Virtual Radiologic (VRAD) 10-Q 2009 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number 001-33815

Virtual Radiologic Corporation

(Exact name of registrant as specified in its charter)

Delaware	27-0074530
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
11995 Singletree Lane, Suite 500
Eden Prairie, Minnesota	55344
(Address of principal executive offices)	(Zip code)

(952) 595-1100
(Registrant’s telephone number, including area code)

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

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero  Accelerated filero  Non-accelerated filerþ
(Do not check if a smaller reporting company) Smaller reporting companyo 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     As of April 27, 2009, 15,863,693 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

Part I — Financial Information
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
Part II — Other Information
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 5. Other Information	35
Item 6. Exhibits	36
Signatures	37
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I — Financial Information

ITEM 1. Financial Statements

Virtual Radiologic Corporation

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Contents

	Page
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008		4
Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008		5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2009 and the year ended December 31, 2008		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008		7
Notes to Consolidated Financial Statements		8

3

VIRTUAL RADIOLOGIC CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)

	As of			As of
	March 31,			December 31,
	2009			2008
Assets
Current assets:
Cash and cash equivalents	$	22,955		$	19,180
Restricted cash		1,750			700
Short-term investments		10,136			10,136
Accounts receivable, net		17,989			17,383
Prepaid expenses		1,308			1,704
Other current assets		2,498			2,422
Total current assets		56,636			51,525
Property, plant and equipment, net		15,173			11,692
Intangible assets, net		4,793			5,073
Medical malpractice excess loss reserves receivable		1,396			1,288
Other assets		1,339			1,423
Total assets	$	79,337		$	71,001
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	797		$	421
Accrued professional services compensation expense		5,758			5,690
Accrued sales, general and administrative compensation expenses		2,133			1,383
Medical malpractice loss reserves		2,691			1,419
Current deferred tax liability		1,103			1,103
Other current liabilities		3,050			2,490
Total current liabilities		15,532			12,506
Deferred tenant lease allowance		2,684			—
Medical malpractice excess loss reserves		1,396			1,288
Other non-current liabilities		864			690
Total liabilities		20,476			14,484
Commitments and contingencies (see Note 7)
Virtual Radiologic Corporation Stockholders’ equity:
Common stock, $.001 par value; 100,000,000 shares authorized at March 31, 2009 and December 31, 2008; 15,863,693 and 15,849,398 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively		17			17
Additional paid-in capital		96,951			95,881
Treasury stock at cost, 965,272 and 944,760 shares at March 31, 2009 and December 31, 2008, respectively		(8,116	)		(8,000	)
Accumulated deficit		(30,005	)		(31,397	)
Accumulated other comprehensive loss		(8	)		(6	)
Total Virtual Radiologic Corporation stockholders’ equity		58,839			56,495
Non-controlling interest (See Note 2)		22			22
Total stockholders’ equity		58,861			56,517
Total liabilities and stockholders’ equity	$	79,337		$	71,001

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

4

VIRTUAL RADIOLOGIC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended
	March 31,
	2009			2008
Revenue	$	28,568		$	23,320
Operating costs and expenses
Professional services		13,766			10,367
Sales, general and administrative		11,066			8,735
Depreciation and amortization		1,450			855
Total operating costs and expenses		26,282			19,957
Operating income		2,286			3,363
Other income (expense)
Interest income		57			176
Interest expense		(1	)		—
Total other income (expense)		56			176
Income before income tax expense		2,342			3,539
Income tax expense		950			1,535
Net income		1,392			2,004
Non-controlling interest expense		—			4
Net income attributable to Virtual Radiologic Corporation	$	1,392		$	2,000
Earnings per common share
Basic	$	0.09		$	0.12
Diluted	$	0.09		$	0.12
Weighted average common shares outstanding
Basic		15,863			16,616
Diluted		16,240			17,268

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

5

VIRTUAL RADIOLOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands)

															Accumulated
						Additional									Other					Total
	Common Stock					Paid-In			Treasury			Accumulated			Comprehensive			Non-controlling		Stockholders’
	Shares			Amount		Capital			Stock			Deficit			Income			Interest		Equity
Balance at December 31, 2007		16,463		$	16	$	90,165		$	—		$	(39,851	)	$	—		$	8	$	50,338
Net income		—			—		—			—			8,454			—			—		8,454
Other comprehensive income
Foreign currency translation adjustments		—			—		—			—			—			(6	)		—		(6	)
Total comprehensive income																				$	8,448
Equity based compensation for independent contractor physicians		—			—		(479	)		—			—			—			—		(479	)
Equity based compensation for employees		—			—		1,544			—			—			—			—		1,544
Stock option exercises		331			1		313			—			—			—			—		314
Excess tax benefit from exercises of stock options		—			—		4,396			—			—			—			—		4,396
Non-controlling interest		—			—		—			—			—			—			14		14
Stock issuance costs		—			—		(58	)		—			—			—			—		(58	)
Repurchase of common shares		(945	)		—		—			(8,000	)		—			—			—		(8,000	)
Balance at December 31, 2008		15,849		$	17	$	95,881		$	(8,000	)	$	(31,397	)	$	(6	)	$	22	$	56,517
Net income		—			—		—			—			1,392			—			—		1,392
Other comprehensive loss
Foreign currency translation adjustments		—			—		—			—			—			(2	)		—		(2	)
Total comprehensive income																					1,390
Equity based compensation for independent contractor physicians		—			—		(143	)		—			—			—			—		(143	)
Equity based compensation for employees		—			—		721			—			—			—			—		721
Stock option exercises		35			—		31			—			—			—			—		31
Excess tax benefit from exercises of stock options		—			—		461			—			—			—			—		461
Repurchase of common shares		(20	)		—		—			(116	)		—			—			—		(116	)
Balance at March 31, 2009		15,864		$	17	$	96,951		$	(8,116	)	$	(30,005	)	$	(8	)	$	22	$	58,861

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

6

VIRTUAL RADIOLOGIC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2009			2008
Cash flows from operating activities
Net income	$	1,392		$	2,004
Adjustments to reconcile net income to net cash provided by operating activities
Provision for doubtful accounts and sales allowance		535			—
Depreciation and amortization		1,450			855
Interest and discount amortization		—			13
Loss on disposal of property, plant and equipment		16			—
Equity based compensation for independent contractor physicians		(143	)		(495	)
Equity based compensation for employees		721			282
Deferred income taxes		23			145
Changes in operating assets and liabilities:
Accounts receivable		(1,142	)		(665	)
Prepaid expenses		396			488
Current taxes receivable		664			783
Other current assets		(543	)		(57	)
Accounts payable		438			(69	)
Accrued expenses		2,434			244
Current taxes payable		338			—
Other current liabilities		(15	)		(104	)
Deferred rent		119			(8	)
Net cash provided by operating activities		6,683			3,416
Cash flows from investing activities
Purchases of property, plant and equipment		(2,230	)		(4,559	)
Proceeds from sale of property, plant and equipment		5			2
Payments to acquire patents		—			(51	)
Restricted cash		(1,050	)		—
Net cash used in investing activities		(3,275	)		(4,608	)
Cash flows from financing activities
Payments of offering costs		—			(291	)
Proceeds from stock option exercises		22			111
Excess tax benefit from exercises of stock options		461			1,381
Repurchases of common stock		(116	)		—
Net cash provided by financing activities		367			1,201
Net increase in cash and cash equivalents		3,775			9
Cash and cash equivalents
Beginning of period		19,180			33,487
End of period	$	22,955		$	33,496
Supplemental disclosure of cash flow information
Cash (received) paid for income taxes	$	(538	)	$	930

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

7

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(unaudited)

1. Business Overview

     Virtual Radiologic Corporation, or vRad, a Delaware corporation, provides radiologic interpretations, or reads, via teleradiology for emergency and routine care coverage to radiology practices, hospitals, clinics and diagnostic imaging centers primarily located within the United States. Virtual Radiologic Professionals, LLC, or VRP, a Delaware limited liability company, is vRad’s affiliated physician-owned medical practice that contracts with the Company’s affiliated radiologists for the provision of their services to fulfill customer contracts held by vRad or the other Professional Corporations (as defined below).

     Virtual Radiologic Professionals of California, P.A., Virtual Radiologic Professionals of Illinois, S.C., Virtual Radiologic Professionals of Michigan, P.C., Virtual Radiologic Professionals of Minnesota, P.A., Virtual Radiologic Professionals of New York, P.A. and Virtual Radiologic Professionals of Texas, P.A. are collectively referred to as the “Professional Corporations.” As of March 31, 2009 each of these entities was a professional corporation with one stockholder, who was also an officer and a director of vRad, and the sole equity owner of VRP. The Professional Corporations hold customer contracts in certain states to facilitate compliance with various state corporate practice of medicine laws. VRP and the Professional Corporations are collectively referred to as the “Affiliated Medical Practices.”

     vRad also has two wholly owned and consolidated subsidiaries, Virtual Radiologic Limited, or VRL, and vRad Professional Insurance Ltd., or VPIL. VRL was formed under the laws of England and Wales and is located in London, England. VRL was formed to facilitate the international expansion of the Company’s business providing teleradiology services and products to customers located outside of the United States. VPIL was formed for purposes of insuring the Company’s self insured retention under its medical malpractice insurance policy. VPIL was formed as an exempted Company in the Cayman Islands with limited liability.

     The term “Company” as used in this report refers to vRad, its Affiliated Medical Practices, VRL and VPIL.

2. Summary of Significant Accounting Policies

     Interim Financial Statements

     The Company has prepared the unaudited interim consolidated financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America, or GAAP, and the rules and regulations of the Securities and Exchange Commission, or the SEC, for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position, the results of its operations and its cash flows for the interim periods. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.

     These interim consolidated financial statements should be read in conjunction with the consolidated annual financial statements and the notes thereto included in our 2008 Annual Report on Form 10-K filed with the SEC on February 20, 2009. The December 31, 2008 balance sheet data has been derived from audited financial statements as of that date, but does not include all footnote disclosures required by GAAP. However, the Company believes that the disclosures presented are adequate to make the information presented not misleading.

8

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

     Principles of Consolidation and Basis of Presentation

     The Company consolidates its financial results in accordance with Financial Accounting Standards Board, or FASB, Interpretation No., or FIN, 46R,Consolidation of Variable Interest Entities, or FIN 46R, which requires a primary beneficiary to consolidate entities determined to be variable interest entities, or VIEs. The Company has determined that the Affiliated Medical Practices are VIEs and that vRad is the primary beneficiary of such VIEs, as defined by FIN 46R. The Affiliated Medical Practices were created as the Company’s business expanded for the purpose of facilitating compliance with various state corporate practice of medicine laws. The management of vRad was involved significantly in the design and creation of the VIEs and, with the exception of rendering medical judgments, holds significant influence over their continuing operations through management service agreements. Although vRad holds no legal ownership in the VIEs, as a result of the pricing structure inherent in the management agreements, vRad will absorb a majority of any potential future losses of the VIEs and receive a majority of any potential residual returns of the VIEs. As such, the Company has concluded that vRad is required to consolidate the VIEs. As of March 31, 2009, vRad has historically funded losses of the VIEs totaling approximately $7.8 million and expects to fund any potential future losses. vRad will only receive residual returns up to the amount of previously recognized losses.

     The effect of the VIEs’ consolidation on the Company’s consolidated balance sheet at March 31, 2009, was an increase in the Company’s assets and liabilities of approximately $10.1 million and $6.3 million, respectively. At December 31, 2008, as a result of consolidating the VIEs, the Company’s assets and liabilities increased by approximately $11.1 million and $6.1 million, respectively. The liabilities of the VIEs consolidated by the Company do not represent additional claims on the Company’s general assets; rather they represent claims against the specific assets of the VIEs. Likewise, the assets of the VIEs consolidated by the Company do not represent additional assets available to satisfy claims against the Company’s general assets. For the three months ended March 31, 2009 and 2008, the revenue of the VIEs represented approximately 46%, or $13.3 million, and 44%, or $10.2 million of the consolidated revenue of the Company, respectively. Through consolidation, the Company recognizes all net losses of each VIE in excess of the equity of that VIE. The Company recognizes net earnings of each VIE only to the extent it is recovering losses previously recognized with respect to that VIE. Earnings of each VIE in excess of the Company’s previously recognized losses with respect to that VIE are eliminated from the Company’s earnings and are attributed to the respective equity owners of that VIE by recording such earnings as non-controlling interest on the Company’s consolidated financial statements. During the three months ended March 31, 2008, one of the VIEs experienced net income that increased its’ positive equity position. As a result, the Company recognized non-controlling interest expense of approximately $4,000. During the three months ended March 31, 2009, the Company recognized no non-controlling interest expense.

     As of March 31, 2009 and December 31, 2008 and for the three months ended March 31, 2009 and 2008, the financial statements of vRad have been presented on a consolidated basis to include its variable interests in the Affiliated Medical Practices as well as VRL and VPIL, vRad’s wholly owned subsidiaries.

     Recent Accounting Pronouncements

     In September 2006, the FASB issued Statement of Financial Accounting Standard, or SFAS, No. 157,Fair Value Measurements,or SFAS No. 157. This standard clarified the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. On February 12, 2008 the FASB issued FASB Staff Position, or FSP, FAS 157-2,Effective Date of FASB Statement No. 157,or FSP FAS 157-2. FSP FAS 157-2 deferred the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The portion of SFAS No. 157 that had been deferred by FSP FAS 157-2 was effective for the Company beginning January 1, 2009. The application of the provisions of SFAS No. 157 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

9

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

     In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements,an amendment of ARB 51, or SFAS No. 160, which changes the accounting and reporting of minority interests. Minority interests will be recharacterized as non-controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest being sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 was adopted by the Company on January 1, 2009. The statement has been applied prospectively, except for the presentation and disclosure requirements which have been applied retrospectively for all periods presented. In accordance with the provisions of SFAS No. 160, the Company has classified non-controlling interests as part of total stockholders’ equity on the consolidated balance sheets and the consolidated statements of changes in stockholders’ equity as of March 31, 2009 and December 31, 2008. In addition, the Company has classified non-controlling interest expense after net income to arrive at net income attributable to vRad on the consolidated statements of operations for the three months ended March 31, 2009 and 2008. Prior to the adoption of SFAS No. 160, the Company recorded non-controlling interests as a liability on its consolidated balance sheet and non-controlling interest expense as a component of net income on its consolidated statement of operations. This statement did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In April 2008, the FASB issued FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This pronouncement was effective for fiscal years beginning after December 15, 2008. This statement did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2008, FASB issued FSP FAS 140-4 and FIN 46R-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. This FSP amends FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46R, to require public enterprises to provide additional disclosures about their involvement with variable interest entities. These pronouncements were effective for reporting periods ending after December 15, 2008. The adoption of these pronouncements did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

3. Selected Consolidated Financial Statement Information

     Restricted Cash

     The Company had approximately $1.8 million and $700,000 in restricted cash as of March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009, restricted cash consisted of a letter of credit for a security deposit required by the lease agreement for the Company’s new headquarters, a letter of credit required for the establishment of VPIL and a letter of credit which is required by the Company’s medical malpractice insurance policy. Cash in the amounts of such letters of credit is required to be held on deposit with a bank and restricted as to its use.

     Short-term Investments

     The Company’s short-term investments are classified as held-to-maturity investments. The Company intends and has the ability to hold these investments to maturity, and therefore carries such investments at cost in accordance with the provisions of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. Cost approximates fair value due to the highly liquid nature of these investments.

	As of		As of
	March 31,		December 31,
	2009		2008
	(in thousands)
Due in one year or less:
Certificates of deposit	$	10,136	$	10,136

10

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

     SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1— Quoted prices in active markets for identical assets or liabilities.

Level 2— Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

     The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

     Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements as of
	March 31, 2009
	Total		Level 1		Level 2		Level 3
			(in thousands)
Description
Short-term investments (Certificates of Deposit)	$	10,136	$	10,136	$	—	$	—

Property, Plant and Equipment, Net

	As of		As of
	March 31,		December 31,
	2009		2008
	(in thousands)
Equipment	$	11,533	$	10,332
Software		6,345		6,110
Furniture and fixtures		929		1,144
Leasehold improvements		4,599		342
Other		395		1,742
Total property, plant and equipment		23,801		19,670
Less: Accumulated depreciation and amortization		8,628		7,978
Property, plant and equipment, net	$	15,173	$	11,692

     Depreciation and amortization related to the property, plant and equipment of the Company was approximately $1.2 million and $850,000 for the three months ended March 31, 2009 and 2008, respectively.

11

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

4. Goodwill and Other Intangible Assets

Goodwill

     We record acquired assets, including identifiable intangible assets, and liabilities at their respective fair values, recording goodwill for the excess of cost over the fair value of the net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired, consistent with the guidance in SFAS No. 142,Goodwill and Other Intangible Assets, or SFAS No. 142. The tests are based on the Company’s single operating segment and reporting unit structure. As of both March 31, 2009 and December 31, 2008, the Company had goodwill of $858,000.

Intangible Assets, Net

A summary of intangible assets is as follows:

		As of March 31, 2009						As of December 31, 2008
		(in thousands)
	Estimated	Original		Accumulated		Carrying		Original		Accumulated		Carrying
	Useful Life	Cost		Amortization		Value		Cost		Amortization		Value
Patents	15 years	$	347	$	62	$	285	$	347	$	56	$	291
Non-compete agreements	2 years		298		143		155		298		105		193
Customer relationships	10 years		4,968		615		4,353		4,968		379		4,589
Intangible assets, net		$	5,613	$	820	$	4,793	$	5,613	$	540	$	5,073

     The Company records amortization related to patents and non-compete agreements on a straight line basis over their estimated useful lives of 15 years and 2 years, respectively. The Company also records amortization related to customer relationships over their estimated useful life of 10 years based on the expected future economic benefits of those customer relationships on an accelerated basis. Amortization expense related to intangible assets was approximately $280,000 and $5,000 for the three months ended March 31, 2009 and 2008, respectively.

As of March 31, 2009, future estimated amortization expenses related to intangible assets were as follows:

	Amount
	(in thousands)
Nine months ending December 31, 2009	$	841
Year ending December 31, 2010		879
Year ending December 31, 2011		689
Year ending December 31, 2012		570
Year ending December 31, 2013		473
Thereafter		1,341
Total	$	4,793

     This future amortization expense is an estimate. Actual amounts may vary from these estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization or other events.

12

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

5. Stock Options and Accounting for Stock-Based Compensation

     Stock option activity for employees, directors and independent contractor physicians during the three months ended March 31, 2009 was as follows:

	Stock Options
				Weighted
				Average		Exercise Prices
				Exercise Price		Per Share
	Outstanding			Per Share		Ranging From
Balance at December 31, 2008(1)		2,183,995		$	10.82
Granted		375,000			8.72	$	8.39 - $8.98
Exercised		(34,807	)		2.72		2.00 - 5.50
Forfeited/Cancelled/Expired		(93,309	)		12.15		2.00 - 17.55
Balance at March 31, 2009		2,430,879			10.56
Exercisable at March 31, 2009		766,846			7.46		2.00 - 23.00

⁽¹⁾ The number of options outstanding includes 120,000 options granted in May 2007 to members of the Company’s Board of Directors that were not issued pursuant to the VRC Equity Incentive Plan.

     The following table summarizes the activity of unvested restricted stock awards for the three months ended March 31, 2009:

	Restricted Stock Awards
			Weighted
	Number		Average Grant
	of Shares		Date Fair Value
Unvested at December 31, 2008		—	$	—
Granted		88,000		8.65
Vested		—		—
Cancelled		—		—
Unvested at March 31, 2009		88,000		8.65
Expected to vest after March 31, 2009		88,000		8.65

     As of March 31, 2009, there were 16,826 shares available for issuance under the VRC Equity Incentive Plan.

     Stock-Based Compensation—Employees and Directors

     For the three months ended March 31, 2009, the Company issued 375,000 stock options to certain employees and directors. The Company recorded approximately $721,000 and $282,000 in stock-based compensation expense, related to employee and director options for the three months ended March 31, 2009 and 2008, respectively. Included in stock-based compensation expense for the three months ended March 31, 2009 is $182,000 related to the accelerated vesting of certain stock option awards. In addition, the Company granted 88,000 restricted stock awards to certain employees during the three months ended March 31, 2009. The restricted stock awards have a weighted average grant date fair value of $8.65 and vest in increments of 25% over four years from the date of grant.

     SFAS No. 123R requires that the cash retained as a result of the tax deductibility of employee and director share-based awards be presented as a component of cash flows from financing activities in the consolidated statements of cash flows. During the three months ended March 31, 2009, the Company realized

13

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

approximately $461,000 as a result of the tax deductibility of employee and director share-based awards exercised during the period.

     Stock-Based Compensation—Physicians

     For the three months ended March 31, 2009, the Company did not issue options to its affiliated radiologists. The Company recorded stock-based compensation income related to these independent contractor physicians’ options of approximately $143,000 and $495,000 for the three months ended March 31, 2009 and 2008, respectively.

6. Stock Repurchase Program

     In March 2009, the Company’s Board of Directors authorized the repurchase of up to $5.0 million of the Company’s outstanding common stock. Repurchases may take place in the open market, or pursuant to negotiated or block transactions in accordance with applicable SEC guidelines and regulations. Additionally, repurchases may be made pursuant to trading plans meeting requirements of Rule 10b5-1 of the Securities Exchange Act. During the three months ended March 31, 2009, the Company repurchased 20,512 shares of common stock at an average price of $5.63 per share. Total cash consideration for the repurchased stock was approximately $116,000. As of March 31, 2009, there remained $4.9 million authorized to repurchase shares of the Company’s common stock.

7. Commitments and Contingencies

     On December 7, 2007, we entered into a lease agreement to lease approximately 82,000 square feet of space in Eden Prairie, Minnesota, which houses our corporate headquarters, operations center and physician services group, in one location. The lease commenced on March 2, 2009, and expires on August 31, 2019. In conjunction with the lease, the Company was entitled to a tenant improvement allowance of approximately $2.7 million and upon commencement of the lease the Company recognized approximately $2.7 million in leasehold improvements and deferred tenant lease allowances. The amounts for leasehold improvements and deferred tenant lease allowance are recorded in property, plant and equipment, net and deferred tenant lease allowance, respectively, on the consolidated balance sheet as of March 31, 2009. In addition, the lease arrangement contains a rent escalation clause for which the lease expenses are recognized on a straight-line basis over the term of the lease. Rent in the amount of $135,000 associated with this lease that is recognized but not yet paid is included in deferred rent as part of other non-current liabilities on the consolidated balance sheet as of March 31, 2009.

     On January 22, 2008, the Company entered into two new license agreements for the provision of network related services that also allow the Company to utilize space in a building in Minnetonka, Minnesota, that houses one of the Company’s data centers. The license agreements commenced on February 15, 2008 and June 1, 2008 and have 36 month terms, expiring in February 2011 and May 2011, respectively. Both license agreements have monthly minimum usage requirements of $10,000 that the Company is obligated to pay if actual services used do not exceed these minimums. As of March 31, 2009, these service minimums have been recorded as a liability, in accordance with FIN 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and FSP FIN 45-3,Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners. The maximum potential amount of future payments is $485,000 and the current portion of this obligation is $240,000, which is recorded in other current liabilities on the consolidated balance sheet as of March 31, 2009. The non-current portion is recorded in other liabilities on the consolidated balance sheet as of March 31, 2009. This obligation will become due immediately if the Company prematurely terminates either of these license agreements.

14

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

     The Company entered into capital leases for equipment in February 2009 that expire in February 2013. Capital leases are recorded in property, plant and equipment, net, other current liabilities and other non-current liabilities on the consolidated balance sheet as of March 31, 2009. Future minimum lease payments under these capital leases, together with the present value of minimum lease payments, as of March 31, 2009, are as follows:

	(in thousands)
2009	$	32
2010		43
2011		43
2012		43
2013		3
		164
Less: Amount representing interest		11
Present value of minimum lease payments		153
Less: Current portion		38
Capital lease obligations, less current portion	$	115

     Excluded from contractual obligations and commitments are certain amounts related to the Company’s uncertain tax positions recognized in accordance with FIN 48,Accounting for Uncertain Income Tax, as the timing and amount of any payment related to these tax positions remain uncertain. As of March 31, 2009 the Company has recognized $171,000 related to these uncertain tax positions.

     Professional Liability Coverage

     The Company’s business entails an inherent risk of claims of medical malpractice against its affiliated radiologists and itself. The Company contracts and pays premiums for professional liability insurance that indemnifies it and its affiliated radiologists for losses incurred related to medical malpractice litigation. The Company maintains professional liability insurance policies with a third-party insurer on a claims-made basis, subject to a self-insured retention, deductibles, exclusions and other restrictions. The Company’s self-insured retention under its professional liability insurance program is insured through VPIL, its wholly owned captive insurance subsidiary. The Company records liabilities for self-insured amounts and claims incurred but not reported based on an actuarial valuation using historical loss patterns. An inherent assumption in such estimates is that historical loss patterns can be used to predict future patterns with reasonable accuracy. Because many factors can affect historical and future loss patterns, the determination of an appropriate reserve involves complex, subjective judgment, and actual results may vary significantly from estimates. Insurance liabilities are necessarily based on estimates, including claim frequency and severity. Liabilities for claims incurred but not reported are not discounted. The Company recorded expenses for specific claims reserves, medical malpractice loss development reserves and incurred but not recorded claims reserves of approximately zero, $747,000 and $553,000, respectively, during the three months ended March 31, 2009. The Company did not record expense for specific claims reserves, medical malpractice loss development reserves or incurred but not reported claims for the three months ended March 31, 2008.

     The Company believes that its insurance coverage is appropriate based upon its claims experience and the nature of its business. However, the Company cannot assure that any pending or future claim will not be successful, or if successful that it will not exceed the limits of available insurance coverage. If the self-insured retention amounts and other amounts that the Company is actually required to pay materially exceed the estimates that have been reserved, the Company’s financial condition and results of operations could be materially adversely affected.

     Litigation

     On July 31, 2007, Merge eMed, Inc., or Merge, filed a complaint against the Company in the United States District Court for the Northern District of Georgia, Atlanta Division, alleging that the Company has infringed on certain of Merge’s patents relating to teleradiology. On December 11, 2007, the court granted the Company’s motion to stay the patent suit pending the outcome of a reexamination by the United States Patent and Trademark Office, or PTO, of these same patents. On August 28, 2008, the PTO ruled invalid all of the claims in the patents upon which Merge had sued the Company. Merge has not yet responded to the PTO action. It is expected that a reexamination certificate cancelling the claims of the patents will be issued due to Merge’s failure to respond to the PTO action. The

15

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

judicial stay of proceedings in the lawsuit continues in effect at this time.

     On March 8, 2009, DR Systems, Inc. filed a complaint against the Company in the United States District Court for the Southern District of California, alleging that the Company has infringed on a patent held by DR Systems through our use of medical imaging and archival systems. This litigation is in its early stages. However, based upon investigation into the patent and the allegations, the Company believes that it is entitled to indemnity under a third party license agreement, and has notified the third party of the lawsuit and requested that the licensor defend and indemnify the Company.

     The Company is from time to time subject to, and is presently involved in, other litigation or legal proceedings arising out of the ordinary course of business, including medical malpractice claims and certain employment related matters. Although the results of litigation and claims cannot be predicted with certainty, as of March 31, 2009 and December 31, 2008 the Company’s management believed that the final outcome of these matters would not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

8. Related Party Transactions

     The Company has entered into a non-exclusive, non-transferable license agreement for the use of certain image management software from a minority stockholder of the Company. For the three months ended March 31, 2009 and 2008, the Company incurred licensing fees under this contract of approximately $289,000 and $243,000, respectively.

     The following table illustrates the revenues, expenses and cash flows that result from the management and professional service agreements between the related parties described in Note 1.

	Three Months Ended
	March 31,
	2009		2008
	(in thousands)
VRP professional services revenue from VRC	$	6,134	$	5,266
VRC professional services expense to VRP		6,134		5,266
VRP professional services revenue from the Professional Corporations		6,624		5,074
Professional Corporations professional services expense to VRP		6,624		5,074
VRC management fee revenue from the Professional Corporations		6,557		5,024
Professional Corporations management fee expense to VRC		6,557		5,024
Cash paid for professional services by VRC to VRP		6,134		5,266
Cash paid for professional services by the Professional Corporations to VRP		6,624		5,074
Cash paid for management fees by the Professional Corporations to VRC		6,557		5,024

     During the quarter ended March 31, 2009, the owners of VRP made the election with the Internal Revenue Service to have VRP taxed as a corporation effective January 1, 2009. Prior to that date VRP was taxed as a partnership. In conjunction with that election, vRad incurred certain compensation costs totaling approximately $279,000 for expected payments to certain current and former owners of VRP to reimburse them for taxes owed in connection with the election. These amounts were included in other current liabilities on the consolidated balance sheet as of March 31, 2009, and sales, general and administrative expense in the consolidated statement of operations for the three months ended March 31, 2009.

     Also during the quarter ended March 31, 2009, the Company incurred approximately $535,000 in expenses related to amounts due to the Company’s former Chairman under the Transition Agreement between the Company and its former Chairman. $420,000 of these amounts were included in other current liabilities on the consolidated balance sheet as of March 31, 2009, and $535,000 was included in sales, general and administrative expense in the consolidated statement of operations for the three months ended March 31, 2009; which consisted of the $420,000 in compensation and $115,000 in stock-based compensation expense.

16

VIRTUAL RADIOLOGIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(unaudited)

9. Earnings Per Share

     The Company calculates earnings per share in accordance with Emerging Issues Task Force Issue No. 03-6Participating Securities and the two-class method under FASB Statement No. 128, or EITF Issue No. 03-6, and FSP EITF 03-6-1Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, or FSP EITF 03-6-1. In accordance with FSP EITF 03-6-1, share-based awards with non-forfeitable dividends are classified as participating securities. In calculating basic earnings per share, this method requires net income to be reduced by the amount of dividends declared in the current period for each participating security and by the contractual amount of dividends or other participation payments that are paid or accumulated for the current period. Undistributed earnings for the period are allocated to participating securities based on the contractual participation rights of the security to share in those current earnings assuming all earnings for the period are distributed. The Company’s recipients of restricted stock awards have contractual participation rights that are equivalent to those of common stockholders. Therefore, the Company allocates undistributed earnings to restricted stock and common stockholders based on their respective ownership percentage, as of the end of the period.

     EITF Issue No. 03-6 also requires companies with participating securities to calculate diluted earnings per share using the two-class method in accordance with the provisions of SFAS No. 128Earnings Per Share, or SFAS No. 128. The two-class method requires the denominator to include the weighted average restricted stock along with the additional share equivalents from the assumed conversion of stock options calculated using the treasury stock method, subject to the antidilution provisions of SFAS No. 128.

     The following table presents the computation of earnings per share:

	Three Months Ended March 31,
	2009			2008
	(in thousands, except per share data)
Basic and Diluted Earnings per Share — Two-class Method Basic Earnings per Share
Undistributed income	$	1,392		$	—
Restricted stock ownership		0.6	%		0%(1)
Restricted stock interest in undistributed income	$	8		$	—
Weighted average restricted shares outstanding — Basic		57			—
Total basic earnings per share — Restricted	$	0.14		$	—
Undistributed income	$	1,392		$	2,000
Common ownership		99.4	%		100%(1)
Common stockholders interest in undistributed income	$	1,384		$	2,000
Weighted average common shares outstanding — Basic		15,863			16,616
Total basic earnings per share — Common	$	0.09		$	0.12
Diluted Earnings per Share
Common stockholders interest in undistributed earnings	$	1,384		$	2,000
Add: Undistributed earnings — restricted stock		8			—
Net income used in diluted earnings per share	$	1,391		$	2,000
Weighted average common shares outstanding — Basic		15,863			16,616
Weighted average restricted stock outstanding		57			—
Common share equivalents		320			652
Shares used to compute earnings per common share — Diluted		16,240			17,268
Total diluted earnings per share	$	0.09		$	0.12

⁽¹⁾ There was no restricted stock outstanding during the quarter ended March 31, 2008.

17

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

     Certain statements in this quarterly report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, in particular, statements about our plans, objectives, strategies and prospects regarding, among other things, our business and results of operations. These statements involve a number of risks, uncertainties and other factors that could cause actual results, performance or achievements of Virtual Radiologic Corporation to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Statements that are not historical facts and statements of expectations or future beliefs in this report on Form 10-Q are forward-looking statements that involve certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. Except as required by applicable law, we undertake no duty to update these forward-looking statements due to new information or as a result of future events.

     Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to the following:

• the impact of general economic conditions on the number of reads our customers send to us;

• the competition in the teleradiology market, including pricing pressure resulting from that competition;

• our ability to effectively manage our growth and development;

• the impact of intellectual property infringement claims;

• our ability to recruit and retain qualified radiologists;

• our characterization of our affiliated radiologists as independent contractors;

• our ability to obtain proper physician licenses and hospital credentials on behalf of our affiliated radiologists;

• the regulation of the corporate practice of medicine;

• our dependence on our Affiliated Medical Practices, which we do not own;

• our ability to enforce the non-competition agreements with our affiliated radiologists;

• the loss of key members of management and personnel;

• new technologies;

• the breach of our security measures that safeguard patient and customer data;

• the performance of our information systems, which are dependent on systems provided by third parties;

• our ability to comply with government regulations;

• the general economic conditions of the markets that we operate in; and

• other risk factors listed from time to time in our reports filed with the SEC, including without limitation, the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, as updated by Part II, Item 1A of this report.

     Given these uncertainties, you should not place undue reliance on these forward-looking statements.

18

Overview

     Virtual Radiologic Corporation is a leading provider of teleradiology services throughout the United States, and we have recently begun expanding to serve customers in international markets. We provide radiologic interpretations, or reads, for emergency and routine care cases through the utilization of a scalable communications network incorporating encrypted broadband internet connections and proprietary workflow management software. We serve our customers — radiology practices, hospitals, clinics and diagnostic imaging centers — by providing reads 24 hours a day, 365 days a year. Our distributed operating model provides our team of American Board of Radiology-certified radiologists with the flexibility to choose the location from which they work and allows us to serve customers located throughout the world.

     We provide radiologic interpretations for a broad range of digital diagnostic imaging modalities, including CT, MRI and ultrasound. Diagnostic radiology aids in the diagnosis and treatment of injuries, diseases and other medical conditions by interpreting images of the human body. Our affiliated radiologists collectively have the expertise, including subspecialty fellowship training, necessary to permit them to read all diagnostic imaging modalities, including CT, MRI, ultrasound, nuclear medicine, PET, and x-ray technology modalities.

     In this report, Virtual Radiologic Corporation is sometimes referred to as “vRad.” Virtual Radiologic Professionals of California, P.A., Virtual Radiologic Professionals of Illinois, S.C., Virtual Radiologic Professionals of Michigan, P.C., Virtual Radiologic Professionals of Minnesota, P.A., Virtual Radiologic Professionals of New York, P.A. and Virtual Radiologic Professionals of Texas, P.A. are collectively referred to as the “Professional Corporations.” Virtual Radiologic Professionals, LLC, or VRP, and the Professional Corporations are collectively referred to as the “Affiliated Medical Practices.” vRad has two wholly owned and consolidated subsidiaries; Virtual Radiologic Limited, or VRL, formed under the laws of England and Wales and is located in London, England and vRad Professional Insurance Ltd., or VPIL, formed as an exempted company in the Cayman Islands with limited liability. The terms “Company,” “we,” “us,” and “our” are used in this report refer to vRad, its Affiliated Medical Practices, VRL and VPIL.

Critical Accounting Policies

     The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during a fiscal period. The Securities and Exchange Commission, or SEC, considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. We believe the policies described in the following paragraphs to be our critical accounting policies because they are important to the presentation of our financial condition and results of operations, and require critical management judgment and estimates about matters that are uncertain.

     If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition, results of operations and cash flows for future periods could be materially affected.

Principles of Consolidation

     We consolidate our financial results in accordance with Financial Accounting Standards Board, or FASB, Interpretation No. 46R,Consolidation of Variable Interest Entities, or FIN 46R, which requires a primary beneficiary to consolidate entities determined to be variable interest entities, or VIEs. We have determined that the Affiliated Medical Practices are VIEs, and that vRad is the primary beneficiary of the Affiliated Medical Practices, as defined by FIN 46R, and as a result vRad is required to consolidate the Affiliated Medical Practices.

19

     The following tables show the unaudited condensed consolidating balance sheets as of March 31, 2009 and December 31, 2008, and the unaudited condensed consolidating statements of operations for the three months ended March 31, 2009 and 2008. The amounts reflected in the eliminations columns of the condensed consolidating financial statements represent affiliated party management and professional services fees. The following tables should be read together with our consolidated financial statements and related footnotes included elsewhere in this report.

Condensed Consolidating Balance Sheets
(unaudited)

	As of March 31, 2009
			Affiliated
			Medical
	vRad		Practices			Eliminations			Consolidated
	(in thousands)
Cash and cash equivalents	$	22,007	$	948		$	—		$	22,955
Short-term investments		10,136		—			—			10,136
Accounts receivable, net		8,875		9,114			—			17,989
Other current assets		28,382		19,776			(42,602	)		5,556
Non-current assets		22,686		15			—			22,701
Total assets	$	92,086	$	29,853		$	(42,602	)	$	79,337
Current liabilities	$	20,496	$	37,638		$	(42,602	)	$	15,532
Non-current liabilities		4,944		—			—			4,944
Total liabilities		25,440		37,638			(42,602	)		20,476
Total stockholders’ equity (deficiency)		66,646		(7,785	)		—			58,861
Total liabilities and stockholders’ equity	$	92,086	$	29,853		$	(42,602	)	$	79,337

	As of December 31, 2008
			Affiliated
			Medical
	vRad		Practices			Eliminations			Consolidated
	(in thousands)
Cash and cash equivalents	$	17,399	$	1,781		$	—		$	19,180
Short-term investments		10,136		—			—			10,136
Accounts receivable, net		8,842		8,541			—			17,383
Other current assets		20,677		8,223			(24,074	)		4,826
Non-current assets		19,292		16			168			19,476
Total assets	$	76,346	$	18,561		$	(23,906	)	$	71,001
Current liabilities	$	10,014	$	26,566		$	(24,074	)	$	12,506
Non-current liabilities		1,810		—			168			1,978
Total liabilities		11,824		26,566			(23,906	)		14,484
Total stockholders’ equity (deficiency)		64,522		(8,005	)		—			56,517
Total liabilities and stockholders’ equity	$	76,346	$	18,561		$	(23,906	)	$	71,001

20

Condensed Consolidating Statements of Operations
(unaudited)

	Three Months Ended March 31, 2009
			Affiliated
			Medical
	vRad		Practices		Eliminations			Consolidated
	(in thousands)
Revenue	$	21,863	$	26,020	$	(19,315	)	$	28,568
Operating costs and expenses		19,965		25,632		(19,315	)		26,282
Operating income		1,898		388		—			2,286
Other income		56		—		—			56
Income before income tax		1,954		388		—			2,342
Income tax expense		782		168		—			950
Net income	$	1,172	$	220	$	—		$	1,392

	Three Months Ended March 31, 2008
			Affiliated
			Medical
	vRad		Practices			Eliminations			Consolidated
	(in thousands)
Revenue	$	18,189	$	20,495		$	(15,364	)	$	23,320
Operating costs and expenses		14,551		20,770			(15,364	)		19,957
Operating income		3,638		(275	)		—			3,363
Other income		176		—			—			176
Income (loss) before income tax		3,814		(275	)		—			3,539
Income tax expense		1,533		2			—			1,535
Net income (loss)	$	2,281	$	(277	)	$	—		$	2,004

     Revenue Recognition and Allowance for Doubtful Accounts

     We sell our teleradiology services to radiology practices, hospitals, clinics and imaging centers. Teleradiology revenue is recognized in the period when a diagnostic read and operational support services have been completed and when collection is reasonably assured. Accounts receivable are recorded at the invoiced amount and generally do not bear interest. We maintain an allowance for doubtful accounts to reserve for potentially uncollectable receivables. The allowance is comprised of specific reserves and a general reserve for potentially uncollectable amounts based on our historical bad debt experience. In determining the amount of the specific reserve, we review the accounts receivable for customers who are past due to identify specific customers with known disputes or collectability issues. We make judgments about their creditworthiness based on collections information available to us and historical payment performance. We also maintain a sales allowance to reserve for potential credits issued to customers. The amount of the reserve is determined based on historical credits issued.

     Stock-Based Compensation

     We account for stock-based compensation in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123R,Accounting for Stock Based Compensation, or SFAS No. 123R and Emerging Issues Task Force Issue No. 96-18,Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, or EITF Issue No. 96-18. Under the provisions of SFAS No. 123R and EITF 96-18, stock-based compensation costs are estimated using the fair value of the award as calculated using a Black-Scholes option-pricing model and are recognized as expense over the requisite service period. The Black-Scholes model utilizes various assumptions that require significant judgment, including volatility, forfeiture rates and expected option term. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in future periods from what is recorded in the current period.

21

     Physician Stock-Based Compensation.We record stock-based compensation expense in connection with any equity instrument awarded to our affiliated radiologists in accordance with EITF Issue No. 96-18. We calculate the stock-based compensation expense related to such issuance by determining the then current fair value of the award using a Black-Scholes model at the date of grant and at the end of each subsequent financial reporting period thereafter. Physician stock-based compensation expense is included in professional services expense.

     Employee Stock-Based Compensation.We also record stock-based compensation expense in connection with any award of stock options to employees and directors. We calculate the stock-based compensation expense associated with such awards to our employees and directors granted prior to January 1, 2006, in accordance with Accounting Principles Board No. 25,Accounting for Stock Issued to Employees, or APB No. 25, using the intrinsic value method and in accordance with SFAS No. 123R for awards granted on or after January 1, 2006, by determining the fair value using a Black-Scholes model. We calculate the stock-based compensation expense related to awards to our employees and directors based on the fair value of awards on the date granted. Employee stock-based compensation expense is included in sales, general and administrative expense.

     Medical Malpractice Loss Reserves

     We maintain professional liability insurance policies with a third-party insurer on a claims-made basis, subject to a self-insured retention, deductibles, exclusions and other restrictions. Our self-insured retention under our professional liability insurance program is insured through a wholly owned captive insurance subsidiary. We record liabilities for specific case reserves, claims made loss development reserves and claims incurred but not reported based on specific case analysis and an actuarial valuation using industry data and our historical loss patterns. The actuarial analysis utilizes industry loss data as a result of our limited loss history. An inherent assumption in such estimates is that industry data and our historical loss patterns can be used to predict future patterns with reasonable accuracy. Insurance liabilities are necessarily based on estimates, including claim frequency and severity. Because many factors can affect historical and future loss patterns, the determination of an appropriate reserve involves complex, subjective judgment, and actual results may vary significantly from estimates.

     Intangible Assets and Goodwill

     We account for acquired goodwill and identifiable intangible assets in accordance with SFAS No. 141,Business Combinations, or SFAS No. 141 and SFAS No. 142,Goodwill and Other Intangible Assets, or SFAS No. 142. As such, we record acquired assets, including identifiable intangible assets and liabilities, at their respective fair values, recording goodwill for the excess of cost over the fair value of the net assets acquired. The values assigned to identifiable intangible assets are based on valuations that have been prepared using methodologies and valuation techniques consistent with those used by independent appraisers. These methodologies and techniques utilize various assumptions that require significant judgment, including an estimation of the future cash flows of identifiable intangible assets and the discounting of cash flows to their present value utilizing an appropriate risk-adjusted rate of return, or discount rate. The discount rate used is determined at the time of the acquisition in accordance with accepted valuation methods.

     In accordance with SFAS No. 142 we test our goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. Our tests are based on our single operating segment and reporting unit structure.

     Income Taxes

     vRad recognizes income taxes under the asset and liability method. As such, deferred taxes are based on the temporary differences, if any, between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts. Deferred taxes are determined using the enacted tax rates that are expected to apply when the temporary differences reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

22

     Developing a provision for income taxes, including the effective tax rate and the analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal, state and foreign income tax laws, regulations and strategies, including the determination of deferred tax assets. Our judgment and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our income tax liabilities in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on our consolidated financial condition, results of operations, and/or cash flows.

     As previously noted, we consolidate our financial results under the provisions of FIN 46R. For income tax purposes, however, we are not considered a consolidated entity. As a result, income generated by the Affiliated Medical Practices, as well as any losses they are able to fund, are excluded from vRad’s calculation of income tax liability. In addition, losses generated by the Affiliated Medical Practices that are funded by vRad result in temporary differences between vRad’s book and tax bases of accounting. These temporary differences will reverse in future periods to the extent those losses are able to be recovered by vRad.

     vRad’s 2006 federal income tax return is currently under examination by the Internal Revenue Service, or IRS. In addition, VRP’s 2006 federal income tax return is currently under examination by the IRS and, in conjunction with their audit of VRP’s 2006 federal income tax return, the IRS is also examining the 2006 quarterly employment tax returns of VRP. Subsequent to March 31, 2009, vRad received notice from the IRS that the examiner is recommending the audit of vRad’s 2006 federal income tax return be closed without any adjustment. The examination of VRP is ongoing and we continue to work with the IRS to expedite the conclusion of these examinations. At this time we do not believe the results of these examinations will have a material adverse effect on us, however the timing and results of any final determination remain uncertain and any adverse determination from the IRS could have a material effect on our consolidated financial position, results of operations, or cash flows.

     Effective January 1, 2009, the owners of VRP made the election with the IRS to have VRP taxed as a corporation. Prior to that date, VRP was taxed as a partnership.

Trends in our Business and Factors Affecting Our Results of Operations

     During 2009 we continue to focus on retaining our existing customers, acquiring new customers, retaining and attracting additional radiologists, and further penetration into the final read market.

     Revenue

     We generate substantially all of our revenue from the radiology services that we provide to our customers. We generally seek to provide these services pursuant to contracts that have a two-year term and automatically renew for successive one-year terms unless terminated by the customer or by us. The amount that we charge for our radiology services varies by customer and is based upon a number of factors, including the hours of coverage, the number of reads, whether the reads are preliminary reads or final reads, and the technical and administrative services provided. We typically bill our customers at the beginning of the month following the month in which the services were provided. Because we primarily contract directly with our customers and are paid directly by our customers, we do not generally depend upon payment by third party payers such as Medicare, Medicaid, private insurance or patients.

     Our growth in revenue for the three months ended March 31, 2009 over the three months ended March 31, 2008 primarily resulted from:

• an increase in the number of customers and facilities we serve;

• an increase in utilization of our services by our customers;

• an increase in volume of higher-priced final reads;

• high customer retention rates; and

• customer relationships acquired through our acquisition of Diagna Radiology LLC.

     The above factors have been partially offset by declines in our average price per study during that same time.

     Our revenues are also affected by seasonality. While our revenues have continued to grow each year, we

23

typically experience increased demand for our services and higher revenue growth during the third quarter of each year. We believe that during the summer months there is an increased amount of outdoor and transportation activities, which leads to more hospital visits, as well as there being more frequent vacation time taken by our customers’ radiologists. We expect this seasonality with respect to our revenues to continue. Our operating results are thus subject to seasonal fluctuations, which makes our results difficult to predict and could cause our performance to fall short of quarterly expectations.

     In addition, our revenues are affected by fluctuations in the price per read charged to the customers to whom we provide service. We have seen an increased amount of pricing pressure from competition in our marketplace and we expect these declines in price to continue for the near future. In general, we have seen the greatest impact from pricing declines in preliminary reads and specifically in CT and plain film reads. During the three months ended March 31, 2009, the decrease in average price per read was not materially affected by changes in mix.

     More recently, our customers have been impacted by the economic downturn, which we believe resulted in a decrease in hospital emergency department visits and elective procedures during the second half of 2008, and continued in the first quarter of 2009, impacting imaging volumes. We are unable to predict what impact a continued economic downturn will have on our customers and our business or when general economic conditions will improve.

Key Revenue Metrics

	For the three months ended March 31,
	2009			% change			2008			% change
Customers		625			27.3	%		491			19.5	%
Facilities		1,050			25.3	%		838			13.9	%
Reads		613,117			30.3	%		470,694			33.7	%
% of U.S. hospitals served		17.1	%					13.2	%
Same site volume growth		2.2	%					14.6	%
Percentage of read revenue from:
Final reads		27.2	%					22.7	%
Preliminary reads		72.8	%					77.3	%
Year-over-year change in price per read		(5.4	)%					(3.7	)%

     We also expect to derive revenue in the future from contracts for the licensing of our technology infrastructure, including vRad Enterprise Connect^SM, and the provision of management and support services. Our technology infrastructure products provide customers with the ability to schedule, organize, assign, track and report on thousands of reads every day. The utilization of our proprietary teleradiology platform along with our operational support services enables customers to extend their services, enhance ancillary revenue and increase radiologist efficiency. Revenue realized through the licensing of vRad Enterprise Connect was not material for the three months ended March 31, 2009.

24

     Operating Expenses

     Our operating expenses consist primarily of professional services expense and sales, general and administrative expense.

     Professional Services Expense.Our professional services expense consists of the fees we pay to our affiliated radiologists for their services, physician stock-based compensation and medical malpractice liability expense.

• Physician Cash Compensation Expense.Physician cash compensation expense is the fees paid to our affiliated radiologists for providing diagnostic interpretation services for our customers. We compensate our affiliated radiologists using a formula that includes a base level of compensation and additional amounts with regard to the number and type of reads performed. We recognize physician cash compensation expense in the month in which our affiliated radiologists perform the reads for our customers. Physician cash compensation also includes amounts paid for quality assurance services. Since our inception, our physician cash compensation expense has increased each year as we have added more affiliated radiologists to fulfill the increased demand for our services as our business and customer base has grown. However, physician cash compensation expense as a percentage of revenue has decreased due to the increased productivity of our affiliated radiologists. The increases in productivity by the existing affiliated radiologists have been, and may continue to be, offset, in part, by increases in newly engaged affiliated radiologists and the costs associated with the typical 150- to 180-day period during which newly engaged affiliated radiologists obtain necessary state licenses and hospital credentials, and thereafter become accustomed to our workflow technology. We expect that our physician cash compensation expense will continue to increase, but may decrease as a percentage of revenues over time as the efficiency and utilization of our affiliated radiologists improves.

• Physician Stock-Based Compensation Expense.We record stock-based compensation expense in connection with any stock-based awards to our affiliated radiologists. Physician stock-based compensation expense is a non-cash expense that fluctuates based upon the fair value of our common stock underlying the awards at the close of each reporting period as required by EITF Issue No. 96-18. As the value of an award is based on the underlying value of the common stock, we may record additional expense or income based on fluctuations in that value. Our physician stock-based compensation expense may also increase in future periods if we issue additional options and other stock-based awards to our affiliated radiologists.

• Medical Liability Expense.Medical liability expense consists primarily of premiums paid for third-party medical malpractice insurance, claims made loss development reserves related to our self-insured retention and incurred but not reported, or IBNR, loss reserves. We amortize medical liability insurance premiums over the term of the policy to which they relate and recognize loss development and IBNR reserves based on actuarial analyses performed during the policy term. Our medical liability expense has increased each year since inception due to the increases in our medical liability insurance premiums primarily associated with the increased volume of reads our affiliated radiologists have performed.

Key Professional Service Metrics

	For the three months ended March 31,
	2009		2008
Radiologists providing services		134		116
Average diagnostic cash compensation per read	$	20.09	$	21.79

25

     Sales, General and Administrative Expense.Sales, general and administrative expense is our second most significant expense as a percentage of revenue. Sales, general and administrative expense consists primarily of employee compensation expense, sales and marketing expense, information technology expense, the costs associated with the licensing and credentialing of our affiliated radiologists and the costs associated with maintaining our facilities. Our sales, general and administrative expense has increased each year since our inception as a result of increased employee compensation expenses, including stock-based compensation, and costs associated with development and maintenance of our expanding business, such as information technology and facilities costs. We expect sales, general and administrative expense may increase as a percentage of revenue in the near term, however, we believe that this expense will decrease as a percentage of revenue over time.

Results of Operations

     The following table sets forth selected consolidated statements of operations data for each of the periods indicated as a percentage of revenue.

	Three Months Ended
	March 31,
	2009			2008
Revenue		100.0	%		100.0	%
Operating costs and expenses:
Professional services		48.2			44.5
Physician cash compensation		43.4			44.8
Physician stock-based compensation		(0.5	)		(2.1	)
Medical liability expenses		5.3			1.8
Sales, general and administrative		38.7			37.4
Depreciation and amortization		5.1			3.7
Total operating costs and expenses		92.0			85.6
Operating income		8.0			14.4
Interest income, net		0.2			0.8
Income tax expense		3.3			6.6
Net income		4.9			8.6
Net income attributable to non-controlling interest(1)		—			—
Net income attributable to Virtual Radiologic Corporation		4.9	%		8.6	%

⁽¹⁾ Non-controlling interest for the three months ended March 31, 2009 and 2008 represents less than 0.1% as a percentage of revenue.

26

Comparison of the Three Months Ended March 31, 2009 and March 31, 2008

Revenue

	Three Months Ended
	March 31,				Change
	2009		2008		In Dollars		Percentage
	(dollars in thousands)
Revenue from reads	$	28,102	$	22,929	$	5,173		22.6	%
Other revenue		466		391		75		19.2
Total revenue	$	28,568	$	23,320	$	5,248		22.5	%

     The 22.5% increase in revenue for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, resulted primarily from increased volume from our existing customers and an increase in the number of customers and facilities to whom we provided services, including customer relationships acquired through the purchase of Diagna. This increase was partially offset by a 5.4% decline in our average price per read. The number of customers to whom we provided services increased to 625 as of March 31, 2009, from 491 as of March 31, 2008. The number of medical facilities to whom we provide services increased to 1,050 as of March 31, 2009, from 838 as of March 31, 2008.

     Revenue from reads also increased as a result of higher final read volume and same site volume growth. The percentage of revenue from final reads was 27% and 23% for the three months ended March 31, 2009 and 2008, respectively. Same site volume growth was approximately 2.2% for the three months ended March 31, 2009, as compared to 14.6% for the three months ended March 31, 2008. Same site volume growth measures the percentage increase in the number of reads over the comparable prior year period generated by a facility that has been under contract for at least three months at the beginning of the measurement period and remains a customer throughout that period.

     Other revenue, primarily representing revenue from networking, licensing and credentialing and other service revenue, grew with the addition of new customers.

Operating Costs and Expenses

     Professional Services

	Three Months Ended			Percentage			Three Months Ended			Percentage			Change
	March 31, 2009			of Revenue			March 31, 2008			of Revenue			In Dollars		Percentage
	(dollars in thousands)
Physician cash compensation expense	$	12,402			43.4	%	$	10,452			44.8	%	$	1,950		18.7	%
Physician stock-based compensation income		(143	)		(0.5	)		(495	)		(2.1	)		352		(71.1	)
Medical liability expense		1,507			5.3			410			1.8			1,097		267.6
Professional services	$	13,766			48.2	%	$	10,367			44.5	%	$	3,399		32.8	%

     The 32.8% increase in professional services expense for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, resulted primarily from increases in physician cash compensation expense and medical liability expense. Physician cash compensation expense increased primarily as a result of additional reading radiologists, including the additional radiologists from the acquisition of Diagna. For the three months ended March 31, 2009, the number of physicians performing reads increased 15.5% to 134 compared to 116 for the three months ended March 31, 2008. Medical liability expense increased due to additional loss reserves resulting from an increase in loss claim frequency and the corresponding establishment of actuarially based loss development and IBNR reserves. The decrease in the non-cash physician stock-based compensation income resulted from a smaller decline in the value of our common stock during the first quarter of 2009.

27

     The decrease in physician cash compensation expense as a percentage of revenue from 44.8% for the three months ended March 31, 2008 to 43.4% for the three months ended March 31, 2009 resulted primarily from improved radiologist efficiency due to continuing advancements in both our distributed network infrastructure and our radiologist support services.

     Sales, General and Administrative

	Three Months Ended		Percentage			Three Months Ended		Percentage			Change
	March 31, 2009		of Revenue			March 31, 2008		of Revenue			In Dollars		Percentage
	(dollars in thousands)
Sales, general and administrative	$	11,066		38.7	%	$	8,735		37.4	%	$	2,331		26.7	%

     The 26.7% increase in sales, general and administrative expense for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, resulted primarily from increased expenses for employee compensation, information technology and other general and administrative expense.

• Employee Compensation.Our employee compensation expense increased from $4.9 million for the three months ended March 31, 2008 to $6.0 million for the three months ended March 31, 2009. The 22.4% increase resulted primarily from additional non-cash employee stock-based compensation expense, accrued performance-based bonus compensation, and tax indemnity costs associated with the election by VRP to be taxed as a corporation. Non-cash employee stock-based compensation increased $438,000 for the three months ended March 31, 2009 as a result of an increase in the number of options outstanding and the accelerated vesting of certain outstanding employee stock-based awards. Employee compensation also increased $405,000 from additional accrued performance-based bonus compensation resulting from the achievement of certain financial targets during the first quarter of 2009 and $295,000 from costs associated with VRP’s election to be taxed as a corporation rather than a partnership. These increases were partially offset by a decrease in salaries expense as a result of a 14.4% decline in the number of administrative and operations personnel from March 31, 2008 to March 31, 2009. Employee compensation expense as a percentage of revenue was 21.0% for the three months ended March 31, 2009 and 2008.

• Information Technology.Our information technology expense increased from $541,000 for the three months ended March 31, 2008 to $814,000 for the three months ended March 31, 2009. The 50.5% increase resulted primarily from increased software transactional costs associated with our growth in volumes and incremental provisioning costs for data center floor space and communications bandwidth. Information technology expense as a percentage of revenue was 2.9% and 2.3% for the three months ended March 31, 2009 and 2008, respectively.

• Other General and Administrative.Our other general and administrative expenses increased from $2.1 million for the three months ended March 31, 2008 to $3.1 million for the three months ended March 31, 2009. The 47.6% increase resulted primarily from a $420,000 charge related to amounts due to our former Chairman under the Transition Agreement between us and our former Chairman, a $354,000 increase in bad debt reserves, and a $155,000 increase in outside professional fees. These increases were partially offset by reductions in shipping costs and hiring and recruiting expense for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Other general and administrative expenses as a percentage of revenue were 11.0% and 9.0% for the three months ended March 31, 2009 and 2008, respectively.

     We believe that sales, general and administrative expenses will increase as we continue to grow. We also anticipate that in the near term our sales, general and administrative expense as a percentage of revenue may increase; however, we believe that this expense will decrease as a percentage of revenue over time.

     Depreciation and Amortization Expense.Depreciation and amortization expense increased from $855,000 for the three months ended March 31, 2008 to $1.5 million for the three months ended March 31, 2009. This 75.4% increase was due primarily to additional technology equipment purchased for our operations and the amortization of customer relationship and non-compete intangible assets, which resulted from our acquisition of Diagna. Depreciation and amortization expense as a percentage of revenue was 5.1% and 3.7% for the three

28

months ended March 31, 2009 and 2008, respectively. We believe that depreciation and amortization expense will increase in the future.

     Interest Income, Net.Interest income, net, decreased from income of $176,000 for the three months ended March 31, 2008 to income of $56,000 for the three months ended March 31, 2009. This decrease in interest income relates primarily to the decrease in interest rates from the three months ended March 31, 2008 to the three months ended March 31, 2009.

     Income Tax Expense.Income tax expense decreased from $1.5 million for the three months ended March 31, 2008 to $950,000 for the three months ended March 31, 2009, which resulted primarily from a decrease in pre-tax net income for vRad of approximately $3.8 million for the three months ended March 31, 2008 to approximately $2.0 million for the three months ended March 31, 2009. As previously discussed, we consolidate our financial results in accordance with FIN 46R. However, for income tax purposes, vRad is a single tax entity that is taxed as a corporation and is not included in a tax consolidated group with the Affiliated Medical Practices. As a result, tax losses of the Affiliated Medical Practices are not available to offset taxable income of vRad. The difference in the consolidated group for financial statement purposes and tax purposes, combined with the valuation allowances established for deferred tax assets related to net operating loss carryforwards of certain of the Affiliated Medical Practices, also contributed to the decrease in income tax expense for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The totality of these factors resulted in an effective tax rate of 40.6% for the three months ended March 31, 2009 compared to a rate of 43.4% for the three months ended March 31, 2008.

Liquidity and Capital Resources

Cash, Cash Equivalents and Short-Term Investments

     Our financial position included cash and cash equivalents of $23.0 million and $33.5 million at March 31, 2009 and 2008, respectively. In addition, we have short-term investments totaling $10.1 million at March 31, 2009. We have historically funded our operations from cash flows generated from our operating activities, by proceeds generated from the sale of our stock, and to a lesser extent on a historical basis, from borrowings under our previous credit facilities.

     The reported changes in cash and cash equivalents for the three months ended March 31, 2009 and 2008 are summarized below:

	Three Months Ended March 31,
	2009			2008
	(in thousands)
Net cash provided by operating activities	$	6,683		$	3,416
Net cash used in investing activities		(3,275	)		(4,608	)
Net cash provided by financing activities		367			1,201
Increase in cash and cash equivalents	$	3,775		$	9

29

Cash Flows from Operating Activities

     For the three months ended March 31, 2009, we generated $6.7 million of net cash from operating activities from net income of $1.4 million. Our net cash from operating activities during this period included cash inflows of $2.4 million in accrued expenses related primarily to an increase in accrued professional services expense, $664,000 as a result of a decrease in current taxes receivable, $438,000 related to an increase in accounts payable resulting primarily from the growth in our business, and $396,000 as a result of a decrease in prepaid expenses related to the amortization of prepaid medical liability insurance premiums. These inflows were partially offset by cash outflows of $1.1 million related to an increase in accounts receivable. In addition, we had non-cash charges of $1.5 million for depreciation and amortization, $578,000 for stock-based compensation, and $535,000 for the provision of doubtful accounts and sales allowances.

     For the three months ended March 31, 2008, we generated $3.4 million of net cash from operating activities from net income of $2.0 million. Our net cash from operations during this period included cash inflows of $783,000 as a result of a decrease in current taxes receivable, $488,000 as a result of a decrease in prepaid expenses related to the amortization of prepaid medical expenses and $244,000 as a result of an increase in accrued expenses related primarily to an increase in accrued professional services expense. These inflows were partially offset by cash outflows of $665,000 related to an increase in accounts receivable resulting primarily from the growth in our business. In addition, we had non-cash charges of $855,000 for depreciation and amortization and ($213,000) for stock-based compensation.

Cash Flows from Investing Activities

     Net cash used in investing activities was $3.3 million for the three months ended March 31, 2009, which resulted primarily from $2.2 million in capital expenditures associated with our new headquarters facility and the continued investment in our information technology infrastructure. In addition, there was a $1.1 million increase in restricted cash related to a security deposit for the lease of our new headquarters facility and a letter of credit for the establishment of VPIL.

     Net cash used in investing activities was $4.6 million for the three months ended March 31, 2008. The cash used was primarily for capital expenditures associated with the purchase of equipment and continued investment in our information technology infrastructure.

     Cash Flows from Financing Activities

     Net cash provided by financing activities was $367,000 for the three months ended March 31, 2009. Our net cash provided by financing activities included retained cash of $461,000 as a result of tax benefits generated by the disqualified disposition of stock options during the period and $22,000 of net proceeds from the issuance of common stock relating to the exercise of stock options. These inflows were partially offset by $116,000 paid for the repurchase of our common stock.

     Net cash provided by financing activities was $1.2 million for the three months ended March 31, 2008. Our net cash provided by financing activities included retained cash of $1.4 million as a result of tax benefits generated by the disqualified disposition of stock options during the period, $111,000 of net proceeds from the issuance of common stock relating to the exercise of stock options and $291,000 for payments of costs related to our initial public offering.

30

     Future Liquidity Requirements

     We believe that our cash balances and the expected cash flow from our operations will be sufficient to fund our operating activities, working capital and capital expenditure requirements for the foreseeable future. We expect our long-term liquidity needs to consist primarily of working capital and capital expenditure requirements. We intend to fund these long-term liquidity needs from cash generated from operations along with cash generated by potential future financing transactions. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors. Many of these factors are beyond our control and cannot be anticipated at this time. To the extent that existing cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Potential investments in, or acquisitions of, complementary businesses, services or technologies could also require us to seek additional debt or equity financing. Additional funds may not be available on terms favorable to us or at all. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result.

Contractual Obligations and Commitments

     On December 7, 2007, we entered into a lease agreement to lease approximately 82,000 square feet of space in Eden Prairie, Minnesota, which houses our corporate headquarters, operations center and physician services group, in one location. The lease commenced on March 2, 2009, and expires on August 31, 2019. In conjunction with the lease, we were entitled to a tenant improvement allowance of approximately $2.7 million and upon commencement of the lease we recognized approximately $2.7 million in leasehold improvements and deferred tenant lease allowances. The amounts for leasehold improvements and deferred tenant lease allowance are recorded in property, plant and equipment, net and deferred tenant lease allowance, respectively on the consolidated balance sheet as of March 31, 2009. In addition, the lease arrangement contains a rent escalation clause for which the lease expenses are recognized on a straight-line basis over the term of the lease. Rent in the amount of $135,000 associated with this lease that is recognized but not yet paid is included in deferred rent as part of other non-current liabilities on the consolidated balance sheet as of March 31, 2009.

     On January 22, 2008, we entered into two new license agreements for the provision of network related services that allow us to utilize space in a building in Minnetonka, Minnesota, that houses one of our data centers. The license agreements commenced on February 15, 2008 and June 1, 2008 and have 36 month terms, expiring in February 2011 and May 2011, respectively. Both license agreements have monthly minimum usage requirements of $10,000 for which we are obligated to pay if actual services used do not exceed these minimums. These service minimums have been recorded as a liability as of March 31, 2009, in accordance with FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and FASB Staff Position, or FSP, FIN 45-3,Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners. The maximum potential amount of future payments is $485,000 and the current portion of this obligation is $240,000, which is recorded in other current liabilities on the consolidated balance sheet as of March 31, 2009. The non-current portion is recorded in other liabilities on the consolidated balance sheet as of March 31, 2009. This obligation will become due immediately if we prematurely terminate either of the license agreements.

     We also lease equipment under capital leases that expire in February 2013. Future minimum lease payments under these capital leases, together with the present value of minimum lease payments, as of March 31, 2009, consist of the following:

	(in thousands)
2009	$	32
2010		43
2011		43
2012		43
2013		3
		164
Less: Amount representing interest		11
Present value of minimum lease payments		153
Less: Current portion		38
Capital lease obligations, less current portion	$	115

31

     Excluded from contractual obligations and commitments are certain amounts related to our uncertain tax positions recognized in accordance with Financial Interpretation No. 48,Accounting for Uncertain Income Tax, as the timing and amount of any payment related to these tax positions remain uncertain. As of March 31, 2009 we have recognized $171,000 related to these uncertain tax positions.

Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard, or SFAS, No. 157,Fair Value Measurements,or SFAS No. 157. This standard clarified the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. On February 12, 2008 the FASB issued FASB Staff Position, or FSP, FAS 157-2,Effective Date of FASB Statement No. 157,or FSP FAS 157-2. FSP FAS 157-2 deferred the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The portion of SFAS No. 157 that had been deferred by FSP FAS 157-2 was effective beginning January 1, 2009. The application of the provisions of SFAS No. 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.

     In December 2007, the FASB issued SFAS No. 160,Non-controlling Interests in Consolidated Financial Statements,an amendment of ARB 51, or SFAS No. 160, which changes the accounting was and reporting of minority interests. Minority interests will be recharacterized as non-controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest being sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 was adopted by us on January 1, 2009. The statement has been applied prospectively, except for the presentation and disclosure requirements which have been applied retrospectively for all periods presented. In accordance with the provisions of SFAS No. 160, we have classified non-controlling interests as part of total stockholders’ equity on the consolidated balance sheets and the consolidated statements of changes in stockholders’ equity as of March 31, 2009 and December 31, 2008. In addition, we have classified non-controlling interest expense after net income to arrive at net income attributable to Virtual Radiologic Corporation on the consolidated statements of operations for the three months ended March 31, 2009 and 2008. Prior to the adoption of SFAS No. 160, we recorded non-controlling interests as a liability on our consolidated balance sheet and non-controlling interest expense as a component of net income on our consolidated statement of operations. This statement did not have a material impact on our consolidated financial position, results of operations or cash flows.

     In April 2008, the FASB issued FSP No. FAS 142-3,Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This pronouncement was effective for fiscal years beginning after December 15, 2008. This statement did not have a material impact on our consolidated financial position, results of operations or cash flows.

     In December 2008, FASB issued FSP FAS 140-4 and FIN 46R-8,Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities, this FSP amends FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional disclosures about transfers of financial assets. It also amends FIN 46R to require public enterprises to provide additional disclosures about their involvement with variable interest entities. These pronouncements were effective for reporting periods ending after December 15, 2008. The adoption of these pronouncements did not have a material impact on our consolidated financial position, results of operations or cash flows.

32

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

Foreign Currency Exchange Risk

     As of March 31, 2009, we did not have significant exposure to foreign currency exchange rates as substantially all of our transactions are denominated in U.S. dollars. VRL’s functional currency is the British pound; however, as of and for the three months ended March 31, 2009, VRL’s operations were not significant and did not have a material impact on our consolidated results of operations or financial position.

Interest Rate Market Risk

     Our cash is invested in bank deposits, demand deposit accounts and certificates of deposit denominated in U.S. dollars. The carrying value of our cash, restricted cash, accounts receivable, other current assets, trade accounts payable, accrued expenses and customer deposits approximate fair value because of the short period of time to their maturity.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

     During the most recent fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

33

PART II — Other Information

ITEM 1. Legal Proceedings

     On July 31, 2007, Merge eMed, Inc. filed a complaint against vRad in the United States District Court for the Northern District of Georgia, Atlanta Division, alleging that vRad has infringed on certain of Merge’s patents relating to teleradiology. On December 11, 2007, the court granted our motion to stay the patent suit pending the outcome of a reexamination by the United States Patent and Trademark Office, or PTO, of these same patents. On August 28, 2008, the PTO ruled invalid all of the claims in the patents upon which Merge had sued vRad. Merge has not yet responded to the PTO action. It is expected that a reexamination certificate cancelling the claims of the patents will be issued due to Merge’s failure to respond to the PTO action. The judicial stay of proceedings in the lawsuit continues in effect at this time.

     On March 8, 2009, DR Systems, Inc. filed a complaint against vRad in the United States District Court for the Southern District of California, alleging that vRad has infringed on a patent held by DR Systems through our use of medical imaging and archival systems. This litigation is in its early stages. However, based upon investigation into the patent and the allegations, we believe that vRad is entitled to indemnity under a third party license agreement, and have notified the third party of the lawsuit and requested that the licensor defend and indemnify vRad.

     We are from time to time subject to, and are presently involved in, other litigation and legal proceedings arising out of the ordinary course of business, including medical malpractice claims and certain employment related matters. We believe that neither we, nor, to our knowledge, any of our affiliated radiologists, are presently a party to any litigation, the outcome of which could have a material adverse effect on us.

     We maintain professional and general liability insurance policies with third-party insurers on a claims-made basis, subject to deductibles, self-insured retention limits, policy aggregates, exclusions, and other restrictions, in accordance with standard industry practice. Our self-insured retention under our professional liability insurance program is insured through VPIL, our wholly owned captive insurance subsidiary. We believe that our insurance coverage is appropriate based upon our claims experience and the nature and risks of our business. However, we cannot assure that any pending or future claim will not be successful or if successful will not exceed the limits of available insurance coverage.

ITEM 1A. Risk Factors

     The Company has added the following risk factor to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2008.

     We are subject to medical device regulations applicable to our use of vRad PACS and our failure to maintain regulatory clearance for this software or to maintain regulatory compliance as a medical device establishment could adversely impact our business.

     On April 13, 2009, we announced the development of vRad PACS — our proprietary Picture Communications and Archiving System. Even though we currently intend to only provide vRad PACS for internal use by our affiliated radiologists in the United States, its use in diagnosing and treating patients makes vRad PACS a medical device subject to regulation in the United States by the United States Food and Drug Administration, or FDA. Accordingly, we sought and received Section 510(k) marketing clearance from the FDA.

     In the United States, the FDA regulates the design control, development, manufacturing, labeling, record keeping and surveillance procedures for medical devices. Although vRad PACS has received requisite marketing clearance from the FDA, the FDA could require us to cease using vRad PACS due to failure to comply with regulatory standards or the occurrence of unforeseen problems. As a developer of a medical device, our facilities and processes are also subject to regulation. The FDA can and will be expected to inspect our facilities to determine whether we are in compliance with various regulations relating to quality systems, such as manufacturing practices, validation, testing, quality control, product labeling and product surveillance.

     FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us. A determination that we are in violation of FDA regulations could lead to imposition of civil penalties,

34

including fines, product recalls or product seizures and, in extreme cases, criminal sanctions, depending on the nature of the violation, all of which could have a material adverse effect on our business.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

     On March 4, 2009, our Board of Directors authorized the repurchase of up to $5.0 million of our outstanding common stock in the open market or through private transactions, from time to time, in accordance with Securities and Exchange Commission regulations. The repurchase plan does not have an expiration date. During the period from March 4, 2009 to March 31, 2009, the Company repurchased shares in the open market and pursuant to trading plans meeting the requirements of Rule 10b5-1 of the Securities Exchange Act of 1934. The following table summarizes the repurchases:

					Total Number of
					Shares
	Total Number		Average Price		Purchased as		Maximum Value that
	of Shares		Paid per		Part of Publicly		May Yet Be Purchased
Period	Purchased		Share		Announced Plans		Under the plan
March 4, 2009 — March 31, 2009		20,512	$	5.63		20,512	$	4,883,959

ITEM 5. Other Information

     On April 30, 2009, we entered into amendments with VRP and the Professional Corporations to (i) the Professional and Management Services Agreement and License, as amended, by and between us and VRP, and (ii) the Management Services Agreements, as amended, by and between us and each of the Professional Corporations (the “Amendments”). The Amendments modify the circumstances under which we may designate a successor equity owner for VRP and each of the Professional Corporations, and are intended to ensure the continuity of patient care and the business relationship between us, VRP and the Professional Corporations when those circumstances arise. The circumstances include the equity owner’s death, disability, disqualification, certain transfer events involving the equity and breach or threatened breach of the agreement.

     The above summary of the Amendments is qualified in its entirety by reference to the Amendments, which are filed as Exhibits 10.1 through 10.7 to this Quarterly Report on Form 10-Q, and are incorporated herein by reference.

35

ITEM 6. Exhibits

Exhibits are incorporated herein by reference or are filed with this quarterly report as set forth below:

EXHIBIT INDEX

Exhibit No.	Description
10.1	Amendment No. 3 to Management Professional and Management Services Agreement and License, dated as of April 30, 2009, by and between Virtual Radiologic Professionals, LLC and Virtual Radiologic Corporation.***
10.2	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of California, P.A. ***
10.3	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Illinois, S.C.***
10.4	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Michigan, P.C.***
10.5	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Minnesota, P.A.***
10.6	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of New York, P.A.***
10.7	Amendment No. 2 to Management Services Agreement, dated as of April 30, 2009, by and between Virtual Radiologic Corporation and Virtual Radiologic Professionals of Texas, P.A.***
10.8	First Amendment to Lease, effective March 31, 2009, between Windsor Plaza, LLC and Virtual Radiologic Corporation***
31.1	Certification by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.***
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***

*** Filed herewith.

36

SIGNATURES

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.

Signature	Title	Date
/s/ Robert C. Kill	President and Chief Executive Officer
Robert C. Kill	(Principal Executive Officer)	May 1, 2009
/s/ Leonard C. Purkis	Chief Financial Officer (Principal
Leonard C. Purkis	Financial and Accounting Officer)	May 1, 2009

37