The Financial Statements are attached hereto and begin on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ------- --------------------------------------------- Inapplicable. 38 PRIMEDEX HEALTH SYSTEMS, INC. INDEPENDENT AUDITORS' REPORT AND FINANCIAL STATEMENT OCTOBER 31, 2002 AND 2001 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Primedex Health Systems, Inc. We have audited the accompanying consolidated balance sheets of Primedex Health Systems, Inc. and affiliates as of October 31, 2002 and 2001 and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended October 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Primedex Health Systems, Inc. and affiliates as of October 31, 2002 and 2001, and the consolidated results of their operations and cash flows for each of the years in the three-year period ended October 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /S/ MOSS ADAMS LLP Los Angeles, California January 22, 2003 -------------------------------------------------------------------------------- F-1 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS

OCTOBER 31, 2001 2002 ---------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 40,000 $ 36,000 Accounts receivable, net 28,764,000 29,453,000 Unbilled receivables and other receivables 133,000 1,451,000 Due from related party 94,000 -- Deferred income taxes 5,235,000 2,100,000 Other 1,328,000 1,518,000 -------------- -------------- Total current assets 35,594,000 34,558,000 -------------- -------------- PROPERTY AND EQUIPMENT, net 65,368,000 87,875,000 OTHER ASSETS Accounts receivable, net 2,499,000 2,366,000 Due from related parties 60,000 -- Goodwill 24,064,000 23,064,000 Deferred income taxes -- 3,135,000 Other 844,000 641,000 -------------- -------------- Total other assets 27,467,000 29,206,000 -------------- -------------- $ 128,429,000 $ 151,639,000 -------------- -------------- LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Cash disbursement in transit $ 3,804,000 $ 4,613,000 Accounts payable and accrued expenses 19,361,000 20,871,000 Income taxes payable 125,000 -- Subordinated debentures payable -- 16,291,000 Notes payable to related party 119,000 1,173,000 Current portion of notes and leases payable 39,172,000 36,278,000 -------------- -------------- Total current liabilities 62,581,000 79,226,000 LONG-TERM LIABILITIES Subordinated debentures payable 16,303,000 -- Notes payable to related party 1,330,000 105,000 Notes and leases payable, net of current portion 90,569,000 121,031,000 Accrued expenses 1,986,000 694,000 -------------- -------------- Total long-term liabilities 110,188,000 121,830,000 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,142,000 1,504,000 REDEEMABLE STOCK 160,000 -- STOCKHOLDERS' DEFICIT (45,642,000) (50,921,000) -------------- -------------- $ 128,429,000 $ 151,639,000 -------------- -------------- ---------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-2

PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED OCTOBER 31, 2000 2001 2002 ---------------------------------------------------------------------------------------------------------------------- REVENUE Revenue $ 229,598,000 $ 284,981,000 $ 378,942,000 Less: Allowances 141,633,000 173,144,000 239,661,000 -------------- -------------- -------------- Net revenue 87,965,000 111,837,000 139,281,000 OPERATING EXPENSES Operating expenses 62,207,000 78,008,000 105,473,000 Depreciation and amortization 8,580,000 10,705,000 15,309,000 Provision for bad debts 2,581,000 4,022,000 7,183,000 Total operating expenses 73,368,000 92,735,000 127,965,000 Income from operations 14,597,000 19,102,000 11,316,000 -------------- -------------- -------------- OTHER EXPENSE Interest expense, net (13,140,000) (13,620,000) (16,693,000) Gain (loss) on sale of subsidiaries, divisions and assets (335,000) 3,520,000 (299,000) Other 239,000 178,000 511,000 Total other expense (13,236,000) (9,922,000) (16,481,000) -------------- -------------- -------------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM 1,361,000 9,180,000 (5,165,000) INCOME TAX BENEFIT -- 5,110,000 -- -------------- -------------- -------------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM 1,361,000 14,290,000 (5,165,000) MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (259,000) (343,000) (387,000) -------------- -------------- -------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,102,000 13,947,000 (5,552,000) EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT (NET OF INCOME TAXES OF $0) 1,512,000 554,000 1,000 -------------- -------------- -------------- NET INCOME (LOSS) $ 2,614,000 $ 14,501,000 $ (5,551,000) ============== ============== ============== BASIC EARNINGS PER SHARE Income (loss) before extraordinary gain $ 0.03 $ 0.35 $ (0.14) Extraordinary gain 0.04 0.01 0.00 BASIC NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.36 $ (0.14) -------------- -------------- -------------- DILUTED EARNINGS PER SHARE Income (loss) before extraordinary gain $ 0.03 $ 0.32 $ (0.14) Extraordinary gain 0.04 0.01 0.00 -------------- -------------- -------------- DILUTED NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.33 $ (0.14) ============== ============== ============== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 38,992,323 39,960,972 40,875,695 ============== ============== ============== Diluted 39,843,422 44,170,547 40,875,695 ============== ============== ============== ---------------------------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-3

PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002 ------------------------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value, 100,000,000 shares authorized Treasury Stock, at cost ------------------------------ Paid-in ------------------------------- Shares Amount Capital Shares Amount -------------- -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 1999 40,757,760 $ 408,000 $ 99,337,000 (1,825,000) $ (695,000) Issuance of common stock 200,000 2,000 28,000 -- -- Discounted note, used to retire subordinated debentures -- -- -- -- -- Net income -- -- -- -- -- -------------- -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 2000 40,957,760 410,000 99,365,000 (1,825,000) (695,000) Issuance of common stock 1,474,250 15,000 743,000 -- -- Payment of subscription receivable -- -- -- -- -- Net income -- -- -- -- -- -------------- -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 2001 42,432,010 425,000 100,108,000 (1,825,000) (695,000) Issuance of common stock 398,724 4,000 60,000 -- -- Payment of subscription receivable -- -- -- -- -- Retirement of redeemable stock 160,000 160,000 Net loss -- -- -- -- -- BALANCE - OCTOBER 31, 2002 42,830,734 $ 429,000 $ 100,328,000 (1,825,000) $ (695,000) ============== ============== ============== ============== ==============

(CONTINUED BELOW)

Stock Total Accumulated Due from Subscription Stockholders' Deficit Related Party Receivable Deficit -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 1999 $(162,547,000) $ (830,000) $ (30,000) $ (64,357,000) Issuance of common stock -- -- (30,000) -- Discounted note, used to retire subordinated debentures -- 830,000 -- 830,000 Net income 2,614,000 -- -- 2,614,000 -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 2000 (159,933,000) -- (60,000) (60,913,000) Issuance of common stock -- -- -- 758,000 Payment of subscription receivable -- -- 12,000 12,000 Net income 14,501,000 -- -- 14,501,000 -------------- -------------- -------------- -------------- BALANCE - OCTOBER 31, 2001 (145,432,000) -- (48,000) (45,642,000) Issuance of common stock -- -- 18,000 82,000 Payment of subscription receivable -- -- 30,000 30,000 Retirement of redeemable stock Net loss (5,551,000) -- -- (5,551,000) BALANCE - OCTOBER 31, 2002 $(150,983,000) $ -- $ -- $ (50,921,000) ============== ============== ============== ============== ------------------------------------------------------------------------------------------------------------------------ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-4

PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2000 2001 2002 ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,614,000 $ 14,501,000 $ (5,551,000) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 8,580,000 10,705,000 15,309,000 Provision for bad debts and allowance adjustments (25,000) 3,297,000 1,811,000 Gain (loss) on write-downs, amortization and disposals of other assets and accrued liabilities 417,000 (116,000) 1,000 Loss (gain) on sale of assets, subsidiaries and divisions -- (3,527,000) 299,000 Imputed interest expense 1,169,000 1,154,000 1,427,000 Minority interest in earnings of subsidiaries 259,000 343,000 387,000 Extraordinary gain (1,512,000) (554,000) (1,000) Changes in assets and liabilities: Accounts receivable (1,798,000) (12,157,000) (2,367,000) Unbilled receivables (1,271,000) 1,556,000 (1,318,000) Other assets (458,000) (495,000) (86,000) Deferred income taxes -- (5,235,000) -- Accounts payable and accrued expenses 131,000 3,989,000 3,910,000 Income taxes payable -- 125,000 (125,000) ------------- ------------- ------------- Net cash provided by operating activities 8,106,000 13,586,000 13,696,000 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of imaging centers - net of cash acquired -- (61,000) -- Purchase of property and equipment (4,559,000) (7,469,000) (7,815,000) Proceeds from sale of divisions, centers, and equipment 1,540,000 5,050,000 1,700,000 Loan fees (70,000) (20,000) (22,000) Investment in center -- (100,000) -- Payments to related parties (205,000) (233,000) (39,000) ------------- ------------- ------------- Net cash used by investing activities (3,294,000) (2,833,000) (6,176,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash overdraft (321,000) 1,771,000 809,000 Principal payments on notes and leases payable (11,652,000) (16,764,000) (20,675,000) Proceeds from short and long-term borrowings 7,516,000 3,883,000 12,295,000 Purchase of subordinated debentures (122,000) (36,000) (10,000) Proceeds from issuance of common stock -- 97,000 82,000 Joint venture proceeds -- 400,000 250,000 Joint venture distributions (200,000) (100,000) (275,000) ------------- ------------- ------------- Net cash used by financing activities (4,779,000) (10,749,000) (7,524,000) ------------- ------------- ------------- NET INCREASE/(DECREASE) IN CASH 33,000 4,000 (4,000) CASH, beginning of year 3,000 36,000 40,000 CASH, end of year $ 36,000 $ 40,000 $ 36,000 ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for Interest $ 12,981,000 $ 12,646,000 $ 14,953,000 ============= ============= ============= Income taxes $ -- $ -- $ -- ------------- ------------- ------------- ------------------------------------------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS F-5 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002 -------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES - The Company entered into capital leases or financed equipment through notes payable for approximately $5,135,000, $21,753,000 and $30,846,000 for the years ended October 31, 2000, 2001 and 2002, respectively. Effective May 1, 2002, the Company acquired the assets and business of Grove Diagnostic Imaging ["Grove"] in Rancho Cucamonga, California for approximately $1,454,000 in assumed liabilities. The Company recorded net property and equipment of approximately $1,441,000 and other current assets of approximately $13,000 as part of the transaction. Effective March 1, 2001, the Company's DIS subsidiary sold it Valley Regional Oncology Center ["VROC"] and recognized a gain on the sale of $3,527,000. As part of the sale, the Company wrote off $404,000 in net property and equipment and $75,000 in net other current assets. During the year ended October 31, 2001, the Company acquired three imaging centers. Effective May 10, 2001, the Company acquired the assets and business of Modesto Imaging Center and recorded net property and equipment of $1,868,000, notes payable of $6,886,000, other liabilities of $1,032,000 and goodwill of $6,050,000. Effective June 1, 2001, the Company acquired a portion of the equipment of two imaging centers located in Palm Springs and Palm Desert, California and recorded net property and equipment of $376,000, notes payable of $342,000 and other liabilities of $35,000. Effective July 2, 2002, the Company renegotiated twelve of its outstanding notes payable with DVI, obtained working capital and incurred $2.8 million in refinancing charges which will be amortized over the six year life of the notes. During the year ended October 31, 2001, the Company restructured a portion of its debt with DVI transferring the liquidation value of its preferred stock into other notes payable. As part of the transaction, accrued interest of approximately $235,000 was accumulated into the new notes payable balances. In November 2001, the Company issued 132,850 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. In April 2002, an officer of the Company exercised his option to purchase 300,000 shares of common stock at $.15 per share. As part of the transaction, the officer surrendered to the Company 30,201 mature shares of common stock with a fair market value of $45,000 ($1.49 per share public closing price on the transaction date). In addition, the officer surrendered to the Company an additional 13,424 shares of common stock with a fair market value of $20,000 in payment of his note payable with accumulated interest (classified as Stock Subscription Receivable on the Company's financial statements). By combining the transaction, the Company issued a net 256,375 shares of common stock to the officer for his option exercise. -------------------------------------------------------------------------------- F-6 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2000, 2001 AND 2002 -------------------------------------------------------------------------------- During the year ended October 31, 2001, warrants for 920,100 shares of common stock were exercised for approximately $230,000. As part of the transaction, the Company deducted the exercise price from its notes payable payment due to the same individuals. During the year ended October 31, 2001, a cashless exercise of warrants occurred, and 65,484 shares of common stock were issued to eight note holders of the Company. In fiscal 1996, these warrants were issued to the note holders with options for a cashless exercise for common stock if the Company's stock prices exceeded certain levels. During the year ended October 31, 2001, the Company exchanged a $635,000 notes receivable from a related party and recorded a related party payable for approximately $119,000 for the purchase of $1,159,000 of the Company's subordinated debentures. The Company recorded a $405,000 extraordinary gain as a result of the transaction. The accompanying notes are an integral part of these financial statements -------------------------------------------------------------------------------- F-7 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - NATURE OF BUSINESS Primedex Health Systems, Inc., incorporated on October 21, 1985, provides diagnostic imaging services in the state of California. Imaging services include MRI, CT, PET, ultrasound, mammography, nuclear medicine and general diagnostic radiology. The operations of the Company comprise a single segment for financial reporting purposes. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPALS OF CONSOLIDATION - The consolidated financial statements include the accounts of Primedex Health Systems, Inc.; Radnet Management, Inc. ["Radnet"]; Diagnostic Imaging Services, Inc. ["DIS"] and Radnet Managed Imaging Services, Inc.["RMIS"] (collectively referred to as "the Company"). Radnet Management, Inc. is combined with Beverly Radiology Medical Group III ["BRMG"] and consolidated with Radnet Sub, Inc., Westchester Imaging Group (a joint venture), Radnet Management I, Inc., Radnet Management II, Inc. ["Modesto"], Burbank Advanced LLC, Rancho Bernardo Advanced LLC and SoCal MR Site Management, Inc.. Diagnostic Imaging Services is also combined with BRMG. Operating activities of subsidiary entities are included in the accompanying financial statements from the date of acquisition. All intercompany transactions and balances have been eliminated in consolidation and combinations. Westchester Imaging Group is consolidated with the Company based upon the criteria of both SFAS 94 and EITF 97-2. Medical services and supervision at most of the Company's imaging centers are provided through BRMG and through other independent physicians and physician groups. BRMG is consolidated with Pronet Imaging Medical Group, Inc. and Beverly Radiology Medical Group, both of which are 99% owned by a shareholder and president of Primedex Health Systems, Inc. Radnet and DIS provide non-medical, technical and administrative services to BRMG for which they receive a management fee. CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates their fair market value. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost, less accumulated depreciation and amortization and valuation impairment allowances. Depreciation and amortization of property and equipment are provided using the straight-line method over the estimated useful lives, which range from 3 to 15 years. Leasehold improvements are amortized over their estimated useful life, which range from 3 to 20 years. -------------------------------------------------------------------------------- F-8 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE AND ALLOWANCES - Accounts receivable are stated at gross amounts billed, less allowances. A significant portion of the Company's accounts receivable involve third-party payors, primarily insurance companies. The collection cycle on accounts receivable from continuing operations extends up to 36 months with most personal injury cases having the longest collection cycle. The current portion of accounts receivable are the amounts which are reasonably expected to be collected within one year, based upon historical collection data. Accounts receivable as of October 31, 2002, are shown net of contractual allowances and allowances for doubtful accounts of approximately $59,150,000, of which $54,751,000 has been deducted from current receivables and $4,399,000 has been deducted from noncurrent receivables. Accounts receivable as of October 31, 2001, are shown net of contractual allowances and allowances for doubtful accounts of approximately $54,211,000, of which $49,878,000 has been deducted from current receivables and $4,333,000 has been deducted from noncurrent receivables. GOODWILL - Goodwill is recognized in certain business combinations and represents the excess of the purchase price over the fair value of net assets acquired. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets." Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but subject to annual impairment tests in accordance with the statements. Intangible assets with finite lives will continue to be amortized over their useful lives. SFAS 142 applies to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date. The Company has adopted this Standard as of November 1, 2001. In implementing SFAS 142, the Company has performed the transitional reassessment and impairment tests required as of November 1, 2001, and determined that there was no impairment on goodwill. The Company ceased amortizing these assets on November 1, 2001. REVENUE RECOGNITION - UNBILLED RECEIVABLES - Unbilled receivables represents the amount of service revenue earned during the period for which billings did not occur until the subsequent period. During the year ended October 31, 2002, the Company continued to convert many of its sites to one billing and collection system with one uniform gross fee schedule and phase-out its involvement with external collection companies and multiple internal systems with different gross fee schedules. As a result, when sites are converted to the new system, delays due to learning new procedures have increased the Company's unbilled receivables at month end. Billings are generally completed in the month following. During the last two quarters of fiscal 2002, the Company converted its Orange, Tustin, Los Coyotes and Redondo facilities to the new system, and as a result, delays in billing occurred. -------------------------------------------------------------------------------- F-9 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION (CONTINUED) NET PATIENT SERVICE REVENUE - Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services in the period in which services are provided. Provision for bad debt is reported separately on the Company's financial statements. Service revenue is comprised of premium revenue and prepaid plan revenue ["capitation"]. Net premium revenue, less provisions for bad debt, for the year ended October 31, 2001 and 2002 was approximately $88,685,000 and $105,898,000, respectively. Gross premium revenue for the year ended October 31, 2001 and 2002 was approximately $217,736,000 and $279,676,000, respectively. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. PREPAID PLAN REVENUE - The Company contracts with health maintenance organizations and other third parties to provide health care services to plan enrollees. Under the various contracts, the Company receives a per enrollee amount (capitated payment) each month covering all contracted services needed by the plan enrollees. Capitation payments are recognized as service revenue during the period in which the Company is obligated to provide services to the plan enrollees. Net prepaid plan revenue for the year ended October 31, 2001 and 2002 was approximately $19,130,000 and $26,200,000, respectively. Gross prepaid plan revenue for the year ended October 31, 2001 and 2002 was approximately $67,245,000 and $99,266,000, respectively. INCOME TAXES - Income tax expense is computed using an asset and liability method, using expected annual effective tax rates. Under this method, deferred income taxes are recorded resulting from differences in the financial reporting basis and the income tax reporting basis of assets and liabilities. Income taxes are further explained in Note 9. CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject the Company to credit risk are primarily cash equivalents and accounts receivable. The Company has placed its cash and cash equivalents with one major financial institution. At times, the cash in the financial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC). -------------------------------------------------------------------------------- F-10 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK (CONTINUED) With respect to accounts receivable, the Company routinely assesses the financial strength of its customers and third-party payors and, based upon factors surrounding their credit risk, establishes a provision for bad debt. Contractual adjustments represent the normal and customary reimbursement adjustments based on the site's current gross fee schedule. Gross and net charges by payor for the year ended October 31, 2001 and 2002 were:

Gross Charges Net Charges ------------- ----------- 2001 2002 2001 2002 ---- ---- ---- ---- Capitation contracts 23.6% 26.2% 17.8% 19.8% HMO/PPO/Managed care 21.2% 19.8% 21.7% 20.5% Special group contract 17.8% 17.0% 13.8% 12.4% Medicare 11.0% 11.3% 12.2% 12.9% Blue Cross/Shield/Champus 9.3% 9.5% 10.9% 11.8% Commercial insurance 7.2% 6.9% 10.6% 10.5% Workers Compensation 4.0% 4.0% 6.6% 6.2% Medi-Cal 2.7% 2.9% 1.9% 2.4% Other 3.2% 2.4% 4.5% 3.5%

Management believes that its accounts receivable credit risk exposure, beyond allowances that have been provided, is limited. USE OF ESTIMATES - The preparation of the 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPAIRMENT ON LONG-LIVED ASSETS - Certain long-lived assets of the Company are reviewed at least annually as to whether their carrying values have become impaired in accordance with Statement of Financial Accounting Standards (SFAS) 144, "Accounting for Impairment or Disposal of Long-Lived Assets." Management considers assets to be impaired if the carrying value exceeds the undiscounted projected cash flows from operations. If impairment exists, the assets are written down to fair value or the projected cash flows from related operations. As of October 31, 2002, the Company expects the remaining carrying value of assets to be fully recoverable. -------------------------------------------------------------------------------- F-11 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK OPTIONS - As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the Company continues to apply APB Opinion No. 25 (APB 25) and related Interpretations in accounting for its option plans. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under APB 25, compensation cost is the excess, if any, of the quoted market price of the stock at the measurement date over the amount that must be paid to acquire the stock. The new standard allows the Company to continue to account for stock-based compensation under APB 25, with disclosure of the effects of the new standard. The proforma effect on income as if the Company had adopted SFAS 123 is disclosed in Note 10. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the current year presentation. These changes have no effect on net earnings. EARNINGS PER SHARE - Earnings per share are based upon the weighted average number of shares of common stock and common stock equivalents outstanding, net of common stock held in treasury as follows: Year Ended October 31, ------------------------------------------- 2000 2001 2002 ------------- ------------- ------------- Net income (loss) for earnings per share computation $ 2,614,000 $ 14,501,000 $ (5,551,000) BASIC Weighted average number of common shares outstanding during the year 38,992,323 39,960,972 40,875,695 ------------- ------------- ------------- Basic earnings per share $ 0.07 $ 0.36 $ (0.14) ============= ============= ============= DILUTED Weighted average number of common shares outstanding used in calculating basic earnings per share 38,992,323 39,960,972 40,875,695 Add additional shares issuable upon exercise of stock options, warrants and convertible securities 851,099 4,209,575 -- Weighted average number of common shares used in calculating diluted earnings per share 39,843,422 44,170,547 40,875,695 ============= ============= ============= Diluted earnings per share $ 0.07 $ 0.33 $ (0.14) -------------------------------------------------------------------------------- F-12 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE (CONTINUED) For the year ended October 31, 2000, the Company has included 2,571,963 of options and warrants in the calculation of dilutive earnings per share. Common stock equivalents, which are exercisable into 4,156,790 shares of common stock at October 31, 2000, have been excluded because their effect would be antidilutive. For the year ended October 31, 2001, the Company has included 7,724,350 options and warrants in the calculation of diluted earnings per share. The Company has excluded 3,483,822 options and warrants in the calculation of diluted earnings per share because their effect would be antidilutive as of October 31, 2001. For the year ended October 31, 2002, the Company has excluded all options and warrants in the calculation of diluted earnings per share because their effect would be antidilutive. However, these instruments could potentially dilute earnings per share in future years. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND PROPOSED ACCOUNTING CHANGES - During 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147 ("Acquisitions of Certain Financial Institutions--an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"), No. 146 ("Accounting for Costs Associated with Exit or Disposal Activities") and No. 145, ("Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002"). SFAS No. 147 is effective for acquisitions on or after October 1, 2002. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 145 is effective for financial statements issued after May 15, 2002. Management does not believe the adoption of SFAS 145, SFAS 146, and SFAS 147 will have material impact on the financial statements. In December 2002, the FASB issued SFAS No. 148 ("Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"), which amends SFAS No. 123. SFAS No. 148, for which certain provisions are effective for fiscal years ending after December 15, 2002, provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock based employee compensation and amends certain disclosure provisions of SFAS No. 123. Management does not believe the adoption of SFAS No. 148 will have a material impact on the financial statements. NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES Future openings of imaging center: ---------------------------------- In December 2002, the Company opened a joint venture center in Rancho Bernardo, California. Prior to its opening, in late November 2001, the Company entered into a new building lease arrangement for 9,557 square feet in Rancho Bernardo in anticipation of opening the new multi-modality imaging center. The center, Rancho Bernardo Advanced Imaging Center ["RB"], is 75%-owned by the Company and 25%-owned by two physicians who invested $250,000. -------------------------------------------------------------------------------- F-13 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES (Continued) Sale of imaging center: ----------------------- Effective March 1, 2001, the Company's DIS subsidiary sold its Valley Regional Oncology Center ["VROC"] to Summit Health Enterprises, LLC, an unaffiliated third party, for $4,000,000 cash and recognized a gain on the sale of approximately $3,527,000. In addition, the Company invested an additional $100,000 in the center for which it received an 8.89% interest which was subsequently sold for $105,000 in October 2002. For the four months ended February 28, 2001, the center generated net revenue of approximately $570,000 and net income of approximately $190,000. Acquisitions and openings of imaging centers: --------------------------------------------- In the second quarter of fiscal 2002, the Company entered into two new building leases for approximately 10,000 square feet of space in the building across the street from Orange Imaging Center to open Orange Advanced and Orange Women's Imaging Centers. Orange Advanced will offer MRI, PET, nuclear medicine and x-ray services and Orange Women's will offer ultrasound and mammography services. The centers opened in late September 2002. Effective May 1, 2002, the Company acquired certain assets and related liabilities of Grove Diagnostic Imaging Center ["Grove"] in Rancho Cucamonga, California for approximately $1,454,000. The transaction was financed by DVI. The center provides MRI, CT, ultrasound, mammography and x-ray services. Effective January 1, 2002, the Company entered into a new capitation arrangement with Primecare Medical Group for approximately 62,000 lives primarily benefiting the Company's Temecula ["TVIC"] facility. The Company entered into two new building leases in Sun City and Lake Elsinore, California which provide x-ray services to support the new contract. Subsequent to year-end, the Company will close Lake Elsinore and move the location to nearby Wildomar, California. In January 2002, the Company opened Tarzana Advanced Imaging Center which provides MRI, CT and PET services. In late November 2001, the Company opened Burbank Advanced Imaging Center, LLC ["Burbank"], which provides MRI, CT, ultrasound and x-ray services. Burbank is a joint venture with two physicians and is 75%-owned by the Company. Effective June 1, 2001, the Company acquired a portion of the assets and related liabilities of Sadler Radiology, Inc.. The results of operations have been included in the consolidated financial statements as of that date. Sadler Radiology, Inc. is the provider of radiology services in two imaging centers in Palm Springs and Palm Desert, California. The aggregate purchase price was $407,000, consisting of a cash purchase price of $31,000 and the assumption of debt and liabilities totaling $376,000. The purchase price has been allocated to property and equipment. -------------------------------------------------------------------------------- F-14 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 3 - ACQUISITIONS, SALES AND DIVESTITURES (Continued) Effective May 9, 2001, the Company acquired certain assets and related liabilities of Modesto Imaging Center, Inc. ["Modesto"]. The results of operations have been included in the consolidated financial statements as of that date. Modesto provides MRI, CT, ultrasound, mammography and x-ray services. The aggregate purchase price was $7,918,000, consisting of cash and notes payable of $6,357,000, and assumption of debt totaling $561,000. The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of Modesto. Property and equipment $ 1,868,000 Goodwill 6,050,000 ------------ Total assets acquired 7,918,000 Current liabilities (32,000) Long-term debt (529,000) ------------ Total liabilities assumed (561,000) ------------ Net assets acquired $ 7,357,000 ============ The $6,050,000 of goodwill has been assigned to the acquired imaging center based on the relative asset values and expected contributions to the Company. The total goodwill is expected to be deductible for tax purposes. During the year ended October 31, 2002, the Company wrote-off $1,000,000 of the goodwill due to the elimination of a contingent liability which was not required to be paid. The following represents the unaudited pro forma results of operations as if the acquisition had been acquired as of the beginning of the respective reporting periods presented: Years ending October 31, ------------------------------ 2000 2001 ------------- -------------- Net revenue $ 99,255,000 $ 118,518,000 Net income before extraordinary item 2,899,000 14,516,000 Net income 4,411,000 15,070,000 EPS 0.11 0.34 -------------------------------------------------------------------------------- F-15 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment and accumulated depreciation and amortization as of October 31, 2001 and 2002 are:

2001 2002 -------------- -------------- Land $ 1,764,000 $ -- Buildings 2,476,000 600,000 Medical equipment 20,965,000 24,523,000 Office equipment, furniture and fixtures 6,879,000 6,443,000 Leasehold improvements 18,173,000 23,449,000 Equipment under capital lease 50,167,000 78,664,000 100,424,000 133,679,000 Accumulated depreciation and amortization (35,056,000) (45,804,000) -------------- -------------- $ 65,368,000 $ 87,875,000 -------------- --------------

Depreciation and amortization expense on property and equipment for the year ended October 31, 2000, 2001 and 2002 was approximately $7,315,000, $9,052,000 and $15,052,000, respectively. Accumulated amortization under capital leases for the years ended October 31, 2001 and 2002 was approximately $15,197,000 and $22,822,000, respectively. Amortization expense under capital leases for the years ended October 31, 2000, 2001 and 2002 was approximately, $3,530,000, $4,216,000, and $8,913,000, respectively. During the year ended October 31, 2002, the Company sold the land and building at its Northridge facility for $1,700,000 and entered into a ten-year lease for the same location with monthly rentals ranging from $13,458 to $18,607 during the lease term. The sale resulted in a loss of approximately $147,000. NOTE 5 - GOODWILL Intangible assets consist of goodwill recorded at cost of $30,330,000 and $29,330,000, less accumulated amortization of $6,266,000 for each of the years ended October 31, 2001 and 2002, respectively. Amortization expense of approximately $903,000, $1,354,000 and $-0- was recognized for the years ended October 31, 2000, 2001 and 2002, respectively. Application of the non-amortization provisions of the Statement resulted in an increase in income of approximately $1,505,000 ($.04 per share) for the year ended October 31, 2002. During the year ended October 31, 2002, the Company wrote-off $1,000,000 of the goodwill associated with the acquisition of Modesto Imaging Center due to the elimination of a contingent liability, which was not required to be paid. -------------------------------------------------------------------------------- F-16 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 5 - GOODWILL (CONTINUED) The following is the reconciliation of reported income (loss) before extraordinary items to the adjusted income (loss) before extraordinary items exclusive of amortization expense relating to goodwill.

Years ending October 31, ------------------------------------------------------------------------------------------------ 2000 2001 2002 --------------------------------------- --------------------------------------- ------------ Per Share Amount Per Share Amount --------------------- --------------------- Amount Basic Diluted Amount Basic Diluted Amount ------------ --------- --------- ------------ --------- --------- ------------ Reported income (loss) before extraordinary item $ 1,102,000 $ 0.03 $ 0.03 $13,947,000 $ 0.35 $ 0.32 $(5,552,000) Add back: Goodwill amortization 930,000 0.02 0.02 1,653,000 0.04 0.04 -- ------------ --------- --------- ------------ --------- --------- ------------ Adjusted income (loss) before extraordinary item $ 2,032,000 $ 0.05 $ 0.05 $15,600,000 $ 0.39 $ 0.36 $(5,552,000) ------------ --------- --------- ------------ --------- --------- ------------

The following is the reconciliation of reported net income (loss) to the adjusted income (loss) exclusive of amortization expense relating to goodwill.

Years ending October 31, ------------------------------------------------------------------------------------------------ 2000 2001 2002 --------------------------------------- --------------------------------------- ------------ Per Share Amount Per Share Amount --------------------- --------------------- Amount Basic Diluted Amount Basic Diluted Amount ------------ --------- --------- ------------ --------- --------- ------------ Reported net income (loss) $ 2,614,000 $ 0.07 $ 0.07 $14,501,000 $ 0.36 $ 0.33 $(5,551,000) Add back: Goodwill amortization 930,000 0.02 0.02 1,653,000 0.04 0.04 -- ------------ --------- --------- ------------ --------- --------- ------------ Adjusted net income (loss) $ 3,544,000 $ 0.09 $ 0.09 $16,154,000 $ 0.40 $ 0.37 $(5,551,000) ============ ========= ========= ============ ========= ========= ============

NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2001 2002 ------------- ------------- Accounts payable $ 7,423,000 $ 8,213,000 Accrued expenses 10,116,000 8,956,000 Accrued professional fees 2,163,000 2,565,000 Accrued loss on legal judgments 412,000 347,000 Other 1,233,000 1,484,000 ------------- ------------- 21,347,000 21,565,000 Less long-term portion of accrued expenses, professional fees, accrued losses and other (1,986,000) (694,000) ------------- ------------- $ 19,361,000 $ 20,871,000 ============= ============= Accrued professional fees consist of outside professional agreements, which are paid out of net cash collections. The long-term portion relates to the accounts receivable classified as long-term. -------------------------------------------------------------------------------- F-17 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES Notes payable, long-term debt and capital lease obligations at October 31, 2002 and 2001 consists of the following:

2001 2002 -------------- -------------- Revolving lines of credit $ 20,752,000 $ 10,199,000 Notes payable at interest rates ranging from 6.6% to 11.5%, due through 2008, collateralized by medical equipment 66,024,000 80,986,000 Note payable bearing interest at 9.5%, due in 2005, collateralized by real estate 1,701,000 1,662,000 Obligations from a Company acquisition bearing interest at 8%, due through 2003 278,000 58,000 Obligations under capital leases at interest rates ranging from 8.0% to 13.6%, due through 2009, collateralized by medical and office equipment 40,986,000 64,404,000 -------------- -------------- 129,741,000 157,309,000 Less: current portion (39,172,000) (36,278,000) -------------- -------------- $ 90,569,000 $ 121,031,000 -------------- --------------

The Company's working capital needs currently are provided under two lines of credit. Under one agreement with Coast Business Credit, due December 31, 2003, the Company may borrow the lesser of 75% to 80% of eligible accounts receivable, the prior four months' cash collections, or $15,000,000. In any scenario, the Company may borrow up to the aggregate collection of receivables in the prior four months as long as the collections in any one month do not decrease by more than 25% from the prior month. Interest on outstanding borrowings is payable monthly at the greater of 8% or the bank's prime rate plus 2.5%, with a minimum interest paid each month of $30,000. At October 31, 2002 approximately $8,454,000 was outstanding under this line. The lender holds a first lien position on substantially all of Radnet's assets. The president and C.E.O. of the Company personally guaranteed $10,000,000 of the line. The line is further secured by a $5,000,000 life insurance policy of the president and C.E.O [See Note 16]. -------------------------------------------------------------------------------- F-18 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED) Under the second agreement with DVI Business Credit, the Company may borrow the lesser of 110% of eligible accounts receivable or $5,000,000. Interest on the outstanding balance is payable monthly at the bank's prime rate plus 1%. At October 31, 2002, approximately $1,746,000 was outstanding on this line. This line of credit is on a month-to-month basis. This credit line is collateralized by approximately 80% of the Tower division's eligible accounts receivable. A third line with the same lender was eliminated during the year ended October 31, 2001 by restructuring two of the lender's existing notes payable with the Company distributing the combined balances over 72 months. The banks prime rate at October 31, 2002 was 4.75%. The total funds available for borrowing under the two lines are approximately $8,746,000 at October 31, 2002. For the year ended October 31, 2001 and 2002, the weighted average interest rate on short-term borrowings was 9.0% and 7.6%, respectively. Annual principal maturities of long-term obligations exclusive of capital leases, for future years ending October 31, are: 2003 $24,634,000 2004 14,588,000 2005 15,104,000 2006 22,358,000 2007 10,864,000 Thereafter 5,357,000 ------------ $92,905,000 ============ -------------------------------------------------------------------------------- F-19 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 7 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (CONTINUED) The Company leases equipment under capital lease arrangements. Future minimum lease payments under capital leases as of October 31, 2002 are: 2003 $ 17,368,000 2004 16,766,000 2005 15,917,000 2006 13,538,000 2007 9,772,000 Thereafter 8,639,000 ------------- Total minimum payments 82,000,000 Amount representing interest (17,596,000) ------------- Present value of net minimum lease payments 64,404,000 Current portion (11,644,000) ------------- Long-term portion $ 52,760,000 ============= At October 31, 2002, the Company is in default on approximately $317,000 under various note agreements, pertaining to the acquisition of imaging centers, for non-payment of principal and interest. These notes have been classified as current payables. During the years ended October 31, 2000, 2001 and 2002, the Company paid off and renegotiated various obligations at discounts resulting in extraordinary gains of $20,000, $117,000 and $-0-, respectively. NOTE 8 - SUBORDINATED DEBENTURES In June of 1993, the Company's registration for a total of $25,875,000 of 10% Series A Convertible subordinated debentures due 2003 was declared effective by the Securities and Exchange Commission. The net proceeds to the Company were approximately $23,000,000. Costs of $3,000,000 associated with the original offering are being amortized over ten years to result in a constant yield. The unamortized portion is classified as other assets. The debentures are convertible into shares of common stock at any time before maturity into $1,000 principal amounts at a conversion price of $10 per share through June 1999 and $12 per share thereafter. As debentures are being converted or retired, a pro-rata share of the offering costs are written-off. -------------------------------------------------------------------------------- F-20 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 8 - SUBORDINATED DEBENTURES (CONTINUED) Amortization expense of the offering costs for the years ended October 31, 2000, 2001 and 2002 was $230,000, $202,000 and $188,000, respectively. Interest expense for the years ended October 31, 2000, 2001 and 2002 was approximately $1,984,000, $1,720,000 and $1,630,000, respectively. There were no conversions during the years ended October 31, 2001 and 2002. During the years ended October 31, 2000, 2001 and 2002, the Company repurchased debentures with face amounts of $234,000, $68,000 and $12,000, for $122,000, $37,000 and $11,000, respectively, resulting in gains on early extinguishments of $112,000, $31,000 and $1,000, respectively. During the year ended October 31, 2000, the Company exchanged a $893,000 note receivable from a related party for $2,273,000 in subordinated debentures. The Company recorded a $1,380,000 extraordinary gain as a result of this transaction. During the year ended October 31, 2001, the Company exchanged a $634,000 note receivable from a related party and recorded a $119,000 related party payable for $1,159,000 in subordinated debentures. The Company recorded a $406,000 extraordinary gain as a result of this transaction. In connection with these transactions, $76,000, $23,000 and $-0- of net offering costs were written-off during the years ended October 31, 2000, 2001 and 2002, respectively. The Company plans to offer the debenture holders the right to extend the debenture for three (3) years, in which event the conversion price would be reduced to $4. Any remaining debentures shall be redeemed on their due date of June 30, 2003. The Company intends to utilize its financing lines to effect the majority of the redemptions. NOTE 9 - INCOME TAXES Income taxes have been recorded under SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial and income tax reporting purposes and operating loss carryforwards. The components of the income tax provisions are as follows: 2000 2001 2002 ------------ ------------ ------------ Current tax provision Federal $ -- $ 100,000 $ -- State -- 25,000 -- ------------ ------------ ------------ -- 125,000 -- Deferred tax benefit -- (5,235,000) -- ------------ ------------ ------------ $ -- $(5,110,000) $ -- ============ ============ ============ -------------------------------------------------------------------------------- F-21 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (CONTINUED) Reconciliation between the effective tax rate and the statutory tax rates for the years ended October 31, 2000, 2001 and 2002 are as follows: 2000 2001 2002 -------- -------- -------- Federal tax (34.0)% (34.0)% (34.0)% State franchise tax, net of federal benefit (5.8) (5.8) (5.8) Change in valuation allowance 39.8 90.6 39.8 Other -- (0.2) -- Income tax benefit -- % 50.6 % -- % ======== ======== ======== At October 31, 2001 and 2002, the Company's deferred tax assets are comprised of the following items: 2001 2002 ------------- ------------- DEFERRED TAX ASSETS, current Net operating loss carryforwards $ 5,235,000 $ 2,100,000 Other 1,462,000 1,366,000 ------------- ------------- 6,697,000 3,466,000 Valuation allowance (1,462,000) (1,366,000) ------------- ------------- $ 5,235,000 $ 2,100,000 ============= ============= DEFERRED TAX ASSETS, noncurrent Fixed and intangible assets $ 2,054,000 $ 402,000 Other -- 2,773,000 Net operating loss carryforwards 39,269,000 43,445,000 ------------- ------------- 41,323,000 46,620,000 Valuation allowance (41,323,000) (43,485,000) ------------- ------------- $ -- $ 3,135,000 ============= ============= The valuation allowance of $42,785,000 and $44,851,000 at October 31, 2001 and 2002, respectively, represents a decrease of $9,812,000 and a $2,066,000 respectively, over the preceding year. -------------------------------------------------------------------------------- F-22 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 9 - INCOME TAXES (CONTINUED) The Company has net operating loss carryforwards of approximately $121,400,000, which expire as follows: 2007 $ 8,000,000 2008 21,500,000 2009 16,200,000 2010 15,700,000 2011 16,900,000 2012 1,700,000 2013 15,300,000 2014 12,300,000 2015 5,800,000 2017 8,000,000 ------------- Total $121,400,000 ============= As of October 31, 2002, $24,700,000 of the Company's federal net operating loss carryforwards are subject to limitations related to their utilization under Section 382 of the Internal Revenue Code. NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS PREFERRED STOCK The Company has authorized the issuance of 10,000,000 shares of preferred stock with a par value of $.01 per share. There are no preferred shares issued or outstanding at October 31, 2000, 2001 or 2002. Shares may be issued in one or more series. During the year ended October 31, 2001, the Company issued 5,542,018 preferred shares in settlement of certain debt obligations and subsequently retired the stock by restructuring existing notes payable and combining the preferred stock balance due of approximately $5,542,000 plus accrued interest of approximately $235,000. In conjunction with this refinancing, the Company issued five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $1 per share. -------------------------------------------------------------------------------- F-23 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) REDEEMABLE STOCK In January 1998, the Company entered into a five-year agreement with a former officer of the Company whereby the Company agreed to purchase up to 600,000 shares of the Company's common stock from the former officer at $.40 per share, in minimum increments of 100,000 shares, upon his election any time prior to February 28, 2003. In January 1999, the Company repurchased 200,000 shares under this agreement. In November 2001, the Company paid the former officer $40,000 to eliminate his rights to have the Company repurchase the remaining 400,000 shares. STOCK OPTION INCENTIVE PLANS The Company has a long-term incentive stock option plan which reserves 2,000,000 shares of common stock. Options granted under the plan are intended to qualify as incentive stock options under existing tax regulations. In addition, the Company has issued non-qualified stock options from time to time in connection with acquisitions and for other purposes and has also issued stock under the plan. During the year ended October 31, 2002, the Company issued 132,800 shares as a bonus to 274 employees ($.60 per share public closing price on authorization date). The following table summarizes the activity for the three years ended October 31, 2002: Outstanding Options ------------------------------ Number Exercise Price ----------- -------------- Balance, October 31, 1999 1,461,863 0.21 Granted 500,000 0.40 Canceled or expired (235,000) 0.15 Balance, October 31, 2000 1,726,863 0.28 Granted 607,000 0.48 Exercised (588,666) 0.15 - 0.25 Canceled or expired (243,197) 0.32 - 0.53 ----------- ------------- Balance, October 31, 2001 1,502,000 $ 0.38 Granted 29,000 1.67 Exercised (309,499) 0.15 - 0.46 Canceled or expired (39,584) 0.46 - 1.67 ----------- ------------- Balance, October 31, 2002 1,181,917 $ 0.46 =========== ============= -------------------------------------------------------------------------------- F-24 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) The following summarizes information about stock options outstanding at October 31, 2002:

Outstanding Options ------------------------------------------------------------------- Range of exercise Number Weighted average remaining Weighted average prices outstanding contractual life exercise price -------------------------------------------------------------------------------------------------- $.15 - $.30 99,167 1.51 years $0.29 $.31 - $.60 955,750 6.21 years $0.42 $.61 - $1.70 127,000 8.49 years $0.92 ----------- ------------ ------- 1,181,917 6.06 years $0.60 ----------- ------------ -------

Had compensation cost for the Company's options granted been determined consistent with SFAS 123, the Company's earnings per share would be affected as follows:

Year Ended October 31, --------------------------------------------------------- 2000 2001 2002 -------------- --------------- -------------- Net income (loss) As reported $ 2,614,000 $ 14,501,000 $ (5,551,000) -------------- --------------- -------------- Pro Forma $ 2,454,000 $ 11,696,000 $ (6,534,000) -------------- --------------- -------------- Income (loss) per share (basic and diluted): As reported $ .07 $ .36 $ (.14) ============== =============== ============== Pro Forma $ .06 $ .29 $ (.16) ============== =============== ==============

The fair value of each option granted is estimated on grant date using the Black-Scholes option pricing model which takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the risk-free interest rate for the term of the option. The following is the average of the data used to calculate the fair value: Risk-free Expected Expected October 31, interest rate Expected life volatility dividends ----------- ------------- ------------- ---------- --------- 2002 3.66% 5 years 78.93% N/A 2001 4.17% 5 years 98.54% N/A 2000 6.60% 5 years 104.60% N/A -------------------------------------------------------------------------------- F-25 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) From time to time, the Company has issued warrants under various types of transactions, including in exchange for outside services and debt financing. Warrants outstanding at October 31, 2002 expire at various times through October 2007. All warrants are issued at fair market value. The following table summarizes the activity in outstanding stock purchase warrants: Outstanding warrants ----------------------------------- Shares Price range ----------- ---------------- Balance, October 31, 1999 5,001,890 $ 0.25 - $ 0.60 Granted -- -- ----------- ---------------- Balance, October 31, 2000 5,001,890 0.25 - 0.60 Granted 6,428,655 0.38 - 1.00 Exercised (920,100) 0.25 Canceled or expired (3,832,560) 0.60 ----------- ---------------- Balance, October 31, 2001 6,677,885 0.38 - 1.00 Granted 1,093,250 0.60 - 1.61 Canceled or expired (309,000) 0.40 - 1.35 ----------- ---------------- Balance, October 31, 2002 7,462,135 $ 0.38 - $ 1.61 =========== ================ CAPITAL TRANSACTIONS During the year ended October 31, 2002, five individuals exercised their options to purchase 9,499 shares of common stock at $.46 per share, or approximately $4,000. In April 2002, an officer of the Company exercised his option to purchase 300,000 shares of common stock at $.15 per share. As part of the transaction, the officer surrendered to the Company 30,201 mature shares of common stock with a fair market value of $45,000 ($1.49 per share public closing price on the transaction date). In addition, the officer surrendered to the Company an additional 13,424 mature shares of common stock with a fair market value of $20,000 in payment of his note payable with accumulated interest (classified as Stock Subscription Receivable on the Company's financial statements). By combining the transaction, the Company issued a net 256,375 shares of common stock to the officer for his option exercise. In November 2001, the Company issued 132,850 shares of common stock as a bonus to 274 employees under the long-term incentive stock option plan ($.60 per share public closing price on the authorization date). As part of the transaction, approximately $80,000 was recorded as operating expenses. -------------------------------------------------------------------------------- F-26 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 10 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS (CONTINUED) CAPITAL TRANSACTIONS (CONTINUED) Effective November 1, 2001, the Company paid $40,000 to a former officer eliminating his options to require the Company to repurchase 400,000 shares under his separation agreement (stock put was classified as Redeemable Stock on the Company's financial statements). The $40,000 was charged to other expenses. Effective January 19, 2001, the Company settled five of its outstanding notes payable relating to the historical acquisition of DIS common stock from unrelated third parties. Warrants issued with the notes were exercised for 920,100 shares of the Company's common stock at $.25 per share, or $230,000. As part of the settlement, the Company issued a total of 150,000 warrants at $1.00 per share. On December 29, 2000, the Company renegotiated two of its existing notes with General Electric Company aggregating $3,130,000 into a new promissory note with interest at 8.0% payable along with unpaid interest on December 29, 2005 for $4,664,000. As part of the renegotiation, the company issued five-year warrants to purchase 779,000 shares of the Company's common stock at a price of $1.00 per share. The Company allocated approximately $225,000 of the renegotiated notes to the warrants which represented the interest discount GE gave the Company in consideration for the warrants when the rate was compared to other recent financing. Effective December 13, 2000, the Company's major lender, DVI Financial Services, Inc., agreed to convert a $5,542,000 note payable into a new series of non-voting convertible preferred stock on the basis of one share of preferred stock for each one dollar of debt canceled. Subsequent to July 2001, but before October 2001, the Company converted the preferred stock back into notes payable with accrued interest of approximately $235,000 accumulated into the new notes payable balances. -------------------------------------------------------------------------------- F-27 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimates the fair value of financial instruments as of October 31, follows:

2001 2002 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Accounts receivable, current $28,764,000 $28,764,000 $29,453,000 $29,453,000 Accounts receivable, long term $ 2,499,000 $ 2,499,000 $ 2,366,000 $ 2,366,000 Due from related party - long-term $ 60,000 $ 60,000 $ -- $ -- Debt maturing within one year $31,789,000 $31,789,000 $24,634,000 $24,634,000 Long-term debt $56,966,000 $51,826,000 $68,271,000 $65,093,000 Notes payable related parties, $ 119,000 $ 119,000 $ 1,173,000 $ 1,173,000 current Notes payable related parties, $ 1,330,000 $ 1,179,000 $ 105,000 $ 119,000 long-term Subordinated debentures $16,303,000 $16,537,000 $16,291,000 $16,532,000

In assessing the fair value of these financial instruments, the Company has used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, cash overdraft, current accounts receivable, due from/to related parties and current and short-term debt, it was assumed that the carrying amount approximated fair value for the majority of these instruments because of their short maturities. The fair value of the long term amounts for accounts receivable, due from related party, notes payable related parties and debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The fair value of the subordinated debentures is the estimated value of debentures available to repurchase at current market rates over the bond term including an estimated interest payment stream. NOTE 12 - RELATED PARTY TRANSACTIONS The amount due from related parties at October 31, 2001 consisted of notes to a current officer of the Company of approximately $18,000 (classified as Stock Subscription Receivable), short-term loans made to a current officer of the Company of approximately $94,000, notes to a prior officer of the Company for $70,000 bearing interest at 6.5% (including $30,000 classified as Stock Subscription Receivable), and accrued interest of approximately $20,000. The amount due from related parties as of October 31, 2002 is $-0-. -------------------------------------------------------------------------------- F-28 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED) During the year ended October 31, 2002, the Company received $38,000 from the prior officer as payment of his Stock Subscription Receivable and $8,000 of accumulated interest, and forgave an additional note with accumulated interest due from him of approximately $50,000 in consideration of his prior efforts. In addition, another officer repaid short-term loans of $94,000, and an additional officer settled his obligation by giving 13,424 mature shares of common stock with a fair market value of $20,000 ($1.49 per share public trading price on the date of the transaction) as payment in full of his note payable (classified as Stock Subscription Receivable) with accumulated interest. The amount due to related parties at October 31, 2001 primarily consisted of notes due to an officer and employee of the Company for the purchase of DIS common stock in 1996. The notes bear interest at 6.58% paid annually. At October 31, 2001, the officer had outstanding notes payable of approximately $1,225,000 (due June 2003) and the employee had notes payable of approximately 105,000 (due June 2004). In addition, the Company incurred a short-term related party payable of approximately $119,000 for the purchase of subordinated debentures. During the year ended October 31, 2002, the Company repaid the officer $119,000 for the purchase of subordinated debentures and repaid a portion of its outstanding obligation with the other officer of approximately $52,000. NOTE 13 - COMMITMENTS AND CONTINGENCIES LEASES - The Company leases various operating facilities and certain medical equipment under operating leases expiring through 2018. Certain leases contain renewal options from two to ten years and escalation based primarily on the consumer price index. Future minimum annual payments under noncancellable operating leases are as follows: Year ending October 31, Facilities Equipment ----------------------- ---------- --------- 2003 $ 6,977,000 $ 2,300,000 2004 5,974,000 2,168,000 2005 5,497,000 1,906,000 2006 5,157,000 1,247,000 2007 4,111,000 402,000 Thereafter 16,294,000 19,000 ------------ ------------ $44,010,000 $ 8,042,000 ------------ ------------ -------------------------------------------------------------------------------- F-29 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED) LEASES (CONTINUED) - Total rent expense, including equipment rentals, for the years ended October 31, 2000, 2001 and 2002 amounted to approximately $6,334,000, $7,344,000 and $8,799,000, respectively. SALARIES AND CONSULTING AGREEMENTS - The Company has a variety of arrangements for payment of professional and employment services. The agreements provide for the payment of professional fees to physicians under various arrangements including a percentage of revenue collected from 15% to 30%, fixed amounts per periods and combinations thereof. The Company also has employment agreements with officers and key employees at annual compensation rates ranging from $48,000 to $350,000 and for periods extending up to five years. Total commitments under the agreements are approximately $9,482,000 for the next twelve-month period. The Company renegotiated and bought out the remaining years of an employment contract with one officer. Terms of the settlement include the establishment of a legal consulting arrangement which expires February 2003. The remaining commitment under this agreement is approximately $20,000. Additionally, the Company was required to repurchase, at the former officer's option, up to 600,000 shares of common stock at $.40 per share any time through February 2003. During the year ended October 31, 1999, the Company repurchased 200,000 shares under this agreement. During the year ended October 31, 2002, the Company paid $40,000 to this former officer eliminating his option to require the Company to repurchase the remaining 400,000 shares under his agreement. PURCHASE COMMITMENT - On February 19, 1999 the Company entered into a five year purchase agreement with an imaging film provider whereby the Company must purchase $9,990,000 of film at a rate of approximately $2,000,000 annually over the term of the agreement. EQUIPMENT SERVICE CONTRACTS - On March 1, 2000, the Company entered into an equipment maintenance service contract through October 2005 with GE Medical Systems to provide maintenance on the majority of its medical equipment for a fee based upon a percentage of net revenues with minimum aggregate net revenue requirements. The percent of revenue to be billed ranges from 2.82% to 3.74% and the aggregate minimum net revenue ranges from $85,000,000 to $125,000,000 during the term of the agreement. The Company has met or exceeded the minimum required revenue for fiscal 2001 and 2002. LITIGATION - In the ordinary course of the business, from time to time the Company becomes involved in certain legal proceedings, the majority of which are covered by insurance. Management is not aware of any pending material legal proceedings. -------------------------------------------------------------------------------- F-30 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 14 - EMPLOYEE BENEFIT PLAN The Company has adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue Code, that covers substantially all employees. Eligible employees may contribute on a tax deferred basis a percentage of compensation, up to the maximum allowable under tax law. Employee contributions vest immediately. The plan does not require a matching contribution by the Company. There was no expense for the years ended October 31, 2000, 2001 or 2002. NOTE 15 - MALPRACTICE INSURANCE The Company and physicians employed by the Company are insured by TIG Insurance. TIG Insurance provides claims-based malpractice insurance coverage which covers only asserted malpractice claims within policy limits. Tail insurance coverage is included in the cost of the premiums. Management does not believe there are material uninsured malpractice costs at October 31, 2002. NOTE 16 - SUBSEQUENT EVENTS In November 2002, the Company issued 100,000 five-year warrants exercisable at $.75 per share. In December 2002, the Company issued 50,000 five year warrants exercisable at $.41 per share. On December 2, 2002, the Company opened its new center, Rancho Bernardo Advanced, LLC in Rancho Bernardo, California (near San Diego) which will provide MRI, CT, ultrasound and x-ray services. During the year ended October 31, 2002, the joint venture partners invested $250,000 and the Company has contributed approximately $950,000 which was primarily used for leasehold improvements. On February 10, 2003, the Company was advised that the Federal Deposit Insurance Corporation ("FDIC") had elected to close Coast Business Credit ("Coast") and liquidate its accounts. While the FDIC has agreed that the Company facility shall continue through its December 2003 term, it has reduced the amount available from $22 million to $15 million. The Company intends to seek an alternative lending source. -------------------------------------------------------------------------------- F-31 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 17 - LIQUIDITY The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. As of October 31, 2002, the Company has a deficiency in equity of $50,921,000 compared to $45,642,000 as of October 31, 2001. The working capital deficiency of $44,668,000 as of October 31, 2002, has increased by $17,681,000, from the deficiency of $26,987,000 as of October 31, 2001. Over the past several years, management has been addressing the issues that have lead to these deficiencies, and the results of management's plans and efforts have been positive in two of the last three years. However, the results of this last fiscal period show that continued effort is needed in the future to allow the Company to continue to operate profitably. Such actions and plans include: o Increase revenue by selectively opening imaging centers in areas currently not served by the Company. o In late November 2001, the Company opened a new center in Burbank, California o In January 2002, the Company opened a new center in Tarzana, California o In May 2002, the Company acquired Grove Diagnostic Imaging in Rancho Cucamonga, California o In December 2002, the Company opened its Rancho Bernardo joint venture facility. o Increase revenue by expanding existing facilities or opening new locations close to existing sites. In order to obtain certain new large contracts, nearby x-ray offices may be acquired to meet the increase in patient volume. In addition, the Company may consolidate certain procedures into one location predominately with women's centers offering mammography and ultrasound services. o In September 2002, the Company opened Orange Advanced Imaging Center and Orange Women's Center across the street from the existing Orange Imaging Center. o Effective January 1, 2002, the Company entered into a new capitation agreement for approximately 62,000 lives primarily benefiting the Company's Temecula facility ["TVIC"]. The Company opened two additional facilities in Sun City and Lake Elsinore, California which will provide x-ray services to support the new contract. Subsequent to year end, the Company relocated its Lake Elsinore location to nearby Wildomar, California. o In June 2002, the Company entered into a new capitation contract for approximately 25,000 lives primarily benefiting the Company's Los Coyotes' facility. To service the contract, the Company assumed the leases of three x-ray facilities in nearby cities. -------------------------------------------------------------------------------- F-32 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 17 - LIQUIDITY (CONTINUED) o In October 2001 and July 2002, the Company entered into two separate capitation agreements for approximately 80,000 lives and 15,000 lives, respectively, primarily benefiting the Company's Desert Advanced facilities. To service these contracts, the Company opened three adjacent x-ray facilities in Palm Springs, Indio and Bermuda Dunes, California. o In August 2002, the Company entered into a new capitation contract for approximately 53,000 lives primarily benefiting the Company's new Grove facility in Rancho Cucamonga, California. To service the contract, the Company assumed a nearby facility providing x-ray services. o Increase revenue by renegotiating existing capitation and managed care contracts for additional services and more favorable terms. Effective November 1, 2002, the Company renegotiated one of its existing capitation contracts primarily benefiting the Company's Orange facilities increasing its reimbursement by approximately 15%, or $500,000. o Increase net revenue and decrease operating losses by eliminating poor performing capitation and managed care contracts where reimbursement falls short of the Company's costs. In November 2002, the Company ceased doing business with one capitation contract in Orange County where renewal reimbursement would have fallen short of cost. o Continue to evaluate all facilities' operations and trim excess operating and general and administrative costs where it is feasible to do so including consolidating underperforming facilities to reduce operating cost duplication and improve operating income. Due to a shortage of qualified radiologists in the marketplace, the Company experienced difficulty in hiring and retaining physicians by its affiliated medical group [BRMG] at the individual sites during most of fiscal 2002. This required the engagement of independent contractors and locum tenens (part-time fill-in physicians) to interpret patient films. The cost of these individuals was approximately double the salary of a regular BRMG full-time physician with additional costs for travel and lodging required. Recently, BRMG hired a new medical director who oversees physician recruitment and staffing. The new director has already arranged for BRMG to hire over twelve new physicians during the last two quarters of fiscal 2002. BRMG is working to solidify its physicians at the majority of the Company's sites while increasing the volume of interpretations done by physicians at the Company's main offices utilizing the Company's computer and PACS systems. o Continue to selectively acquire new medical equipment and replace old and obsolete equipment in order to increase service volume and throughput at many facilities. In the past two years, the Company has replaced or upgraded the majority of its equipment and increased throughput at most of its locations. -------------------------------------------------------------------------------- F-33 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 17 - LIQUIDITY (CONTINUED) o Continue to work with lessors and lenders to extend terms of leases and financing to accommodate cash flow requirements for ongoing agreements and upon the expiration of leases and notes. The Company has demonstrated continued success in renegotiation of many of its existing notes payable and capital lease obligations by extending payment terms, reducing interest rates, reducing or eliminating monthly payments and creating long-term balloon payments. The Company's long-term relationships with its lenders and their continued confidence in their extensions of credit is critical to the Company's success. o During the year ended October 31, 2002, the Company renegotiated several notes payable with DVI to obtain working capital of $2,000,000 and extend payment terms. o During the year ended October 31, 2002, the Company financed previously accrued maintenance charges with General Electric for approximately $1,108,000 with payment terms of 35 months at 9.5%. o During the third quarter of fiscal 2002, the Company obtained $17 million in working capital from DVI to provide a secured source of financing in advance of the June 30, 2003 date for retirement of the remaining $16,291,000 Series A Convertible Subordinated Debentures. o Continue to settle historical notes payable, subordinated bond debentures and other debt at discounts. The Company plans to offer the debenture holders the right to extend the debenture for three (3) years, in which event the conversion price would be reduced to $4. Any remaining debentures shall be redeemed on their due date of June 30, 2003. The Company intends to utilize its financing lines to effect the majority of the redemptions. o Depending on price, market circumstances and strategic buyers, the Company may look to liquidate non core assets. In March 2001, the Company sold its only radiation therapy center ("VROC") for $4,000,000, resulting in a gain of approximately $3,527,000. Notwithstanding the continued working capital deficiency, substantial doubt about the entity's ability to continue as a going concern is alleviated by mitigating factors. Those mitigating factors include the aforementioned actions and plans by management combined with the positive cash flow from operations and the willingness of existing lenders to offer alternative debt financing and payment plans. -------------------------------------------------------------------------------- F-34 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------------------------------

NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarter Ended ----------------------------------------------------------------- January 31 April 30 July 31 October 31 ------------- ------------- ------------- ------------- FISCAL 2002 Net revenue $ 32,441,000 $ 33,722,000 $ 35,580,000 $ 37,538,000 Income (loss) before extraordinary item 917,000 836,000 (5,123,000) (2,182,000) Net income (loss) 917,000 836,000 (5,122,000) (2,182,000) Earnings (loss) per share Basic 0.02 0.02 (0.12) (0.05) Diluted 0.02 0.02 (0.12) (0.05) January 31 April 30 July 31 October 31 ------------- ------------- ------------- ------------- FISCAL 2001 Net revenue $ 24,110,000 $ 26,104,000 $ 29,464,000 $ 32,159,000 Income (loss) before extraordinary item 918,000 5,107,000 2,081,000 5,841,000 Net income 923,000 5,215,000 2,081,000 6,282,000 Earnings per share Basic 0.02 0.12 0.05 0.16 Diluted 0.02 0.11 0.04 0.14 -------------------------------------------------------------------------------------------------------- F-35

INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE To the Stockholders and Board of Directors of Primedex Health Systems, Inc. Our report on the consolidated financial statements of Primedex Health Systems, Inc. and its affiliates, as of October 31, 2002 and 2001 and for the three years ended October 31, 2002, is included on page F-1 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related accompanying financial statements Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 2002, 2001, and 2000. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /S/ MOSS ADAMS LLP Los Angeles, California January 22, 2003 -------------------------------------------------------------------------------- S-1 PRIMEDEX HEALTH SYSTEMS, INC. AND AFFILIATES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ------------------------------------------------------------------------------------------------------------------------------------

Additions -------------- Balance at Charged Deductions from Balance at Beginning of Year Against Income Reserves (a) End of Year ----------------- -------------- ------------ ----------- YEAR ENDED OCTOBER 31, 2002: Accounts receivable-contractual allowances -current $ 48,746,000 $221,840,000 $217,428,000 $ 53,158,000 ------------- ------------- ------------- ------------- Accounts receivable-bad debt allowances -current $ 1,132,000 $ 6,649,000 $ 6,188,000 $ 1,593,000 ============= ============= ============= ============= Accounts receivable-contractual allowances-noncurrent $ 4,235,000 $ 17,821,000 $ 17,785,000 $ 4,271,000 ============= ============= ============= ============= Accounts receivable-bad debt allowances -noncurrent $ 98,000 $ 534,000 $ 504,000 $ 128,000 ------------- ------------- ------------- ------------- Goodwill amortization $ 6,265,000 $ -- $ -- $ 6,265,000 ------------- ------------- ------------- ------------- YEAR ENDED OCTOBER 31, 2001: Accounts receivable-contractual allowances -current $ 28,579,000 $159,303,000 $139,136,000 $ 48,746,000 ============= ============= ============= ============= Accounts receivable-bad debt allowances -current $ 521,000 $ 3,701,000 $ 3,090,000 $ 1,132,000 ============= ============= ============= ============= Accounts receivable-contractual allowances-noncurrent $ 2,960,000 $ 13,841,000 $ 12,566,000 $ 4,235,000 ------------- ------------- ------------- ------------- Accounts receivable-bad debt allowances -noncurrent $ 54,000 $ 321,000 $ 277,000 $ 98,000 Goodwill amortization $ 4,912,000 $ 1,353,000 $ -- $ 6,265,000 ------------- ------------- ------------- ------------- YEAR ENDED OCTOBER 31, 2000: Accounts receivable-contractual allowances -current $ 24,514,000 $128,339,000 $124,274,000 $ 28,579,000 ------------- ------------- ------------- ------------- Accounts receivable-bad debt allowances -current $ 791,000 $ 2,339,000 $ 2,609,000 $ 521,000 ============= ============= ============= ============= Accounts receivable-contractual allowances-noncurrent $ 4,645,000 $ 13,294,000 $ 14,979,000 $ 2,960,000 ============= ============= ============= ============= Accounts receivable-bad debt allowances -noncurrent $ 150,000 $ 242,000 $ 338,000 $ 54,000 ------------- ------------- ------------- ------------- Goodwill amortization $ 4,009,000 $ 903,000 $ -- $ 4,912,000 ------------- ------------- ------------- ------------- (a) Deductions include sales and divestitures ------------------------------------------------------------------------------------------------------------------------------------ S-2

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------- -------------------------------------------------- The following table sets forth certain information with respect to each of the directors and those executive officers of the Company performing a policy-making function for the Company as of January 17, 2003:

Name Age Director or Officer Since Position with Company ---- --- ------------------------- --------------------- Howard G. Berger, M.D.* 57 1992 President, Treasurer, Chief Executive and Chief Financial Officer, and Director Norman R. Hames 47 1996 Vice President, Secretary, Chief Operating Officer and Director John V. Crues, III, M.D.* 53 2000 Vice President and Director Michael J. Krane, M.D. 58 1992 Vice President, Director of Medical Operations Jeffrey L. Linden 60 2001 Vice President, General Counsel

________ *Member of the Stock Option Committee The following is a brief account of the business experience of each PHS director and executive officer during the past five years. HOWARD G. BERGER, M.D. is the President and Chief Executive Officer and Chief Financial Officer of the Company. Dr. Berger is the 99% owner of Beverly Radiology Medical Group ("BRMG") which provides the professional medical services at a number of the Company's imaging centers. Dr. Berger has been principally engaged since 1987 in the same capacities for the Company and its predecessor entities. (See Item 13.) NORMAN R. HAMES was a founder of Diagnostic Imaging Services, Inc. and has since 1986, served as the president and a director of that entity. Mr. Hames has been the chief operating officer of the Company since 1996. JOHN V. CRUES, III, M.D. has been a medical doctor specializing in radiology, since 1982. MICHAEL J. KRANE, M.D. is the vice president and director of medical operations at RadNet. Dr. Krane has been principally engaged since 1987 in the same capacities for the Company and its predecessor entities. JEFFREY L. LINDEN joined the Company in 2001 as its vice president and general counsel. He is also associated with Cohen & Lord, a professional corporation, outside general counsel to the Company. Prior to joining the Company, Mr. Linden had been engaged in the private practice of law for in excess of 30 years. None of the Company's directors serve as directors of any other corporation with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act. Furthermore, none of the events described in Item 401(f) of Regulation S-K involving a director or an executive officer of the Company occurred during the past five years. The officers are elected annually and serve at the discretion of the Board of Directors. There are no family relationships among any of the officers and directors. During the fiscal year ended October 31, 2002, while the Board of Directors held numerous meetings, they took board action by unanimous written consent, which was done on 10 occasions. All directors participated in all such action. 39 At present the Board of Directors acts as an Audit Committee, which reviews the results and scope of the audit and other services provided by the Company's independent auditors, and as a Compensation Committee, which determines salaries and incentive compensation for employees of and consultants to the Company. The Company intends for such committees to be composed of independent directors at such time as it is able to locate qualified individuals willing and able to serve on the Company's Board of Directors. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires the Company's directors and officers and persons who own more than 10% of a registered class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Directors and officers and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of the reports they file. Based solely on the review of the copies of such reports and written representations from certain persons that certain reports were not required to be filed by such persons, the Company believes that all its directors, officers and greater than 10% beneficial owners complied with all filing requirements applicable to them with respect to transactions for the period November 1, 2001 through October 31, 2002. 40 ITEM 11. EXECUTIVE COMPENSATION -------- ---------------------- The following table sets forth information concerning the annual, long-term and all other compensation for services rendered in all capacities to the Company and its subsidiaries for the years ended October 31, 2002, 2001 and 2000, of (i) the person who served as the Company's chief executive officer during the year ended October 31, 2002, and (ii) the four most highly compensated executive officers (other than the chief executive officer) of the Company serving as executive officers at October 31, 2002 ("Other Executive Officers"), and whose aggregate cash compensation exceeded $100,000 for the year ended October 31, 20021 (collectively, "Named Executive Officers"):

SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------- ---------------------- Other Securities Restricted Name and Year Ended Annual Underlying Stock LTIP All Other Principal Position 10/31 Salary($) Bonus($) Comp.($)(1) Options (#) Awards($) Pay-outs($) Comp($) ------------------ ----- --------- -------- ----------------------- --------- ----------- ------- Howard G. Berger, M.D 2002 $ 75,000(3) -- -- -- -- -- -- Chief Executive Officer 2001 $ 75,000(2) -- -- -- -- -- -- 2000 $ 75,000(3) -- -- -- -- -- -- Norman R. Hames 2002 $ 225,000 -- -- -- -- -- -- Vice President, Secretary 2001 $ 154,875 -- -- 3,000,000 -- -- -- Chief Operating Officer 2000 $ 150,000 -- -- -- -- -- -- Michael J. Krane, M.D 2002 $ 100,000(4) -- -- -- -- -- -- Vice President 2001 $ 100,000(4) -- -- -- -- -- -- 2000 $ 100,000(4) -- -- -- -- -- -- John V. Crues, III, M.D 2002 $ 175,000(4) -- -- -- -- -- -- Vice President 2001 $ 150,000(5) -- -- -- -- -- -- 2000 $ 145,000(6) -- -- 500,000 -- -- -- Jeffrey L. Linden 2002 $ 350,000(7) -- -- 1,075,000 -- -- -- Vice President and 2001 $ 149,369(7) -- -- 1,075,000 -- -- -- General Counsel

(1) The dollar value of perquisites and other personal benefits, if any, for each of the named executive officers was less than $50,000 or 10% of salary and bonus, the reporting thresholds established by the Securities and Exchange Commission. (2) Does not include $130,000 received from Beverly Radiology Medical Group (see "Employment Contracts"). (3) Does not include $300,000 received from Beverly Radiology Medical Group (see "Employment Contracts"). (4) Does not include $175,000 received from Beverly Radiology Medical Group. (5) Does not include $150,000 received from Beverly Radiology Medical Group. (6) Does not include $145,000 received from Beverly Radiology Medical Group. (7) On June 1, 2001, Mr. Linden became the vice president and general counsel of the Company. Cohen & Lord, a professional corporation, a law firm with which Mr. Linden is associated, received $309,000 in fees from the Company during the fiscal year ended October 31, 2002. Mr. Linden has specifically waived any interest in Company fees since becoming an officer of the Company. 41 COMPENSATION PURSUANT TO STOCK OPTIONS None of the Named Executive Officers received stock option grants in the fiscal year ended October 31, 2002. As of October 31, 2002, the Company had 8,644,052 in options and warrants outstanding to purchase shares of common stock. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table provides information on option exercises in the fiscal year ended October 31, 2002 by the Named Executive Officers and the value of such officer's unexercised options at October 31, 2002:

Number of Shares Value of Shares Underlying Unexercised Unexercised In-the Acquired on Value Options at Money Options at Name Exercise (#) Realized ($)(1) Fiscal Year End (#) Fiscal Year End ($)(1) ---- ------------ --------------- ------------------- ---------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Norman R. Hames -- -- 3,000,000(2) 0 $ 750,000 0 John V. Crues, III, M.D. 269,798 $215,838 500,000 0 $ 200,000 0 Jeffrey L. Linden -- -- 1,367,365(3) 0 $ 481,723 0

______________________ (1) Based on the closing price reported on the Over-the-Counter Bulletin Board Market for the Common Stock on that date, $.80 per share. (2) Represents warrant issued to Mr. Hames. (3) Includes warrants issued to Mr. Linden. EMPLOYMENT CONTRACTS Beverly Radiology Medical Group entered into a Management Consulting Agreement with Howard G. Berger, M.D. which renews annually whereby Dr. Berger serves as the chief executive for the partnership entities for $300,000 per year. John V. Crues, III, M.D. has a renewable one year employment agreement with the Company and with Beverly Radiology Medical Group which began in 1996 and require him to devote one-half of his time to each entity in exchange for annual combined remuneration of $350,000. On April 16, 2001, the Company entered into a five year employment agreement with Jeffrey L. Linden whereby Mr. Linden became vice president and general counsel. The agreement provides for annual compensation of $350,000, together with a five year warrant to purchase 1,000,000 shares of the Company's Common Stock at a price of $0.43 per share (the closing price reported on the Over-the-Counter Bulletin Board Market on the date the agreement was executed). On May 1, 2001, the Company entered into a three year employment agreement with Norman R. Hames. Pursuant to the agreement Mr. Hames agreed to continue his employment with the Company as its vice president and chief operating officer. The agreement provides for Mr. Hames to receive annual compensation of $225,000. Additionally, in consideration of his entry into the agreement Mr. Hames received a five year warrant to purchase 3,000,000 shares of the Company's Common Stock at a price of $0.55 per share (the closing price reported on the Over-the-Counter Bulletin Board Market on the date the agreement was executed). The Company also agreed to provide a bonus to Mr. Hames of $0.20 per share upon exercise of the warrant up to a maximum of $600,000. 42 STOCK PLANS The Company has one stock incentive plan-the 2000 Long-Term Incentive Plan pursuant to which 2,000,000 shares of Common Stock have been reserved for issuance. The material features of the 2000 Plan are as follows: ADMINISTRATION The Plan is presently administered by the Board of Directors, but upon the Company locating non-employee directors who have the requisite qualifications will then be administered by a committee appointed by the Board which will consist of two or more non-employee Directors (the "Compensation Committee"). Subject to the terms of the Plan, the Board (and the Committee, if established) has full authority to administer the Plan in all respects, including: (i) selecting the individuals who are to receive Awards under the Plan; (ii) determining the specific form of any Award; and (iii) setting the specific terms and conditions of each Award. The Company's senior legal and human resources representatives are also authorized to take ministerial actions as necessary to implement the Plan and Awards issued under the Plan. ELIGIBILITY Employees, directors and other individuals who provide services to the Company, its affiliates and subsidiaries who, in the opinion of the Board (or its appointed Committee), are in a position to make a significant contribution to the success of the Company, its affiliates and subsidiaries are eligible for Awards under the Incentive Plan. AMOUNT OF AWARDS The value of shares or other Awards to be granted to any recipient under the Incentive Plan are not presently determinable. However, the Plan restricts the number of shares and the value of Awards not based on shares which may be granted to any individual during a calendar year or performance period. In order to facilitate the Company's compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), which deals with the deductibility of compensation for any of the chief executive officer and the four other most highly-paid executive officers, the Plan limits to 500,000 the number of shares for which options, stock appreciation rights or other stock Awards may be granted to an individual in a calendar year and limits to $1,000,000 the value of non-stock-based Awards that may be paid to an individual with respect to a performance period. These restrictions were adopted by the Board of Directors as a means of complying with Code section 162(m) and are not indicative of historical or contemplated Awards made or to be made to any individual under the Plan. STOCK OPTIONS The Plan authorizes the grant of options to purchase shares of common stock, including options to employees intended to qualify as incentive stock options within the meaning of Section 422 of the Code, as well as non-statutory options. The term of each option will not exceed ten years and each option will be exercisable at a price per share not less than 100% of the fair market value of a share of common stock on the date of the grant. Generally, optionees will pay the exercise price of an option in cash or by check, although the Board (and the Committee, if established) may permit other forms of payment including payment through the delivery of shares of common stock. Options granted under the Plan are generally not transferable (except at death or as gifts to certain Family Members (as defined in the Plan)). At the time of grant 43 or thereafter, the Board (and the Committee, if established) may determine the conditions under which stock options vest and remain exercisable. Unless otherwise determined by the Board (and the Committee, if established), unexercised options will terminate if the holder ceases for any reason to be associated with the Company, its affiliates and subsidiaries. Options generally remain exercisable for a specified period following termination for reasons other than for Cause (as defined in the Plan), particularly in circumstances of death, Disability and Retirement (as defined in the Plan). In the event of a Change in Control or Covered Transaction (as defined in the Incentive Plan) of the Company, options become immediately exercisable and/or are converted into options for securities of the surviving party as determined by the Board (and the Committee, if established). OTHER AWARDS The Board (and the Committee, if established) may grant stock appreciation rights which pay, in cash or common stock, an amount generally equal to the difference between the fair market values of the common stock at the time of exercise of the right and at the time of grant of the right. In addition, the Board (and the Committee, if established) may grant Awards of shares of common stock at a purchase price less than fair market value at the date of issuance, including zero. A recipient's right to retain these shares may be subject to conditions established by the Board (and the Committee, if established), if any, such as the performance of services for a specified period or the achievement of individual or Company performance targets. The Board (and the Committee, if established) may also issue shares of common stock or authorize cash or other payments under the Plan in recognition of the achievement of certain performance objectives or in connection with annual bonus arrangements. PERFORMANCE CRITERIA The Board (and the Committee, if established) may condition the exercisability, vesting or full enjoyment of an Award on specified Performance Criteria. For purposes of Performance Awards (as defined in the Plan) that are intended to qualify for the performance-based compensation exception under Code Section 162(m), Performance Criteria means an objectively determinable measure of performance relating to any of the following as specified by the Board (and the Committee, if established) (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): (i) sales; revenues; assets; liabilities; costs; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, amortization or other items, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets; one or more operating ratios; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; working capital requirements; stock price; stockholder return; sales, contribution or gross margin, of particular products or services; particular operating or financial ratios; customer acquisition, expansion and retention; or any combination of the foregoing; or (ii) acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; recapitalizations, restructurings, financings (issuance of debt or equity) and refinancings; transactions that would constitute a change of control; or any combination of the foregoing. Performance Criteria measures and targets determined by the Board (and the Committee, if established) need not be based upon an increase, a positive or improved result or avoidance of loss. 44 AMENDMENTS The Board (and the Committee, if established) may amend the Plan or any outstanding Award for any purpose permitted by law, or may at any time terminate the Plan as to future grants of Awards. The Board (and the Committee, if established) may not, however, increase the maximum number of shares of common stock issuable under the Plan or change the description of the individuals eligible to receive Awards. In addition, no termination of or amendment to the Plan may adversely affect the rights of a Participant with respect to any Award previously granted under the Plan without the Participant's consent, unless the Compensation Committee expressly reserves the right to do so in writing at the time the Award is made. To the extent the Board (and the Committee, if established) desires the Plan to qualify under the Code, certain amendments may require shareholder approval. DIRECTOR COMPENSATION Directors do not receive a fee for their services as a director. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 2000 all executive compensation has been determined by the three member board of directors of PHS, Howard G. Berger, M.D., Norman R. Hames and John V. Crues, III, M.D. In addition, no individual who served as an executive officer of the Company during fiscal 2002, served during fiscal 2002 on the board of directors or compensation committee of another entity where an executive officer of the other entity also served on the board of directors of the Company. 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------- -------------------------------------------------------------- The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of February 1, 2003, by (i) each holder known by the Company to beneficially own more than five percent of the outstanding Common Stock, (ii) each of the Company's directors and executive officers [including officers listed in the Summary Compensation Table] as a group. The percentages set forth in the table have been calculated on the basis of treating as outstanding, for purposes of computing the percentage ownership of a particular holder, all shares of PHS Common Stock outstanding at such date and all shares of Common Stock purchasable upon exercise of options and warrants owned by such holder which are exercisable at or within 60 days after such date.

Name of Shares of Common Stock Beneficial Owner Beneficially Owned(1) Percent of Class ---------------- --------------------- ---------------- Howard G. Berger, M.D.* 12,490,128(2) 25.1% John V. Crues, III, M.D. * 993,875(3) 2.0% Norman R. Hames* 3,000,000(4) 6.0% Michael J. Krane, M.D. * 2,216,228 4.5% Jeffrey L. Linden* 1,367,365(5) 2.7% All directors and executive officers of the Company as a group [five persons] 20,067,596(6) 40.3%

___________ *The address of all of the Company's officers and directors is c/o the Company, 1510 Cotner Avenue, Los Angeles, California 90025. (1) Subject to applicable community property statutes and except as otherwise noted, each holder named in the table has sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned. (2)Includes 23,900 shares issuable upon conversion of the Company's outstanding convertible debentures convertible at $10 per share. (3)Includes options for 500,000 shares exercisable at $.40 per share. (4)Represents warrants exercisable at $.55 per share. (5)Includes 1,272,365 options and warrants exercisable at prices between $.43 and $.60 per share. (6)See the above footnotes. Includes 15,014,956 shares owned of record and 5,052,640 shares issuable upon exercise of presently exercisable options, warrants and convertible debentures. As a result of his stock ownership and his positions as president and a director of the Company, Howard G. Berger, M.D. may be deemed to be a controlling person of the Company. 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------- ---------------------------------------------- Howard G. Berger, M.D. [see "Items 10 and 12"] is the 99% owner of Beverly Radiology Medical Group, Inc. and Pronet Imaging Medical Group, Inc., who together have formed the partnership known as Beverly Radiology Medical Group, which has executed a Management and Services Agreement with RadNet and DIS pursuant to which it supplies the professional medical services at most of the Company's imaging centers [see "Item 1] through 2012. The fees paid to the Company by BRMG for services rendered is 74% of total revenues. In fiscal 2002, Dr. Berger was paid $300,000 and Dr. Krane was paid $150,000 by BRMG. On August 1, 1996, the Company acquired from Norman Hames, [not then an officer or director of the Company] all of his common stock and warrants to purchase shares of common stock of Diagnostic Imaging Services, Inc., a Delaware corporation ("DIS") which then represented 21.6% of the outstanding shares of that entity in exchange for five year warrants to purchase 2,913,550 shares of the Company's common stock at $.60 per share as well as the Company's promissory note, payable interest only annually at 6.58% for $2,448,862 and due June 15, 2001. At October 31, 2001, the note was renegotiated so as to now be due in June 2003. At October 31, 2002, the Company was indebted on account of said note in the amount of $1,173,000. The warrant expired unexercised. At October 31, 2001, the Company was indebted to Jeffrey L. Linden in the amount of $104,992 in connection with the Company's acquisition of his interest in DIS. The obligation incurs interest at the rate of 6.58% per annum and is due June 30, 2004. In the acquisition transaction the Company issued to Mr. Linden its warrants to purchase 197,365 shares of Common Stock at a price of $.60 per share expiring June 30, 2004. ITEM 14. CONTROLS AND PROCEDURES -------- ----------------------- (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's principal executive officer and principal financial officer has 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 (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. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. 47 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------- --------------------------------------------------------------- (a) FINANCIAL STATEMENTS - The following financial statements are filed herewith:

Page No. -------- Independent Auditor's Report....................................................................... F-1 Consolidated Balance Sheets........................................................................ F-2 Consolidated Statements of Operations.............................................................. F-3 Consolidated Statements of Stockholders' Deficit................................................... F-4 Consolidated Statements of Cash Flows.............................................................. F-5 to F-7 Notes to Consolidated Financial Statements......................................................... F-8 to F-35 SCHEDULES - The Following financial statement schedules are filed herewith: Independent Auditor's Report on Supplemental Schedule.............................................. S-1 Schedule II - Valuation and Qualifying Accounts.................................................... S-2

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) EXHIBITS - The following exhibits are filed herewith or incorporated by reference herein:

Incorporated by Exhibit No. Description of Exhibit Reference to ----------- ---------------------- ------------ 3.1.1 Certificate of Incorporation as amended (A) 3.1.2 November 17, 1992 amendment to the Certificate of Incorporation (A) 3.1.3 December 27, 2000 amendment to the Certificate of Incorporation (H) 3.2 By-laws 4.1 Form of Common Stock Certificate (AA) 4.2 Form of Indenture between Registrant and American Stock Transfer and Trust Company as Incorporated by Indenture Trustee with respect to the 10% Series A Convertible Subordinated Debentures due 2003 (B) 4.3 Form of 10% Series A Convertible Subordinated Debenture Due 2003 [Included in Exhibit 4.2] (B) 10.1 Employment Agreement dated as of June 12, 1992 between RadNet and Howard G. Berger. [Dr. Krane executed a substantially identical employment agreement with New RadNet on said date.] (C) 10.2 Separation Agreement dated January 31, 1995 between PHS and CareAd (D) 10.3 Separation Agreement dated April 20, 1995 between PHS and CareAd (E) 48 10.4 Stock Purchase Agreement made as of June 2, 1995 among PHS, CareAd, Howard G. Berger and Robert E. Brennan (E) 10.5 Stock Purchase Agreement dated as of November 14, 1995 among PHS, RadNet Managed Imaging Services, Inc. ["RMIS"], Future Diagnostics, Inc. ["FDI"] and the shareholders of FDI relating to the purchase by RMIS of all of the outstanding stock of FDI (F) 10.6 Securities Purchase Agreement dated March 22, 1996, between the Company and Diagnostic Imaging Services, Inc. (F) 10.7 Stockholders Agreement by and among the Company, Diagnostic Imaging Services, Inc. and Norman Hames (F) 10.8 Securities Purchase Agreement dated June 18, 1996 between the Company and Norman Hames (F) 10.9 Stock Purchase Agreement dated September 3, 1997 between the Company and Preferred Health Management, Inc. whereby the Company sold its Future Diagnostics, Inc. subsidiary (G) 10.10 DVI Securities Purchase Agreement (H) 10.11 General Electric Note Purchase Agreement (H) a. Securities Purchase Agreement between the Company and Howard G. Berger, M.D. (H) 10.13 2000 Long-Term Incentive Plan (I) 10.14 Employment Agreement dated April 16, 2001, with Jeffrey L. Linden (J) 10.15 Employment Agreement with Norman R. Hames dated May 1, 2001 (J)

__________________ (A) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-1 [File No. 33-51870]. (AA) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-3 [File 33-73150]. (B) Incorporated by reference to exhibit filed with PHS' Registration Statement on Form S-3 [File No. 33-59888]. (C) Incorporated by reference to exhibit filed in an amendment to Form 8-K report for June 12, 1992. (D) Incorporated by reference to exhibit filed with PHS' annual report on Form 10-K for the year ended October 31, 1994. (E) Incorporated by reference to exhibit filed with PHS' Form 8-K report for June 5, 1995. (F) Incorporated by reference to exhibit filed with Form 10-K for the year ended October 31, 1996. (G) Incorporated by reference to exhibit filed with Form 8-K report for September 8, 1997. (c) Incorporated by reference to exhibit filed with the Form 10-K for the year ended October 31, 2000. (d) Incorporated by reference to exhibit filed with PHS' Form 10-Q for the quarter ended January 31, 2000. (e) Incorporated by reference to exhibit filed with the Form 10-K for the year ended October 31, 2001. 49

21 Subsidiaries PHS % Ownership State of Incorporation ------------ --------------- ---------------------- RadNet Management, Inc. 100% California RadNet Managed Imaging Services, Inc. 100% California Diagnostic Imaging Services, Inc. 91% Delaware Primedex Corporation 100% California Radnet Heartcheck Management, Inc. 100% California Radnet Management I, Inc. 100% California Radnet Management II, Inc. 100% California Radnet Sub, Inc. 100% California SoCal MR Site Management, Inc. 100% California Burbank Advanced Imaging Center, LLC 75% California Rancho Bernardo Advanced Imaging Center, LLC 75% California

23 Consent of Independent Public Accountants, filed herewith. (c) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter ended October 31, 2002. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. PRIMEDEX HEALTH SYSTEMS, INC. Date: February 11, 2003 /s/ Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D., President, Treasurer and Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: By /s/ Howard G. Berger, M.D. ---------------------------------- Howard G. Berger, M.D., Director Date: February 11, 2003 By /s/ John V. Crues, III, M.D. ---------------------------------- John V. Crues, III, M.D., Director Date: February 11, 2003 By /s/ Norman R. Hames ---------------------------------- Norman R. Hames, Director Date: February 11, 2003 51 CERTIFICATION I, Howard G. Berger, M.D., certify that: 1. I have reviewed this annual report on Form 10-K of Primedex Health Systems, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 52 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: February 11, 2003 /s/ Howard G. Berger, M.D. ----------------------------------------- Howard G. Berger, M.D. President, and Principal Financial Officer 53