UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington
D.C. 20549





FORM
10-K





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





For
the fiscal year ended December 31, 2009





Commission
File Number 0-19019





RadNet,
Inc.


(Exact
name of registrant as specified in charter)





Delaware
            13-3326724(State
      or other jurisdiction of
              incorporation
      or organization)
            (I.R.S.
      Employer
              Identification
      No.)1510
      Cotner AvenueLos
      Angeles, California
            90025(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code: (310) 478-7808




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




Title of Each Class
                Name of each exchange on which
      registeredCommon
      Stock, $.0001 par value
                NASDAQ
      Global Market




Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes    ̈      No
x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) or the act.  Yes   ̈     No  x





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 and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes x     No
 ̈


Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Website, 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 ̈No ̈





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





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.





LargeAcceleratedFiler ̈
            
            AcceleratedFilerxNon-AcceleratedFiler ̈(Donotcheckifasmallerreportingcompany)
            
            SmallerReportingCompany ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule
12b-2)                                                                                                                                                                  
Yes   ̈No
x





The
aggregate market value of the registrant’s voting and nonvoting common equity
held by non-affiliates of the registrant was approximately $63,538,580 on June
30, 2009 (the last business day of the registrant’s most recently completed
second quarter) based on the closing price for the common stock on the NASDAQ
Global Market on June 30, 2009.





The
number of shares of the registrant’s common stock outstanding on March 10, 2010,
was 36,488,354 shares (excluding treasury shares).





DOCUMENTS
INCORPORATED BY REFERENCE




The
information required by Part III of the Form 10-K, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive
proxy statement for the Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the close of the registrant’s fiscal year.








RADNET,
INC.




TABLE
OF CONTENTS




FORM 10-K ITEM
                PAGEPART
      I.Item 1.
                Business
                1Item 1A.
                Risk
      Factors
                19Item 1B.
                Unresolved
      Staff Comments
                28Item
      2.
                Properties
                29Item
      3.
                Legal
      Proceedings
                29Item
      4.
                (Removed
      and Reserved).
                29PART
      II.Item
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                30Item
      6.
                Selected
      Consolidated Financial Data
                33Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                34Item 7A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                49Item
      8.
                Financial
      Statements and Supplementary Data
                49Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                76Item
      9A.
                Controls
      and Procedures
                76Item
      9B.
                Other
      Information
                78PART
      III.Item
      10.
                Directors,
      Executive Officers and Corporate Governance
                80Item
      11.
                Executive
      Compensation
                81Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                81Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                83Item
      14.
                Principal
      Accountant Fees and Services
                83PART
      IV.Item
      15.
                Exhibits
      and Financial Statement Schedules
                84




Cautionary Note Regarding Forward-Looking
Statements




This
annual report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to future events or
our future financial performance, and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. These risks and other factors include, among
other things, those listed in Item 1A, “Risk Factors,” Item 7 — “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
elsewhere in this annual report. In some cases, you can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expect,” “intend,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”
“assumption” or the negative of these terms or other comparable terminology. The
forward-looking statements contained herein reflect our current views with
respect to future events and are based on our currently available financial,
economic and competitive data and on current business plans. Actual events or
results may differ materially depending on risks and uncertainties that may
affect the Company’s operations, markets, services, prices and other factors.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to
statements concerning RadNet’s ability to successfully acquire and integrate new
operations, to grow our contract management business, our financial guidance,
our statements regarding future cost savings, our statements regarding increased
business from new equipment or operations and our statements regarding our
ability to finance our operations.




We do not
undertake any responsibility to release publicly any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this annual report. Additionally, we do not undertake
any responsibility to update you on the occurrence of any unanticipated events
which may cause actual results to differ from those expressed or implied by the
forward-looking statements contained in this annual report.





PART
I




Item
      1.
            Business




Business
Overview




With
180 centers located in California, Delaware, Maryland, New Jersey, Florida,
Kansas and New York, we are the leading national provider of freestanding,
fixed-site outpatient diagnostic imaging services in the United States based on
number of locations. Our centers provide physicians with imaging capabilities to
facilitate the diagnosis and treatment of diseases and disorders and may reduce
unnecessary invasive procedures, often minimizing the cost and amount of care
for patients. Our services include magnetic resonance imaging (MRI), computed
tomography (CT), positron emission tomography (PET), nuclear medicine,
mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and other
related procedures. The vast majority of our centers offer multi-modality
imaging services, a key point of differentiation from our competitors. Our
multi-modality strategy diversifies revenue streams, reduces exposure to
reimbursement changes, and provides patients and referring physicians one
location to serve the needs of multiple procedures.





We
seek to develop regional markets in order to leverage operational efficiencies.
Our scale and density within our selected geographies provides close, long-term
relationships with key payors, radiology groups and referring physicians. Each
of our facility managers is responsible for managing relationships with
local physicians and payors, meeting our standards of patient service and
maintaining profitability. We provide corporate training programs, standardized
policies and procedures and sharing of best practices among the physicians in
our regional networks.











We derive
substantially all of our revenue, directly or indirectly, from fees charged for
the diagnostic imaging services performed at our facilities. For the year ended
December 31, 2009, we performed 3,174,006 diagnostic imaging procedures and
generated net revenue from continuing operations of $524.4 million. Additional
information concerning RadNet, Inc., including our consolidated subsidiaries,
for each of the years ended December 31, 2009, December 31, 2008 and December
31, 2007 is included in the consolidated financial statements and notes thereto
in this Annual Report.




History
of our Business




We were originally incorporated in the
State of New York in 1985 and have been continuously engaged in the medical
imaging business since that time.


-1-





On November 15, 2006, we completed the
acquisition of Radiologix, Inc. Radiologix, a Delaware corporation, then
employing approximately 2,200 people, through its subsidiaries, was a national
provider of diagnostic imaging services through the ownership and operation of
freestanding, outpatient diagnostic imaging centers. Radiologix owned, operated
and maintained equipment in 69 locations, with imaging centers in seven states,
including primary operations in the Mid-Atlantic; the Bay-Area, California; the
Treasure Coast area, Florida; Northeast Kansas; and the Finger Lakes (Rochester)
and Hudson Valley areas of New York State. Under the terms of the acquisition
agreement, Radiologix stockholders received aggregate consideration of
11,310,950 shares (after giving effect to the one-for-two reverse stock split
effected in November 2006) of our common stock and $42,950,000 in cash. We
financed the transaction and refinanced substantially all of our outstanding
debt with a $405 million senior secured credit facility with GE Commercial
Healthcare Financial Services.





Since that time we have continued to
develop our medical imaging business through a combination of organic growth and
acquisitions. For a discussion of acquisitions and dispositions of facilities,
see “Management’s Discussion and Analysis and Results of Operations—Facility
Acquisitions” below.





On September 3, 2008 we reincorporated
from New York into Delaware and have operated as a Delaware corporation since
that time. References to







Company
Website




We
maintain a website at www.radnet.com. We
make available, free of charge, on our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports as soon as is reasonably practicable after the material is
electronically filed with the Securities and Exchange Commission. References to
our website addressed in this report are provided as a convenience and do not
constitute, or should be viewed as, an incorporation by reference of the
information contained on, or available through, the website. Therefore, such
information should not be considered part of this report.




Industry
Overview




Diagnostic
imaging involves the use of non-invasive procedures to generate representations
of internal anatomy and function that can be recorded on film or digitized for
display on a video monitor. Diagnostic imaging procedures facilitate the early
diagnosis and treatment of diseases and disorders and may reduce unnecessary
invasive procedures, often minimizing the cost and amount of care for patients.
Diagnostic imaging procedures include MRI, CT, PET, nuclear medicine,
ultrasound, mammography, X-ray and fluoroscopy. We estimate that the national
imaging market in the United States is $100 billion, with projected mid-single
digit growth for MRI, CT and PET/CT driven by the aging of the U.S. population,
wider physician and payor acceptance for imaging technologies, and greater
consumer and physician awareness of diagnostic screening
capabilities.





While
general X-ray remains the most commonly performed diagnostic imaging procedure,
the fastest growing and higher margin procedures are MRI, CT and PET. The rapid
growth in PET scans is attributable to the increasing recognition of the
efficacy of PET scans in the diagnosis and monitoring of cancer. The number of
MRI and CT scans continues to grow due to their wider acceptance by physicians
and payors, an increasing number of applications for their use and a general
increase in demand due to the aging population in the United
States.





Industry
Trends




We
believe the diagnostic imaging services industry will continue to grow as a
result of a number of factors, including the following:




Escalating
Demand for Healthcare Services from an Aging Population




Persons
over the age of 65 comprise one of the fastest growing segments of the
population in the United States. According to the United States Census Bureau,
this group is expected to increase as much as 33% from 2010 to 2020. Because
diagnostic imaging use tends to increase as a person ages, we believe the aging
population will generate more demand for diagnostic imaging procedures.




New
Effective Applications for Diagnostic Imaging Technology




New
technological developments are expected to extend the clinical uses of
diagnostic imaging technology and increase the number of scans performed. Recent
technological advancements include:


-2-


·
            MRI
      spectroscopy, which can differentiate malignant from benign
      lesions;




·
            MRI
      angiography, which can produce three-dimensional images of body parts and
      assess the status of blood vessels;




·
            enhancements
      in teleradiology systems, which permit the digital transmission of
      radiological images from one location to another for interpretation by
      radiologists at remote locations;
and




·
            the
      development of combined PET/CT scanners, which combine the technology from
      PET and CT to create a powerful diagnostic imaging
  system.





Additional
improvements in imaging technologies, contrast agents and scan capabilities are
leading to new non-invasive methods of diagnosing blockages in the heart’s vital
coronary arteries, liver metastases, pelvic diseases and vascular abnormalities
without exploratory surgery. We believe that the use of the diagnostic
capabilities of MRI and other imaging services will continue to increase because
they are cost-effective, time-efficient and non-invasive, as compared to
alternative procedures, including surgery, and that newer technologies and
future technological advancements will further increase the use of imaging
services. At the same time, the industry has increasingly used upgrades to
existing equipment to expand applications, extend the useful life of existing
equipment, improve image quality, reduce image acquisition time and increase the
volume of scans that can be performed. We believe this trend toward equipment
upgrades rather than equipment replacements will continue, as we do not foresee
new imaging technologies on the near-term horizon that will displace MRI, CT or
PET as the principal advanced diagnostic imaging modalities.




Wider
Physician and Payor Acceptance of the Use of Imaging




During
the last 30 years, there has been a major effort undertaken by the medical and
scientific communities to develop higher quality, cost-effective diagnostic
imaging technologies and to minimize the risks associated with the application
of these technologies. The thrust of product development during this period has
largely been to reduce the hazards associated with conventional x-ray and
nuclear medicine techniques and to develop new, harmless imaging technologies.
As a result, the use of advanced diagnostic imaging modalities, such as MRI, CT
and PET, which provide superior image quality compared to other diagnostic
imaging technologies, has increased rapidly in recent years. These advanced
modalities allow physicians to diagnose a wide variety of diseases and injuries
quickly and accurately without exploratory surgery or other surgical or invasive
procedures, which are usually more expensive, involve greater risk to patients
and result in longer rehabilitation time. Because advanced imaging systems are
increasingly seen as a tool for reducing long-term healthcare costs, they are
gaining wider acceptance among payors.




Greater
Consumer Awareness of and Demand for Preventive Diagnostic
Screening




Diagnostic
imaging, such as elective full-body scans, is increasingly being used as a
screening tool for preventive care procedures. Consumer awareness of diagnostic
imaging as a less invasive and preventive screening method has added to the
growth in diagnostic imaging procedures. We believe that further technological
advancements allowing for early diagnosis of diseases and disorders using less
invasive procedures will create additional demand for diagnostic
imaging.




Diagnostic
Imaging Settings




Diagnostic
imaging services are typically provided in one of the following
settings:




Fixed-site,
freestanding outpatient diagnostic facilities




These
facilities range from single-modality to multi-modality facilities and are
generally not owned by hospitals or clinics. These facilities depend upon
physician referrals for their patients and generally do not maintain dedicated,
contractual relationships with hospitals or clinics. In fact, these facilities
may compete with hospitals or clinics that have their own imaging systems to
provide services to these patients. These facilities bill third-party payors,
such as managed care organizations, insurance companies, Medicare or Medicaid.
All of our facilities are in this category.




Hospitals




Many
hospitals provide both inpatient and outpatient diagnostic imaging services,
typically on site. These inpatient and outpatient centers are owned and operated
by the hospital or clinic, or jointly by both, and are primarily used by
patients of the hospital or clinic. The hospital or clinic bills third-party
payors, such as managed care organizations, insurance companies, Medicare or
Medicaid.


-3-


While
many hospitals own or lease their own equipment, certain hospitals provide these
services by contracting with providers of mobile imaging equipment. Using
specially designed trailers, mobile imaging service providers transport imaging
equipment and provide services to hospitals and clinics on a part-time or
full-time basis, thus allowing small to mid-size hospitals and clinics that do
not have the patient demand to justify fixed on-site access to advanced
diagnostic imaging technology. Diagnostic imaging providers contract directly
with the hospital or clinic and are typically reimbursed directly by
them.




Diagnostic
Imaging Modalities




The
principal diagnostic imaging modalities we use at our facilities
are:




MRI




MRI has
become widely accepted as the standard diagnostic tool for a wide and
fast-growing variety of clinical applications for soft tissue anatomy, such as
those found in the brain, spinal cord and interior ligaments of body joints such
as the knee. MRI uses a strong magnetic field in conjunction with low energy
electromagnetic waves that are processed by a computer to produce
high-resolution, three-dimensional, cross-sectional images of body tissue,
including the brain, spine, abdomen, heart and extremities. A typical MRI
examination takes from 20 to 45 minutes. MRI systems can have either open or
closed designs, routinely have magnetic field strength of 0.2 Tesla to 3.0 Tesla
and are priced in the range of $0.6 million to $2.5 million. As of December 31,
2009, we had 139 MRI systems in operation.




CT




CT
provides higher resolution images than conventional X-rays, but generally not as
well defined as those produced by MRI. CT uses a computer to direct the movement
of an X-ray tube to produce multiple cross-sectional images of a particular
organ or area of the body. CT is used to detect tumors and other conditions
affecting bones and internal organs. It is also used to detect the occurrence of
strokes, hemorrhages and infections. A typical CT examination takes from 15 to
45 minutes. CT systems are priced in the range of $0.3 million to $1.2 million.
As of December 31, 2009, we had 79 CT systems in operation.




PET




PET
scanning involves the administration of a radiopharmaceutical agent with a
positron-emitting isotope and the measurement of the distribution of that
isotope to create images for diagnostic purposes. PET scans provide the
capability to determine how metabolic activity impacts other aspects of
physiology in the disease process by correlating the reading for the PET with
other tools such as CT or MRI. PET technology has been found highly effective
and appropriate in certain clinical circumstances for the detection and
assessment of tumors throughout the body, the evaluation of some cardiac
conditions and the assessment of epilepsy seizure sites. The information
provided by PET technology often obviates the need to perform further highly
invasive or diagnostic surgical procedures. PET systems are priced in the range
of $0.8 million to $2.5 million. In addition, we employ combined PET/CT systems
that blend the PET and CT imaging modalities into one scanner. These combined
systems are priced in the range of $1.1 million to $2.8 million. As of December
31, 2009, we had 32 PET or combination PET/CT systems in operation.




Nuclear
Medicine




Nuclear
medicine uses short-lived radioactive isotopes that release small amounts of
radiation that can be recorded by a gamma camera and processed by a computer to
produce an image of various anatomical structures or to assess the function of
various organs such as the heart, kidneys, thyroid and bones. Nuclear medicine
is used primarily to study anatomic and metabolic functions. Nuclear medicine
systems are priced in the range of $300,000 to $400,000. As of December 31,
2009, we had 40 nuclear medicine systems in operation.




X-ray




X-rays
use roentgen rays to penetrate the body and record images of organs and
structures on film. Digital X-ray systems add computer image processing
capability to traditional X-ray images, which provides faster transmission of
images with a higher resolution and the capability to store images more
cost-effectively. X-ray systems are priced in the range of $95,000 to $440,000.
As of December 31, 2009, we had 155 x-ray systems in operation.


-4-


Ultrasound




Ultrasound
imaging uses sound waves and their echoes to visualize and locate internal
organs. It is particularly useful in viewing soft tissues that do not X-ray
well. Ultrasound is used in pregnancy to avoid X-ray exposure as well as in
gynecological, urologic, vascular, cardiac and breast applications. Ultrasound
systems are priced in the range of $90,000 to $250,000. As of December 31, 2009,
we had 253 ultrasound systems in operation.




Mammography




Mammography
is a specialized form of radiology using low dosage X-rays to visualize breast
tissue and is the primary screening tool for breast cancer. Mammography
procedures and related services assist in the diagnosis of and treatment
planning for breast cancer. Analog mammography systems are priced in the range
of $70,000 to $100,000, and digital mammography systems are priced in the range
of $250,000 to $400,000. As of December 31, 2009, we had 122 mammography systems
in operation, 113 of which are digital mammography systems. During the last two
years we converted 92 of our analog mammography systems to digital mammography
systems.




Fluoroscopy




Fluoroscopy
uses ionizing radiation combined with a video viewing system for real time
monitoring of organs. Fluoroscopy systems are priced in the range of $100,000 to
$400,000. As of December 31, 2009, we had 86 fluoroscopy systems in
operation.




Our
Competitive Strengths




Our Position as the Largest Provider
of Freestanding, Fixed-site Outpatient Diagnostic Imaging Services in the UnitedStates, Based on Number
of Centers and Revenue





As of
December 31, 2009, we operated 180 centers in California, Delaware, Maryland,
New Jersey, Florida, Kansas and New York. Our size and scale allow us to achieve
operating, sourcing and administrative efficiencies, including equipment and
medical supply sourcing savings and favorable maintenance contracts from
equipment manufacturers and other suppliers. Our specific knowledge of our
geographic markets drives strong relationships with key payors, radiology groups
and referring physicians within our markets.





Our
Comprehensive "Multi-Modality" Diagnostic Imaging Offering





The vast majority of our
centers offer multi-modality procedures, driving strong relationships with
referring physicians and payors in our markets and a diversified revenue base.
At each of our multi-modality facilities, we offer patients and referring
physicians one location to serve their needs for multiple procedures.
Furthermore, we have complemented many of our multi-modality sites with
single-modality sites to accommodate overflow and to provide a full range of
services within a local area consistent with demand. This prevents multiple
patient visits or unnecessary travel between facilities, thereby increasing
patient throughput and decreasing costs and time delays. Our revenue is
generated by a broad mix of modalities. We believe our multi-modality strategy
lessens our exposure to reimbursement changes in any specific
modality.





Our
Facility Density in Many Highly Populated Areas of the United
States





The
strategic organization of our diagnostic imaging facilities into regional
networks densely concentrated around major population centers in seven states
offers unique benefits to our patients, our referring physicians, our payors and
us. We are able to increase the convenience of our services to patients by
implementing scheduling systems within geographic regions, where practical. For
example, many of our diagnostic imaging facilities within a particular region
can access the patient appointment calendars of other facilities within the same
regional network to efficiently allocate time available and to meet a patient's
appointment, date, time or location preferences. The grouping of our facilities
within regional networks enables us to easily move technologists and other
personnel, as well as equipment, from under-utilized to over-utilized facilities
on an as-needed basis, and drive referrals. Our organization of referral
networks results in increased patient throughput, greater operating efficiencies
and better equipment utilization rates and improved response time for our
patients. We believe our networks of facilities and tailored service offerings
for geographic areas drives local physician referrals, makes us an attractive
candidate for selection as a preferred provider by third-party payors, creates
economies of scale and provides barriers to entry by competitors in our
markets.


-5-





Our
Strong Relationships with Payors and Diversified Payor Mix





Our
revenue is derived from a diverse mix of payors, including private payors,
managed care capitated payors and government payors, which should mitigate our
exposure to possible unfavorable reimbursement trends within any one payor
class. In addition, our experience with capitation arrangements over the last
several years has provided us with the expertise to manage utilization and
pricing effectively, resulting in a predictable and recurring stream of revenue.
We believe that third-party payors representing large groups of patients often
prefer to enter into managed care contracts with providers that offer a broad
array of diagnostic imaging services at convenient locations throughout a
geographic area. As of December 31, 2009, we received approximately 56% of our
payments from commercial insurance payors, 15% from managed care capitated
payors, 20% from Medicare and 3% from Medicaid. With the exception of Blue
Cross/Blue Shield, which are managed by different entities in each of the states
in which we operate, and Medicare, no single payor accounted for more than 5% of
our net revenue for the twelve months ended December 31, 2009.









Our
Strong Relationships with Experienced and Highly Regarded
Radiologists





Our
contracted radiologists have outstanding credentials, strong relationships with
referring physicians, and a broad mix of sub-specialties. The collective
experience and expertise of these radiologists translates into more accurate and
efficient service to patients. Our close relationship with Dr. Berger, our
President and Chief Executive Officer, and BRMG in California and our long-term
arrangements with radiologists outside of California enable us to better ensure
that medical service provided at our facilities is consistent with the needs and
expectations of our referring physicians, patients and payors.





Our
Experienced and Committed Management Team





Our
senior management group has more than 100 years of combined healthcare
management experience. Our executive management team has created our
differentiated approach based on their comprehensive understanding of the
diagnostic imaging industry and the dynamics of our regional markets. We have a
track record of successful acquisitions and integration of acquired businesses
into RadNet, and have managed the business through a variety of economic and
reimbursement cycles. Our management beneficially owns approximately 29% of our
common stock.





Our
Technologically Advanced Imaging Systems





We
have invested significant capital in our imaging systems over the last three
years. Our state-of-the-art imaging systems can perform high quality scans more
rapidly and can be used for a wider variety of imaging applications than less
advanced systems. While general X-ray remains the most commonly performed
diagnostic imaging procedure, the fastest growing and higher margin procedures
are MRI, CT and PET. Because technological change in diagnostic imaging is
gradual, most of our systems can be upgraded with software or hardware
enhancements, which should allow us to continue to provide advanced technology
without significant capital expenditure to replace an entire system. In recent
years, we have made significant investments in upgrading our facilities to 100%
digital imaging technology, inclusive of x-ray and mammography, and believe our
advanced imaging systems will drive increased applications and higher patient
through-put.





Business
Strategy




Maximize
Performance at Our Existing Facilities





We intend to enhance our
operations and increase scan volume and revenue at our existing facilities by
expanding physician relationships and increasing the procedure
offerings.


-6-





Focus
on Profitable Contracting





We
regularly evaluate our contracts with third-party payors, industry vendors and
radiology groups, as well as our equipment and real property leases, to
determine how we may improve the terms to increase our revenues and reduce our
expenses. Because many of our contracts with third party payors are short-term
in nature, we can regularly renegotiate these contracts, if necessary. We
believe our position as a leading provider of diagnostic imaging services and
our long-term relationships with physician groups in our markets enable us to
obtain more favorable contract terms than would be available to smaller or less
experienced imaging services providers.





Expand
MRI, CT and PET Applications





We
intend to continue to use expanding MRI, CT and PET applications as they become
commercially available. Most of these applications can be performed by our
existing MRI, CT and PET systems with upgrades to software and hardware, thereby
minimizing capital expenditure requirements. We intend to introduce applications
that will decrease scan and image-reading time to increase our
productivity.





Optimize
Operating Efficiencies





We
intend to maximize our equipment utilization by adding, upgrading and
re-deploying equipment where we experience excess demand. We will continue to
trim excess operating and general and administrative costs where it is feasible
to do so, including consolidating, divesting or closing under-performing
facilities to reduce operating costs and improve operating income. We also may
continue to use, where appropriate, highly trained radiology physician
assistants to perform, under appropriate supervision of radiologists, basic
services traditionally performed by radiologists. We will continue to upgrade
our advanced information technology system to create cost reductions for our
facilities in areas such as image storage, support personnel and financial
management.





Expand Our
Networks





We intend
to continue to expand the number of our facilities through new developments and
targeted acquisitions, using a disciplined approach for evaluating and entering
new areas, including consideration of whether we have adequate financial
resources to expand. Our current plans are to strengthen our market presence in
geographic areas where we currently have existing operations and to expand into
neighboring and other areas which we determine to be appropriate. We perform
extensive due diligence before developing a new facility or acquiring an
existing facility, including surveying local referral sources and radiologists,
as well as examining the demographics, reimbursement environment, competitive
landscape and intrinsic demand of the geographic market. We generally will only
enter new markets where:





·
            there
      is sufficient patient demand for outpatient diagnostic imaging
      services;




·
            we
      believe we can gain significant market
share;




·
            we
      can build key referral relationships or we have already established such
      relationships; and




·
            payors
      are receptive to our entry into the
market.





Our
Services




We offer a
comprehensive set of imaging services including MRI, CT, PET, nuclear medicine,
X-ray, ultrasound, mammography, fluoroscopy and other related procedures. In our
centers we focus on providing standardized high quality imaging services,
regardless of location, to ensure patients, physicians and payors consistency in
service and quality. To ensure the high quality of our services, we monitor
patient satisfaction, timeliness of services to patients and reports to
physicians. Based on our conversations with payors, in our experience, our fees
are generally lower than hospital fees for the services we provide.





The key
features of our services include:





·
            patient-friendly,
      non-clinical environments;




·
            a
      24-hour turnaround on routine
examinations;




·
            interpretations
      within one to two hours, if needed;




·
            flexible
      patient scheduling, including same-day
  appointments;


-7-


·
            extended
      operating hours, including
weekends;




·
            reports
      delivered by courier, facsimile or
email;




·
            availability
      of second opinions and
consultations;




·
            availability
      of sub-specialty interpretations at no additional charge;
    and




·
            standardized
      fee schedules by region.





Radiology
Professionals




In the
states in which we provide services (except Florida), a lay person or any entity
other than a professional corporation or similar professional organization is
not allowed to practice medicine, including by employing professional persons or
by having any ownership interest or profit participation in or control over any
medical professional practice. This doctrine is commonly referred to as the
prohibition on the “corporate practice” of medicine. In order to comply with
this prohibition, we contract with radiologists to provide professional medical
services in our facilities, including the supervision and interpretation of
diagnostic imaging procedures. The radiology practice maintains full control
over the physicians it employs. Pursuant to each management contract, we make
available the imaging facility and all of the furniture and medical equipment at
the facility for use by the radiology practice, and the practice is responsible
for staffing the facility with qualified professional medical personnel. In
addition, we provide management services and administration of the non-medical
functions relating to the professional medical practice at the facility,
including among other functions, provision of clerical and administrative
personnel, bookkeeping and accounting services, billing and collection,
provision of medical and office supplies, secretarial, reception and
transcription services, maintenance of medical records, and advertising,
marketing and promotional activities. As compensation for the services furnished
under contracts with radiologists, we generally receive an agreed percentage of
the medical practice billings for, or collections from, services provided at the
facility, typically varying between 75% to 85% of global net revenue or
collections after deduction of the professional fees.




At all
but 10 of our California facilities we contract, directly or through BRMG, with
other radiology groups to provide professional medical services. At our imaging
facilities we charge a fee for our services as manager of the entity which owns
the center.




Many
states have also enacted laws prohibiting a licensed professional from splitting
fees derived from the practice of medicine with an unlicensed person or business
entity. We do not believe that the management, administrative, technical and
other non-medical services we provide to each of our contracted radiology groups
violate the corporate practice of medicine prohibition or that the fees we
charge for such services violate the fee splitting prohibition. However, the
enforcement and interpretation of these laws by regulatory authorities and state
courts vary from state to state. If our arrangements with our independent
contractor radiology groups are found to violate state laws prohibiting the
practice of medicine by general business corporations or fee splitting, our
business, financial condition and ability to operate in those states could be
adversely affected.




BRMG in California




Howard G.
Berger, M.D., is our President and Chief Executive Officer, a member of our
Board of Directors and owns approximately 18% of our outstanding common stock.
Dr. Berger also owns, indirectly, 99% of the equity interests in BRMG. BRMG
provides all of the professional medical services at 87 of our facilities
located in California under a management agreement with us, and contracts with
various other independent physicians and physician groups to provide the
professional medical services at most of our other California facilities. We
obtain professional medical services from BRMG in California, rather than
provide such services directly or through subsidiaries, in order to comply with
California’s prohibition against the corporate practice of medicine. However, as
a result of our close relationship with Dr. Berger and BRMG, we believe that we
are able to better ensure that medical service is provided at our California
facilities in a manner consistent with our needs and expectations and those of
our referring physicians, patients and payors than if we obtained these services
from unaffiliated physician groups.




We
believe that physicians are drawn to BRMG and the other radiologist groups with
whom we contract by the opportunity to work with the state-of-the-art equipment
we make available to them, as well as the opportunity to receive specialized
training through our fellowship programs, and engage in clinical research
programs, which generally are available only in university settings and major
hospitals.




As of
December 31, 2009, BRMG employed 78 full-time and nine part-time radiologists.
Under our management agreement with BRMG, we are paid a percentage of the
amounts collected for the professional services BRMG physicians render as
compensation for our services and for the use of our facilities and equipment.
For the year ended December 31, 2009, this percentage was 79%. The percentage
may be adjusted, if necessary, to ensure that the parties receive the fair value
for the services they render. The following are the other principal terms of our
management agreement with BRMG:


-8-


·
            The
      agreement expires on January 1, 2014. However, the agreement automatically
      renews for consecutive 10-year periods, unless either party delivers a
      notice of non-renewal to the other party no later than six months prior to
      the scheduled expiration date. Either party may terminate the agreement if
      the other party defaults under its obligations, after notice and an
      opportunity to cure. We may terminate the agreement if Dr. Berger no
      longer owns at least 60% of the equity of BRMG; as of December 31, 2009,
      he owned 99% of the equity of BRMG.




·
            At
      its expense, BRMG employs or contracts with an adequate number of
      physicians necessary to provide all professional medical services at all
      of our California facilities, except for 10 facilities for which we
      contract with separate medical
groups.




·
            At
      our expense, we provide all furniture, furnishings and medical equipment
      located at the facilities and we manage and administer all non-medical
      functions at, and provide all nurses and other non-physician personnel
      required for the operation of, the
facilities.




·
            If
      BRMG wants to open a new facility, we have the right of first refusal to
      provide the space and services for the facility under the same terms and
      conditions set forth in the management
  agreement.




·
            If
      we want to open a new facility, BRMG must use its best efforts to provide
      medical personnel under the same terms and conditions set forth in the
      management agreement. If BRMG cannot provide such personnel, we have the
      right to contract with other physicians to provide services at the
      facility.




·
            BRMG
      must maintain medical malpractice insurance for each of its physicians
      with coverage limits not less than $1 million per incident and $3 million
      in the aggregate per year. BRMG also has agreed to indemnify us for any
      losses we suffer that arise out of the acts or omissions of BRMG and its
      employees, contractors and agents.




Non-California Locations and 10
California Locations




At the 10
centers in California that BRMG does not provide professional medical services,
and at all of the centers which are located outside of California, we have
entered into long-term contracts with prominent third-party radiology groups in
the area to provide physician services at those facilities. These arrangements
also allow us to comply with the prohibition against the “corporate practice” of
medicine in other states in which we operate (except in Florida which does not
have an equivalent statute prohibiting the corporate practice of
medicine).




These
third-party radiology practice groups provide professional services, including
supervision and interpretation of diagnostic imaging procedures, in our
diagnostic imaging centers. The radiology practices maintain full control over
the provision of professional services. The contracted radiology practices
generally have outstanding physician and practice credentials and reputations;
strong competitive market positions; a broad sub-specialty mix of physicians; a
history of growth and potential for continued growth. In these facilities we
have entered into long-term agreements (typically 10-40 years in length) under
which, in addition to obtaining technical fees for the use of our diagnostic
imaging equipment and the provision of technical services, we provide management
services and receive a fee based on the practice group’s professional revenue.
We typically receive 100% of the technical reimbursements associated with
imaging procedures plus certain fees paid to us for providing additional
management services. The radiology practice groups retain the professional
reimbursements associated with imaging procedures after deducting certain
additional management service fees paid to us.




Additionally,
we perform certain management services for a portion of the professional groups
with whom we contract who provide professional radiology services at local
hospitals. For performing these management services, which include billing,
collecting, transcription and medical coding, we receive management
fees.




Payors




The fees
charged for diagnostic imaging services performed at our facilities are paid by
a diverse mix of payors, as illustrated for the following periods presented in
the table below:





% of Net RevenueYear Ended
                          December 31,
                        2007
                      
                      
                      Year EndedDecember 31,
                        2008
                      
                      
                      Year EndedDecember 31,
                        2009Commercial Insurance(1)
                      
                      
                      57
                      %
                      
                      
                      56
                      %
                      
                      
                      56
                      %Managed
      Care Capitated Payors
                      
                      
                      15
                      %
                      
                      
                      15
                      %
                      
                      
                      15
                      %Medicare
                      
                      
                      19
                      %
                      
                      
                      20
                      %
                      
                      
                      20
                      %Medicaid
                      
                      
                      3
                      %
                      
                      
                      3
                      %
                      
                      
                      3
                      %Other (2)
                      
                      
                      2
                      %
                      
                      
                      2
                      %
                      
                      
                      2
                      %Workers
      Compensation/Personal Injury
                      
                      
                      4
                      %
                      
                      
                      4
                      %
                      
                      
                      4
                      %


-9-
  
 (1)
Includes Blue Cross/Blue Shield plans, which represented 19% of our net revenue
for the year ended December 31, 2007, 19% of our net revenue for the year ended
December 31, 2008 and 24% of our net revenue for the year ended December 31,
2009.


(2)
Includes co-payments, direct patient payments and payments through contracts
with physician groups and other non-insurance company payors.




We have
described below the types of reimbursement arrangements we have with third-party
payors.




Commercial
Insurance




Generally,
insurance companies reimburse us, directly or indirectly, including through BRMG
in California or through the contracted radiology groups elsewhere, on the basis
of agreed upon rates. These rates are on average approximately the same as the
rates set forth in the Medicare Physician Fee Schedule for the particular
service. The patients are generally not responsible for any amount above the
insurance allowable amount.




Managed
Care Capitation Agreements




Under
these agreements, which are generally between BRMG in California and outside of
California between the contracted radiology group and the payor, typically an
independent physician group or other medical group, the payor pays a
pre-determined amount per-member per-month in exchange for the radiology group
providing all necessary covered services to the managed care members included in
the agreement. These contracts pass much of the financial risk of providing
outpatient diagnostic imaging services, including the risk of over-use, from the
payor to the radiology group and, as a result of our management agreement with
the radiology group, to us.




We
believe that through our comprehensive utilization management, or UM, program we
have become highly skilled at assessing and moderating the risks associated with
the capitation agreements, so that these agreements are profitable for us. Our
UM program is managed by our UM department, which consists of administrative and
nursing staff as well as BRMG medical staff who are actively involved with the
referring physicians and payor management in both prospective and retrospective
review programs. Our UM program includes the following features, all of which
are designed to manage our costs while ensuring that patients receive
appropriate care:




·
            Physician
      Education




At the
inception of a new capitation agreement, we provide the new referring physicians
with binders of educational material comprised of proprietary information that
we have prepared and third-party information we have compiled, which are
designed to address diagnostic strategies for common diseases. We distribute
additional material according to the referral practices of the group as
determined in the retrospective analysis described below.




·
            Prospective
      Review




Referring
physicians are required to submit authorization requests for non-emergency
high-intensity services: MRI, CT, special procedures and nuclear medicine
studies. The UM medical staff, according to accepted practice guidelines,
considers the necessity and appropriateness of each request. Notification is
then sent to the imaging facility, referring physician and medical group.
Appeals for cases not approved are directed to us. The capitated payor has the
final authority to uphold or deny our recommendation.




·
            Retrospective
      Review




We
collect and sort encounter activity by payor, place of service, referring
physician, exam type and date of service. The data is then presented in
quantitative and analytical form to facilitate understanding of utilization
activity and to provide a comparison between fee-for-service and Medicare
equivalents. Our Medical Director prepares a quarterly report for each payor and
referring physician, which we send to them. When we find that a referring
physician is over utilizing services, we work with the physician to modify
referral patterns.


-10-


Medicare/Medicaid




Medicare
is the federal health insurance program for people age 65 or older and people
under age 65 with certain disabilities. Medicaid, funded by both the federal
government and states, is a state-administered health insurance program for
qualifying low-income and medically needy persons. For services for which we
bill Medicare directly or indirectly, including through contracted radiologists,
we are paid under the Medicare Physician Fee Schedule. Medicare patients usually
pay a 20% co-payment unless they have secondary insurance. Medicaid rates are
set by the individual states for each state program and Medicaid patients may be
responsible for a modest co-payment.




Contracts
with Physician Groups and Other Entities




For some
of our contracts with physician groups and other providers, we do not bill
payors, but instead accept agreed upon rates for our radiology
services.




Contracts
with Physician Groups and Other Non-Insurance Company Payors




These
payors reimburse us, directly or indirectly, on the basis of agreed upon rates.
These rates are typically at or below the rates set forth in the current
Medicare Fee Schedule for the particular service. However, we often agree to a
specified rate for MRI and CT procedures that is not tied to the Medicare Fee
Schedule. The patients are generally not responsible for the unreimbursed
portion.




Facilities




Through
our wholly owned subsidiaries, we operate 97 fixed-site, freestanding outpatient
diagnostic imaging facilities in California, 36 in the Baltimore-Washington,
D.C. area, 22 in the Rochester and Hudson Valley areas of New York, 12 in
Delaware, eight in New Jersey, as well as three individual facilities in Florida
and two in Kansas. We lease the premises at which these facilities are
located.




Our
facilities are primarily located in regional networks that we refer to as
regions. The majority of our facilities are multi-modality sites, offering
various combinations of MRI, CT, PET, nuclear medicine, ultrasound, X-ray,
fluoroscopy services and other related procedures. A portion of our facilities
are single-modality sites, offering either X-ray or MRI services. Consistent
with our regional network strategy, we locate our single-modality facilities
near multi-modality facilities, to help accommodate overflow in targeted
demographic areas.




The
following table sets forth the number of our facilities for each year during the
five-year period ended December 31, 2009:




Year
      Ended December 312005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009Total
      facilities owned or managed (at beginning of the year)
            
            
            56
            
            
            
            57
            
            
            
            132
            
            
            
            141
            
            
            
            164Facilities
      added by:Acquisition
      *
            
            
            -
            
            
            
            78
            
            
            
            12
            
            
            
            24
            
            
            
            14Internal
      development
            
            
            1
            
            
            
            4
            
            
            
            2
            
            
            
            4
            
            
            
            3Facilities
      closed or sold
            
            
            -
            
            
            
            (7
            )
            
            
            (5
            )
            
            
            (5
            )
            
            
            (1
            )Total
      facilities owned or managed (at year end)
            
            
            57
            
            
            
            132
            *
            
            
            141
            
            
            
            164
            
            
            
            180





*
Includes 69 Radiologix facilities acquired on November 15, 2006





-11-




Diagnostic
Imaging Equipment




The
following table indicates, as of December 31, 2009, the quantity of principal
diagnostic equipment available at our facilities, by region:





MRI
                                
                                
                                Open/MRI
                                
                                
                                CT
                                
                                
                                PET/CT
                                
                                
                                Mammo
                                
                                
                                Ultrasound
                                
                                
                                X-ray
                                
                                
                                NucMed
                                
                                
                                Fluoroscopy
                                
                                
                                TotalKansas
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                2
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3
                                
                                
                                
                                4
                                
                                
                                
                                -
                                
                                
                                
                                1
                                
                                
                                
                                10California
                                
                                
                                47
                                
                                
                                
                                22
                                
                                
                                
                                29
                                
                                
                                
                                18
                                
                                
                                
                                62
                                
                                
                                
                                103
                                
                                
                                
                                69
                                
                                
                                
                                15
                                
                                
                                
                                51
                                
                                
                                
                                416Florida
                                
                                
                                2
                                
                                
                                
                                1
                                
                                
                                
                                2
                                
                                
                                
                                1
                                
                                
                                
                                6
                                
                                
                                
                                5
                                
                                
                                
                                4
                                
                                
                                
                                2
                                
                                
                                
                                2
                                
                                
                                
                                25Delaware
                                
                                
                                7
                                
                                
                                
                                1
                                
                                
                                
                                6
                                
                                
                                
                                1
                                
                                
                                
                                4
                                
                                
                                
                                14
                                
                                
                                
                                13
                                
                                
                                
                                1
                                
                                
                                
                                4
                                
                                
                                
                                51New
      Jersey
                                
                                
                                7
                                
                                
                                
                                1
                                
                                
                                
                                3
                                
                                
                                
                                -
                                
                                
                                
                                3
                                
                                
                                
                                5
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3
                                
                                
                                
                                22New
      York
                                
                                
                                17
                                
                                
                                
                                1
                                
                                
                                
                                11
                                
                                
                                
                                3
                                
                                
                                
                                14
                                
                                
                                
                                35
                                
                                
                                
                                17
                                
                                
                                
                                2
                                
                                
                                
                                9
                                
                                
                                
                                109Maryland
                                
                                
                                24
                                
                                
                                
                                9
                                
                                
                                
                                26
                                
                                
                                
                                9
                                
                                
                                
                                33
                                
                                
                                
                                88
                                
                                
                                
                                48
                                
                                
                                
                                20
                                
                                
                                
                                16
                                
                                
                                
                                273Total
                                
                                
                                104
                                
                                
                                
                                35
                                
                                
                                
                                79
                                
                                
                                
                                32
                                
                                
                                
                                122
                                
                                
                                
                                253
                                
                                
                                
                                155
                                
                                
                                
                                40
                                
                                
                                
                                86
                                
                                
                                
                                906





The
average age of our MRI and CT units is less than six years, and the average age
of our PET units is less than four years. The useful life of our MRI, CT and PET
units is typically ten years.




Facility
Acquisitions and Divestitures




Information
regarding our facility acquisitions can be found within Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, as
well as Note 3 to the consolidated financial statements of this Form
10-K.




Information
Technology




Our
corporate headquarters and many of our facilities are interconnected through a
state-of-the-art information technology system. This system, which is compliant
with the Health Insurance Portability and Accountability Act of 1996, is
comprised of a number of integrated applications and provides a single operating
platform for billing and collections, electronic medical records, practice
management and image management.




This
technology has created cost reductions for our facilities in areas such as image
storage, support personnel and financial management and has further allowed us
to optimize the productivity of all aspects of our business by enabling us
to:




·
            capture
      patient demographic, history and billing information at
      point-of-service;




·
            automatically
      generate bills and electronically file claims with third-party
      payors;




·
            record
      and store diagnostic report images in digital
  format;




·
            digitally
      transmit in real-time diagnostic images from one location to another, thus
      enabling networked radiologists to cover larger geographic markets by
      using the specialized training of other networked
      radiologists;




·
            perform
      claims, rejection and collection analysis;
and




·
            perform
      sophisticated financial analysis, such as analyzing cost and
      profitability, volume, charges, current activity and patient case mix,
      with respect to each of our managed care
  contracts.




Diagnostic
reports and images are currently accessible via the Internet by our California
referring providers. We have worked with some of the larger medical groups in
California with whom we have contracts to provide access to this content through
their web portals. We are in the process of making such services available
outside of California.




Personnel




At
December 31, 2009, we had a total of 3,006 full-time, 501 part-time and 639 per
diem employees, including those employed by BRMG. These numbers include 78
full-time and nine part-time physicians and 873 full-time, 312 part-time and 396
per-diem technologists.




We employ
site managers who are responsible for overseeing day-to-day and routine
operations at each of our facilities, including staffing, modality and schedule
coordination, referring physician and patient relations and purchasing of
materials. These site managers report to regional managers and directors, who
are responsible for oversight of the operations of all facilities within their
region, including sales, marketing and contracting. The regional managers and
directors, along with our directors of contracting, marketing, facilities,
management/purchasing and human resources report to our chief operating
officers. These officers, our chief financial officer, our director of
information services and our medical director report to our chief executive
officer.


-12-


None of
our employees is subject to a collective bargaining agreement nor have we
experienced any work stoppages. We believe our relationship with our employees
is good.




Marketing




Our
California marketing team consists of one director of marketing, six territory
sales managers and 20 customer service representatives. Our eastern marketing
team consists of 27 customer sales representatives and six sales managers who
each report to a district manager. Our marketing team employs a multi-pronged
approach to marketing, including physician, payor and sports marketing
programs.




Physician
Marketing




Each
customer service representative is responsible for marketing activity on behalf
of one or more facilities. The representatives act as a liaison between the
facility and referring physicians, holding meetings periodically and on an
as-needed basis with them and their staff to present educational programs on new
applications and uses of our systems and to address particular patient service
issues that have arisen. In our experience, consistent hands-on contact with a
referring physician and his or her staff generates goodwill and increases
referrals. The representatives also continually seek to establish referral
relationships with new physicians and physician groups. In addition to a base
salary and a car allowance, each representative receives a quarterly bonus if
the facility or facilities on behalf of which he or she markets meets specified
net revenue goals for the quarter.




Payor
Marketing




Our
marketing team regularly meets with managed care organizations and insurance
companies to solicit contracts and meet with existing contracting payors to
solidify those relationships. The comprehensiveness of our services, the
geographic location of our facilities and the reputation of the physicians with
whom we contract all serve as tools for obtaining new or repeat business from
payors.




Sports
Marketing Program




We have a
sports marketing program designed to increase our public profile. We provide
X-ray equipment and a technician for all of the basketball games of the Lakers,
Clippers and Sparks held at the Staples Center in Los Angeles, Ducks hockey
games held at the Honda Center in Anaheim, and University of Southern California
football games held in the Los Angeles Coliseum. In exchange for this service,
we receive game tickets and an advertisement in each team program throughout the
season. In addition, we have a close relationship with the physicians for some
of these teams.




Suppliers




Historically,
we have acquired a majority of our advanced diagnostic imaging equipment from GE
Medical Systems, Inc., and we purchase medical supplies from various national
vendors. We believe that we have excellent working relationships with all of our
major vendors. However, there are several comparable vendors for our supplies
that would be available to us if one of our current vendors becomes
unavailable.




We
primarily acquire our equipment with cash or through various financing
arrangements with equipment vendors and third party equipment finance companies
involving the use of capital leases with purchase options at minimal prices at
the end of the lease term. At December 31, 2009, capital lease obligations,
excluding interest, totaled approximately $27.7 million through 2014, including
current installments totaling approximately $14.1 million. If we open or acquire
additional imaging facilities, we may have to incur material capital lease
obligations.




Timely,
effective maintenance is essential for achieving high utilization rates of our
imaging equipment. We have an arrangement with GE Medical Systems,
Inc. under which it has agreed to be responsible for the maintenance and
repair of a majority of our equipment for a fee that is based upon a percentage
of our revenue, subject to a minimum payment. Net revenue is reduced by the
provision for bad debts, mobile PET revenue and other professional reading
service revenue to obtain adjusted net revenue.




Competition




The
market for diagnostic imaging services is highly competitive. We compete
principally on the basis of our reputation, our ability to provide multiple
modalities at many of our facilities, the location of our facilities, the
quality of our diagnostic imaging services and technologists and the ability to
establish and maintain relationships with healthcare providers and referring
physicians. We compete locally with groups of radiologists, established
hospitals, clinics and other independent organizations that own and operate
imaging equipment. Our competitors include Alliance Healthcare Services, Inc.,
Diagnostic Imaging Group, InSight Health Services Corp. and American Radiology
Services. Some of our competitors may now or in the future have access to
greater financial resources than we do and may have access to newer, more
advanced equipment. In addition, some physician practices have established their
own diagnostic imaging facilities within their group practices to compete with
us. We experience additional competition as a result of those
activities.


-13-


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




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




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




·
            if
      it is not contrary to public
interest.




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




Liability
Insurance




We
maintain insurance policies with coverage we believe is appropriate in light of
the risks attendant to our business and consistent with industry practice.
However, adequate liability insurance may not be available to us in the future
at acceptable costs or at all. We maintain general liability insurance and
professional liability insurance in commercially reasonable amounts.
Additionally, we maintain workers’ compensation insurance on all of our
employees. Coverage is placed on a statutory basis and responds to individual
state’s requirements.




Pursuant
to our agreements with physician groups with whom we contract, including BRMG,
each group must maintain medical malpractice insurance for each physician in the
group, having coverage limits of not less than $1.0 million per incident and
$3.0 million in the aggregate per year.




California’s
medical malpractice cap further reduces our exposure. California places a
$250,000 limit on non-economic damages for medical malpractice cases.
Non-economic damages are defined as compensation for pain, suffering,
inconvenience, physical impairment, disfigurement and other non-pecuniary
injury. The cap applies whether the case is for injury or death, and it allows
only one $250,000 recovery in a wrongful death case. No cap applies to economic
damages. Other states in which we now operate do not have similar limitations
and in those states we believe our insurance coverage to be
sufficient.




We
maintain a $5.0 million key-man life insurance policy on the life of Dr. Berger.
We are the beneficiary under the policy.




Regulation




General




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




Licensing
and Certification Laws




Ownership,
construction, operation, expansion and acquisition of diagnostic imaging
facilities are subject to various federal and state laws, regulations and
approvals concerning licensing of facilities and personnel. In addition,
free-standing diagnostic imaging facilities that provide services not performed
as part of a physician office must meet Medicare requirements to be certified as
an independent diagnostic testing facility to bill the Medicare program. We may
not be able to receive the required regulatory approvals for any future
acquisitions, expansions or replacements, and the failure to obtain these
approvals could limit the market for our services. We have experienced a
slowdown in the credentialing of our physicians over the last several years
which has lengthened our billing and collection cycle.


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Corporate
Practice of Medicine




In the
states in which we operate, a lay person or any entity other than a professional
corporation or other similar professional organization is not allowed to
practice medicine, including by employing professional persons or by having any
ownership interest or profit participation in or control over any medical
professional practice. The laws of such states also prohibit a lay person or a
non-professional entity from exercising control over the medical judgments or
decisions of physicians and from engaging in certain financial arrangements,
such as splitting professional fees with physicians. We structure our
relationships with the radiology practices, including the purchase of diagnostic
imaging facilities, in a manner that we believe keeps us from engaging in the
practice of medicine, exercising control over the medical judgments or decisions
of the radiology practices or their physicians, or violating the prohibitions
against fee-splitting. There can be no assurance that our present arrangements
with BRMG or the other physicians providing medical services and medical
supervision at our imaging facilities will not be challenged, and, if
challenged, that they will not be found to violate the corporate practice of
medicine or fee splitting prohibitions, thus subjecting us to a potential
combination of damages, injunction and civil and criminal penalties or require
us to restructure our arrangements in a way that would affect the control or
quality of our services or change the amounts we receive under our management
agreements, or both.




Medicare
and Medicaid Fraud and Abuse




Our
revenue is derived through our ownership, operation and management of diagnostic
imaging centers and from service fees paid to us by contracted radiology
practices. During the twelve months ended December 31, 2009, approximately 20%
of our revenue generated at our diagnostic imaging centers was derived from
federal government sponsored healthcare programs (Medicare) and 3% from state
sponsored programs (Medicaid).




Federal
law known as the Anti-kickback Statute prohibits the knowing and willful offer,
payment, solicitation or receipt of any form of remuneration in return for, or
to induce, (i) the referral of a person, (ii) the furnishing or arranging for
the furnishing of items or services reimbursable under the Medicare, Medicaid or
other governmental programs or (iii) the purchase, lease or order or arranging
or recommending purchasing, leasing or ordering of any item or service
reimbursable under the Medicare, Medicaid or other governmental programs.
Enforcement of this anti-kickback law is a high priority for the federal
government, which has substantially increased enforcement resources and is
scheduled to continue increasing such resources. Noncompliance with the federal
Anti-kickback Statute can result in exclusion from the Medicare, Medicaid or
other governmental programs and civil and criminal penalties.




As
described above, the Anti-kickback Statute is broad, and it prohibits many
arrangements and practices that are lawful in businesses outside of the
healthcare industry. Recognizing that the Anti-kickback Statute is broad and may
technically prohibit many innocuous or beneficial arrangements within the
healthcare industry, the Office of the Inspector General of the U.S. Department
of Health and Human Services issued regulations in July of 1991, which the
Department has referred to as “safe harbors.” These safe harbor regulations set
forth certain provisions which, if met in form and substance, will assure
healthcare providers and other parties that they will not be prosecuted under
the federal Anti-kickback Statute. Additional safe harbor provisions providing
similar protections have been published intermittently since 1991. Our
arrangements with physicians, physician practice groups, hospitals and other
persons or entities who are in a position to refer may not fully meet the
stringent criteria specified in the various safe harbors. Although full
compliance with these provisions ensures against prosecution under the federal
Anti-kickback Statute, the failure of a transaction or arrangement to fit within
a specific safe harbor does not necessarily mean that the transaction or
arrangement is illegal or that prosecution under the federal Anti-kickback
Statute will be pursued.




Although
some of our arrangements may not fall within a safe harbor, we believe that such
business arrangements do not violate the Anti-kickback Statute because we are
careful to structure them to reflect fair market value and ensure that the
reasons underlying our decision to enter into a business arrangement comport
with reasonable interpretations of the Anti-kickback Statute. However, even
though we continuously strive to comply with the requirements of the
Anti-kickback Statute, liability under the Anti-kickback Statute may still arise
because of the intentions or actions of the parties with whom we do business.
While we are not aware of any such intentions or actions, we have only limited
knowledge regarding the intentions or actions underlying those arrangements.
Conduct and business arrangements that do not fully satisfy one of these safe
harbor provisions may result in increased scrutiny by government enforcement
authorities such as the Office of the Inspector General.


-15-


Significant
prohibitions against physician referrals have been enacted by Congress. These
prohibitions include the Ethics in Patient Referral Act of 1989 which is
commonly known as the Stark Law. The Stark Law prohibits a physician from
referring Medicare patients to an entity providing designated health services,
as defined under the Stark Law, including, without limitation, radiology
services, in which the physician (or immediate family member) has an ownership
or investment interest or with which the physician (or immediate family member)
has entered into a compensation arrangement. The Stark Law also prohibits the
entity from billing for any such prohibited referral. The penalties for
violating the Stark Law include a prohibition on payment by these governmental
programs and civil penalties of as much as $15,000 for each violation referral
and $100,000 for participation in a circumvention scheme. We believe that,
although we receive fees under our service agreements for management and
administrative services, we are not in a position to make or influence referrals
of patients.




On
January 4, 2001, the Centers for Medicare and Medicaid Services
(CMS) published the first phase of the final regulations to implement the
Stark Law. CMS
subsequently released phase two of the Stark Law final rule as a final ruleeffective July 26, 2004; phase three, effective on December 4, 2007; and
finally, on August 19, 2008, CMS finalized additional changes to the Stark Law
which became effective on October 1, 2009. Under the Stark Law, radiology and
certain other imaging services and radiation therapy services and supplies are
services included in the designated health services subject to the self-referral
prohibition. Such services include the professional and technical components of
any diagnostic test or procedure using X-rays, ultrasound or other imaging
services, CT, MRI, radiation therapy and diagnostic mammography services (but
not screening mammography services). The Stark Law, however, excludes from
designated health services: (i) X-ray, fluoroscopy or ultrasound procedures that
require the insertion of a needle, catheter, tube or probe through the skin or
into a body orifice; (ii) radiology procedures that are integral to the
performance of, and performed during, non-radiological medical procedures; and
(iii) invasive or interventional radiology, because the radiology services in
these procedures are merely incidental or secondary to another procedure that
the physician has ordered. Beginning January 1, 2007, PET and nuclear medicine
procedures are included as designated health services under the Stark
Law.




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




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




The
federal government embarked on an initiative to audit all Medicare carriers,
which are the companies that adjudicate and pay Medicare claims. These audits
are expected to intensify governmental scrutiny of individual providers. An
unsatisfactory audit of any of our diagnostic imaging facilities or contracted
radiology practices could result in any or all of the following: significant
repayment obligations, exclusion from the Medicare, Medicaid or other
governmental programs, and civil and criminal penalties.




Federal
regulatory and law enforcement authorities have increased enforcement activities
with respect to Medicare, Medicaid fraud and abuse regulations and other
reimbursement laws and rules, including laws and regulations that govern our
activities and the activities of the radiology practices. The federal government
also has increased funding to fight healthcare fraud and is coordinating its
enforcement efforts among various agencies, such as the U.S. Department of
Justice, the U.S. Department of Health and Human Services Office of Inspector
General, and state Medicaid fraud control units. The trend towards increased
funding is also seen most recently in President Obama’s budget for fiscal year
2011. The government may investigate our or the radiology practices’
activities, claims may be made against us or the radiology practices and these
increased enforcement activities may directly or indirectly have an adverse
effect on our business, financial condition and results of
operations.


-16-


State
Anti-kickback and Physician Self-referral Laws




Many
states have adopted laws similar to the federal Anti-kickback Statute. Some of
these state prohibitions apply to referral of patients for healthcare services
reimbursed by any source, not only the Medicare and Medicaid programs. Although
we believe that we comply with both federal and state Anti-kickback laws, any
finding of a violation of these laws could subject us to criminal and civil
penalties or possible exclusion from federal or state healthcare programs. Such
penalties would adversely affect our financial performance and our ability to
operate our business.




Federal
False Claims Act




The
federal False Claims Act provides, in part, that the federal government may
bring a lawsuit against any person who it believes has knowingly presented, or
caused to be presented, a false or fraudulent request for payment from the
federal government, or who has made a false statement or used a false record to
get a claim approved. The federal False Claims Act further provides that a
lawsuit thereunder may be initiated in the name of the United States by an
individual, a “whistleblower,” who is an original source of the allegations. The
government has taken the position that claims presented in violation of the
federal anti-kickback law or Stark Law may be considered a violation of the
federal False Claims Act. Penalties include civil penalties of not less than
$5,500 and not more than $11,000 for each false claim, plus three times the
amount of damages that the federal government sustained because of the act of
that person.




Recently,
the number of suits brought against healthcare providers by private individuals
has increased dramatically. Further, on May 20, 2009, President Obama signed
into law the Fraud Enforcement and Recovery Act of 2009 (FERA), which greatly
expanded the types of entities and conduct subject to the False Claims Act.
Also, various states are considering or have enacted laws modeled after the
federal False Claims Act. Under the Deficit Reduction Act of 2005, or DRA,
states are being encouraged to adopt false claims acts similar to the federal
False Claims Act, which establish liability for submission of fraudulent claims
to the State Medicaid program and contain whistleblower provisions. Even in
instances when a whistleblower action is dismissed with no judgment or
settlement, we may incur substantial legal fees and other costs relating to an
investigation. Future actions under the False Claims Act may result in
significant fines and legal fees, which would adversely affect our financial
performance and our ability to operate our business.




We
believe that we are in compliance with the rules and regulations that apply to
the federal False Claims Act as well as its state counterparts. However, we
could be found to have violated certain rules and regulations resulting in
sanctions under the federal False Claims Act or its state counterparts. If we
are so found in violation, any sanctions imposed could result in fines and
penalties and restrictions on and exclusion from participation in federal and
state healthcare programs that are integral to our business.




Healthcare
Reform Initiatives




Currently
pending before the United States Congress is health care reform legislation
which, if enacted, could affect the amount of reimbursement from
federally-funded health care programs such as Medicare and Medicaid. Changes in
reimbursement for services rendered to beneficiaries of Medicare managed care or
Medicare Advantage plans, may also impact our finances in general. We cannot
predict at this time the nature of the final reform legislation, whether current
initiatives will be finalized or their effects on radiology service providers
such as us.




Health
Insurance Portability and Accountability Act of 1996




Congress
enacted the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, in part, to combat healthcare fraud and to protect the privacy and
security of patients’ individually identifiable healthcare information.
 HIPAA, among other things, amends existing crimes and criminal penalties
for Medicare fraud and enacts new federal healthcare fraud crimes, including
actions affecting non-government healthcare benefit programs.  Under
HIPAA, a healthcare benefit program includes any private plan or contract
affecting interstate commerce under which any medical benefit, item or service
is provided.  A person or entity that knowingly and willfully obtains
the money or property of any healthcare benefit program by means of false or
fraudulent representations in connection with the delivery of healthcare
services is subject to a fine or imprisonment, or potentially
both.  In addition, HIPAA authorizes the imposition of civil money
penalties against entities that employ or enter into contracts with excluded
Medicare or Medicaid program participants if such entities provide services to
federal health program beneficiaries.  A finding of liability under
HIPAA could have a material adverse effect on our business, financial condition
and results of operations.


-17-


Further,
HIPAA requires healthcare providers and their business associates to maintain
the privacy and security of individually identifiable protected health
information (“PHI”). HIPAA imposes federal standards for electronic
transactions, for the security of electronic health information and for
protecting the privacy of PHI. The Health Information Technology for Economic
and Clinical Health Act of 2009 (“HITECH”), signed into law on February 17,
2009, dramatically expanded, among other things, (1) the scope of HIPAA to now
apply directly to “business associates,” or independent contractors who receive
or obtain PHI in connection with providing a service to a covered entity, (2)
substantive security and privacy obligations, including new federal security
breach notification requirements to affected individuals, DHHS and prominent
media outlets, of certain breaches of unsecured PHI, (3) restrictions on
marketing communications and a prohibition on covered entities or business
associates from receiving remuneration in exchange for PHI, and (4) the civil
and criminal penalties that may be imposed for HIPAA violations, increasing the
annual cap in penalties from $25,000 to $1.5 million per year.




In
addition, many states have enacted comparable privacy and security statutes or
regulations that, in some cases, are more stringent than HIPAA requirements. In
those cases it may be necessary to modify our operations and procedures to
comply with the more stringent state laws, which may entail significant and
costly changes for us. We believe that we are in compliance with such state laws
and regulations. However, if we fail to comply with applicable state laws and
regulations, we could be subject to additional sanctions.




We
believe that we are in compliance with the current HIPAA requirements, as
amended by HITECH, and comparable state laws, but we anticipate that we may
encounter certain costs associated with future compliance. Moreover, we cannot
guarantee that enforcement agencies or courts will not make interpretations of
the HIPAA standards that are inconsistent with ours, or the interpretations of
our contracted radiology practices or their affiliated physicians. A finding of
liability under the HIPAA standards may result in significant criminal and civil
penalties. Noncompliance also may result in exclusion from participation in
government programs, including Medicare and Medicaid. These actions could have a
material adverse effect on our business, financial condition, and results of
operations.




Compliance
Program




We
maintain a program to monitor compliance with federal and state laws and
regulations applicable to healthcare entities. We have a compliance officer who
is charged with implementing and supervising our compliance program, which
includes the adoption of (i) Standards of Conduct for our employees and
affiliates and (ii) a process that specifies how employees, affiliates and
others may report regulatory or ethical concerns to our compliance officer. We
believe that our compliance program meets the relevant standards provided by the
Office of Inspector General of the Department of Health and Human
Services.




An
important part of our compliance program consists of conducting periodic audits
of various aspects of our operations and that of the contracted radiology
practices. We also conduct mandatory educational programs designed to
familiarize our employees with the regulatory requirements and specific elements
of our compliance program.




U.S.
Food and Drug Administration or FDA




The FDA
has issued the requisite pre-market approval for all of the MRI and CT systems
we use. We do not believe that any further FDA approval is required in
connection with the majority of equipment currently in operation or proposed to
be operated, except under regulations issued by the FDA pursuant to the
Mammography Quality Standards Act of 1992, as amended by the Mammography Quality
Standards Reauthorization Acts of 1998 and 2004 (collectively, the MQSA). All
mammography facilities are required to meet the applicable MQSA requirements,
including quality standards, be accredited by an approved accreditation body or
state agency and certified by the FDA or an FDA-approved certifying state
agency. Pursuant to the accreditation process, each facility providing
mammography services must comply with certain standards that include, among
other things, annual inspection of the facility's equipment, personnel
(interpreting physicians, technologists and medical physicists) and
practices.




Compliance
with these MQSA requirements and standards is required to obtain Medicare
payment for services provided to beneficiaries and to avoid various sanctions,
including monetary penalties, or suspension of certification. Although the
Mammography Accreditation Program of the American College of Radiology is an
approved accreditation body and currently accredits all of our facilities which
provide mammography services, and although we anticipate continuing to meet the
requirements for accreditation, if we lose such accreditation, the FDA could
revoke our certification. Congress has extended Medicare benefits to include
coverage of screening mammography but coverage is subject to the facility
performing the mammography meeting prescribed quality standards described above.
The Medicare requirements to meet the standards apply to diagnostic mammography
and image quality examination as well as screening mammography.




Radiologist
Licensing




The
radiologists providing professional medical services at our facilities are
subject to licensing and related regulations by the states in which they provide
services. As a result, we require BRMG and the other radiology groups with which
we contract to require those radiologists to have and maintain appropriate
licensure. We do not believe that such laws and regulations will either prohibit
or require licensure approval of our business operations, although no assurances
can be made that such laws and regulations will not be interpreted to extend
such prohibitions or requirements to our operations.




-18-


Insurance
Laws and Regulation




States in
which we operate have adopted certain laws and regulations affecting risk
assumption in the healthcare industry, including those that subject any
physician or physician network engaged in risk-based managed care to applicable
insurance laws and regulations. These laws and regulations may require
physicians and physician networks to meet minimum capital requirements and other
safety and soundness requirements. Implementing additional regulations or
compliance requirements could result in substantial costs to the contracted
radiology practices, limiting their ability to enter into capitated or other
risk-sharing managed care arrangements and indirectly affecting our revenue from
the contracted practices.




Environmental
Matters




The
facilities we operate or manage generate hazardous and medical waste subject to
federal and state requirements regarding handling and disposal. We believe that
the facilities that we operate and manage are currently in compliance in all
material respects with applicable federal, state and local statutes and
ordinances regulating the handling and disposal of such materials. We do not
believe that we will be required to expend any material additional amounts in
order to remain in compliance with these laws and regulations or that compliance
will materially affect our capital expenditures, earnings or competitive
position.




Deficit
Reduction Act of 2005 (DRA)




On
February 8, 2006, the President signed into law the Deficit Reduction Act, or
DRA. Effective January 1, 2007, the DRA provides that Medicare reimbursement for
the technical component for imaging services (excluding diagnostic and screening
mammography) performed in freestanding facilities will be capped. Payment will
be the lesser of the Medicare Physician Fee Schedule or the Hospital Outpatient
Prospective Payment System (HOPPS) rates. Implementation of these reimbursement
reductions contained in the DRA has had a significant adverse effect on our
business, financial condition and results of operations.




The DRA also codified the reduction in
reimbursement for multiple images on contiguous body parts previously announced
by the Centers for Medicare & Medicaid Services (CMS), the agency
responsible for administering the Medicare program. In November 2005, CMS
announced that it would pay 100% of the technical component of the higher priced
imaging procedure and 50% of the technical component of each additional imaging
procedure for imaging procedures involving contiguous body parts within a family
of codes when performed in the same session. CMS had indicated that it would
phase in this 50% rate reduction over two years, so that the reduction was 25%
for each additional imaging procedure in 2006 and another 25% in 2007. To date, CMS has
implemented the 25% reduction for each additional procedure but has not yet
implemented the additional 25% reduction scheduled for 2007. The U.S. Congress
is currently considering legislative proposals that would change the percentage
reduction to require the additional 25% reduction. At this time, we cannot
predict the impact on our business if the proposal is
passed.


Item
1A.                Risk
Factors




If
BRMG or any of our other contracted radiology practices terminate their
agreements with us, our business could substantially diminish.




Our relationship with BRMG is an
integral part of our business. Through our management agreement, BRMG provides
all of the professional medical services at 87 of our 97 California facilities.
Professional medical services are provided at the balance of our other
facilities through management contracts with other radiology groups. BRMG and
these other radiology groups contract with various other independent physicians
and physician groups to provide all of the professional medical services at most
of our facilities, and they must use their best efforts to provide the
professional medical services at any new facilities that we open or acquire in
their areas of operation. In addition, BRMG and the other radiology groups’
strong relationships with referring physicians are largely responsible for the
revenue generated at the facilities they service. Although our management
agreement with BRMG runs until 2014, and for terms as long, if not longer, with
the other groups, BRMG and the other radiology groups have the right to
terminate the agreements if we default on our obligations and fail to cure the
default. Also, the various radiology groups’ ability to continue performing
under the management agreements may be curtailed or eliminated due to the
groups’ financial difficulties, loss of physicians or other circumstances. If
the radiology groups cannot perform their obligations to us, we would need to
contract with one or more other radiology groups to provide the professional
medical services at the facilities serviced by the group. We may not be able to
locate radiology groups willing to provide those services on terms acceptable to
us, if at all. Even if we were able to do so, any replacement radiology group’s
relationships with referring physicians may not be as extensive as those of the
terminated group. In any such event, our business could be seriously harmed. In
addition, the radiology groups are party to substantially all of the managed
care contracts from which we derive revenue. If we were unable to readily
replace these contracts, our revenue would be negatively affected.




-19-


Adverse
changes in general domestic and worldwide economic conditions and instability
and disruption of credit markets could adversely affect our operating results,
financial condition, or liquidity.




We are subject to risk
arising from adverse changes in general domestic and global economic conditions,
including recession or economic slowdown and disruption of credit markets.
Recent global market and economic conditions have been unprecedented and
challenging with tighter credit conditions and recession in most major economies
continuing into 2010. Continued concerns about the systemic impact of potential
long-term and wide-spread recession, inflation, energy costs, geopolitical
issues, the availability and cost of credit and the United States mortgage
market have contributed to increased market volatility and diminished
expectations for the United States economy.Added concerns fueled by the
United States government's financial assistance to certain companies and other
federal government’s interventions in the United States financial system has led
to increased market uncertainty and instability in both United States and
international capital and credit markets. These conditions, combined with
volatile oil prices, declining business and consumer confidence and increased
unemployment, have contributed to volatility of unprecedented levels. We believe
our MRI and PET/CT scan volumes have been impacted in 2009 by rising
unemployment rates, the number of under-insured or uninsured patients and other
conditions arising from the global economic conditions described
above.




As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and institutional
investors to reduce, and in some cases, cease to provide funding to
borrowers.




Continued
turbulence in the United States and international markets and economies may
adversely affect our liquidity and financial condition, and the liquidity and
financial condition of our customers. If these market conditions continue, they
may limit our ability, and the ability of our customers, to timely replace
maturing liabilities, and access the capital markets to meet liquidity needs,
resulting in adverse effects on our financial condition and results of
operations.




We
have experienced operating losses and we have a substantial accumulated deficit.
If we are unable to improve our financial performance, we may be unable to pay
our obligations.




We have
incurred net losses of $2.3 million, $12.8 million and $18.1 million, for the
years ended December 31, 2009, 2008 and 2007, respectively. As of December 31,
2009, our accumulated deficit was $74.8 million. We have been successful in
significantly reducing our net losses over the past two years. We expect to
continue this trend and to begin generating net income. However, we cannot
provide any assurances as to the likelihood, timing, or extent of our ability to
achieve net income from operations. If we cannot generate income from operations
in sufficient amounts, we will not be able to pay our obligations as they become
due. Our inability to generate income from operations to pay our obligations
could adversely impact our business, financial condition and results of
operations.




Our
success depends in part on our key personnel and loss of key executives could
adversely affect our operations. In addition, former employees and radiology
practices we have previously contracted with could use the experience and
relationships developed while employed or under contract with us to compete with
us.




Our
success depends in part on our ability to attract and retain qualified senior
and executive management, managerial and technical personnel. Competition in
recruiting these personnel may make it difficult for us to continue our growth
and success. The loss of their services or our inability in the future to
attract and retain management and other key personnel could hinder the
implementation of our business strategy. The loss of the services of Dr. Howard
G. Berger, our President and Chief Executive Officer, and Norman R. Hames or
Stephen M. Forthuber, our Chief Operating Officers, west and east coast,
respectively, could have a significant negative impact on our operations. We
believe that they could not easily be replaced with executives of equal
experience and capabilities. We do not maintain key person insurance on the life
of any of our executive officers with the exception of a $5.0 million policy on
the life of Dr. Berger. Also, if we lose the services of Dr. Berger, our
relationship with BRMG could deteriorate, which would materially adversely
affect our business.




Many of
the states in which we operate do not enforce agreements that prohibit a former
employee from competing with a former employer. As a result, many of our
employees whose employment is terminated are free to compete with us, subject to
prohibitions on the use of confidential information and, depending on the terms
of the employee’s employment agreement, on solicitation of existing employees
and customers. A former executive, manager or other key employee who joins one
of our competitors could use the relationships he or she established with third
party payors, radiologists or referring physicians while our employee and the
industry knowledge he or she acquired during that tenure to enhance the new
employer’s ability to compete with us.




The
agreements with most of our radiology practices contain non-compete provisions
however the enforceability of these provisions is determined by a court based on
all the facts and circumstances of the specific case at the time enforcement is
sought. The inability of us to enforce radiologists’ non-compete provisions
could result in increased competition from individuals who are knowledgeable
about our business strategies and operations.




-20-


The
California budget crisis, if not successfully resolved could have an impact on
our revenue.




California
is experiencing a budget crisis which has resulted in significant state
government cutbacks. 97 of our 180 facilities are located in California. One to
one-and-one-half percent (1% to 1.5%) of our revenues come from the California
Medicaid program ($5 million to $7.5 million). To the extent California is
unable to provide these payments on a timely basis, or at all, our revenues will
be negatively impacted.




Our
failure to integrate the businesses we acquire successfully and on a timely
basis could reduce our profitability.




We may
never realize expected synergies, business opportunities and growth prospects in
connection with our acquisitions. We may experience increased competition that
limits our ability to expand our business. We may not be able to capitalize on
expected business opportunities, assumptions underlying estimates of expected
cost savings may be inaccurate, or general industry and business conditions may
deteriorate. In addition, integrating operations will require significant
efforts and expenses on our part. Personnel may leave or be terminated because
of an acquisition. Our management may have its attention diverted while trying
to integrate an acquisition. If these factors limit our ability to integrate the
operations of an acquisition successfully or on a timely basis, our expectations
of future results of operations, including certain cost savings and synergies as
a result of the acquisition, may not be met. In addition, our growth and
operating strategies for a target’s business may be different from the
strategies that the target company pursued prior to our acquisition. If our
strategies are not the proper strategies, it could have a material adverse
effect on our business, financial condition and results of
operations.




We
may not be able to generate sufficient cash flow to meet our debt service
obligations.




Our
ability to generate sufficient cash flow from operations to make payments on our
debt and other contractual obligations will depend on our future financial
performance. A range of economic, competitive, regulatory, legislative and
business factors, many of which are outside of our control, will affect our
financial performance. Our inability to generate sufficient cash flow to satisfy
our debt and other contractual obligations would adversely impact our business,
financial condition and results of operations.




Our
ability to generate revenue depends in large part on referrals from
physicians.




A
significant reduction in physician referrals would have a negative impact on our
business. We derive substantially all of our net revenue, directly or
indirectly, from fees charged for the diagnostic imaging services performed at
our facilities. We depend on referrals of patients from unaffiliated physicians
and other third parties who have no contractual obligations to refer patients to
us for a substantial portion of the services we perform. If a sufficiently large
number of these physicians and other third parties were to discontinue referring
patients to us, our scan volume could decrease, which would reduce our net
revenue and operating margins. Further, commercial third-party payors have
implemented programs that could limit the ability of physicians to refer
patients to us. For example, prepaid healthcare plans, such as health
maintenance organizations, sometimes contract directly with providers and
require their enrollees to obtain these services exclusively from those
providers. Some insurance companies and self-insured employers also limit these
services to contracted providers. These “closed panel” systems are now common in
the managed care environment. Other systems create an economic disincentive for
referrals to providers outside the system’s designated panel of providers. If we
are unable to compete successfully for these managed care contracts, our results
and prospects for growth could be adversely affected.




The
regulatory framework in which we operate is uncertain and evolving.




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




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




-21-


Changes
in the method or rates of third-party reimbursement could have a negative impact
on our results.




From
time to time, changes designed to contain healthcare costs have been
implemented, some of which have resulted in decreased reimbursement rates for
diagnostic imaging services that impact our business. For services for which we
bill Medicare directly, we are paid under the Medicare Physician Fee Schedule,
which is updated on an annual basis. Under the Medicare statutory formula,
payments under the Physician Fee Schedule would have decreased for the past
several years if Congress failed to intervene. For example, for 2008, the fee
schedule rates were to be reduced by approximately 10.1%. The Medicare, Medicaid
and SCHIP Extension Act of 2007 eliminated the 10.1% reduction for 2008 and
increased the annual payment rate update by 0.5%. This increase to the annual
Medicare Physician Fee Schedule payment update was effective only for Medicare
claims with dates of service between January 1, 2008 and June 30, 2008.
Beginning July 1, 2008, under the Medicare Improvement for Patients and
Providers Act of 2008 (MIPPA), the 0.5% increase was continued for the rest of
2008. In addition, MIPPA established a 1.1% increase to the Medicare Physician
Fee Schedule payment update for 2009. For 2010, CMS is projecting a rate
reduction of 21.2%. However, on December 19, 2009, Congress enacted the
Department of Defense Appropriations Act of 2010, which provided a two-month 0%
update to the 2010 Medicare physician fee schedule effective only for dates of
service January 1, 2010 through February 28, 2010. This was further extended
through March 31, 2010 by the Temporary Extension Act of 2010.It remains
uncertain whether Congress will enact legislation to revise the formula which
determines the annual update to the conversion factor and payment rates, or if,
once again, it will pass additional legislation to delay the payment reductions.
It is also possible that no action will be taken and the 21.2% reduction in
payments will be implemented. ,




MIPPA
also modified the methodology by which the budget neutrality formula was applied
to the 2009 physician fee schedule payment rates, resulting in an overall
reduction in payment rates for services performed by many specialties, including
an estimated 3% reduction for radiation oncology and 1% reduction for nuclear
medicine. The impact of these payment rate reductions could impact the Company’s
future revenue depending upon our service mix.




A
number of other legislative changes impact our business. For example, DRA
imposed caps on Medicare payment rates for certain imaging services furnished in
physician’s offices and other non-hospital based settings. The caps impact MRI
and PET/CT. Under the cap, payments for specified imaging services cannot exceed
the hospital outpatient payment rates for those services. This change applies to
services furnished on or after January 1, 2007. The limitation is applicable to
the technical components of the diagnostic imaging services only, which is the
payment we receive for the services for which we bill directly under the
Medicare Physician Fee Schedule.




The DRA
also codified the reduction in reimbursement for multiple images on contiguous
body parts, which was previously announced by CMS. The DRA mandated payment at
100% of the technical component of the higher priced imaging procedure and 50%
for the technical component of each additional imaging procedure for multiple
images of contiguous body parts within a family of codes performed in the same
session. To date, CMS only implemented a 25% reduction for each additional
imaging procedure on contiguous body parts, beginning in 2006. The U.S. Congress
is currently considering legislative proposals that
would require the percentage reduction of 25% to be further reduced to
50%.




Regulatory
updates to payment rates for which we bill the Medicare program directly are
published annually by CMS. For payments under the Physician Fee Schedule for
calendar year 2010, CMS changed the way it calculates components of the Medicare
Physician Fee Schedule. First, CMS reduced payment rates for certain diagnostic
services using equipment costing more than $1 million through revisions to usage
assumptions from the current 50% usage rate to a 90% usage rate. This change
applied to MRI and CT scans. Congress is currently considering legislative
proposals that would result in lower usage assumptions and, if finalized, would
supersede CMS’s regulatory changes, resulting in higher payments. Further with
respect to its 2010 changes, CMS also reduced payment for services primarily
involving the technical component rather than the physician work component,
including the services we provide, by adjusting downward malpractice payments
for these services. The reductions primarily impacted radiology and other
diagnostic tests. All these changes to the Medicare Fee Schedule will be
transitioned over a four year period such that beginning in 2013, CMS will fully
implement the revised payment rates. CMS projects that the combined impact of
these changes, when fully implemented will result in an estimated 16% reduction
in radiology, 23% reduction in nuclear medicine and 34% reduction for all
suppliers providing diagnostic tests generally. For the 2010 transitioned
payment, CMS estimates the impact of its changes will result in a 5% reduction
in radiology, 18% reduction in nuclear medicine and 12% reduction for all
suppliers providing the technical component of diagnostic tests generally. These
impacts are calculated prior to any application of the projected negative update
factor of 21.2% (which will be implemented in April 2010 unless Congress
intervenes) related to MIPPA and may impact our future revenues.




-22-




Pressure
to control healthcare costs could have a negative impact on our
results.


One of
the principal objectives of health maintenance organizations and preferred
provider organizations is to control the cost of healthcare services. Healthcare
providers participating in managed care plans may be required to refer
diagnostic imaging tests to certain providers depending on the plan in which a
covered patient is enrolled. In addition, managed care contracting has become
very competitive, and reimbursement schedules are at or below Medicare
reimbursement levels. The expansion of health maintenance organizations,
preferred provider organizations and other managed care organizations within the
geographic areas covered by our network could have a negative impact on the
utilization and pricing of our services, because these organizations will exert
greater control over patients’ access to diagnostic imaging services, the
selections of the provider of such services and reimbursement rates for those
services.




If
our contracted radiology practices, including BRMG, lose a significant number of
their radiologists, our financial results could be adversely
affected.




At times,
there has been a shortage of qualified radiologists in some of the regional
markets we serve. In addition, competition in recruiting radiologists may make
it difficult for our contracted radiology practices to maintain adequate levels
of radiologists. If a significant number of radiologists terminates their
relationships with our contracted radiology practices and those radiology
practices cannot recruit sufficient qualified radiologists to fulfill their
obligations under our agreements with them, our ability to maximize the use of
our diagnostic imaging facilities and our financial results could be adversely
affected. For example, in fiscal 2002, due to a shortage of qualified
radiologists in the marketplace, BRMG experienced difficulty in hiring and
retaining physicians and thus engaged independent contractors and part-time
fill-in physicians. Their cost was double the salary of a regular BRMG full-time
physician. Increased expenses to BRMG will impact our financial results because
the management fee we receive from BRMG, which is based on a percentage of
BRMG’s collections, is adjusted annually to take into account the expenses of
BRMG. Neither we, nor our contracted radiology practices, maintain insurance on
the lives of any affiliated physicians.




We
may not be able to successfully grow our business, which would adversely affect
our financial condition and results of operations.




Our
ability to successfully expand through acquiring facilities, developing new
facilities, adding equipment at existing facilities, and directly or indirectly
entering into contractual relationships with high-quality radiology practices
depends upon many factors, including our ability to:




·
            identify
      attractive and willing candidates for
  acquisitions;




·
            identify
      locations in existing or new markets for development of new
      facilities;




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




·
            obtain
      regulatory approvals where necessary and comply with licensing and
      certification requirements applicable to our diagnostic imaging
      facilities, the contracted radiology practices and the physicians
      associated with the contracted radiology
  practices;




·
            recruit
      a sufficient number of qualified radiology technologists and other
      non-medical personnel;




·
            expand
      our infrastructure and management;
and




·
            compete
      for opportunities.  We may not be able to compete effectively
      for the acquisition of diagnostic imaging facilities.  Our
      competitors may have more established operating histories and greater
      resources than we do.  Competition may also make any
      acquisitions more expensive.




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




·
            inability
      to obtain adequate financing;




·
            possible
      adverse effects on our operating
results;




·
            diversion
      of management’s attention and
resources;




·
            failure
      to retain key personnel;




·
            difficulties
      in integrating new operations into our existing infrastructure;
      and




·
            amortization
      or write-offs of acquired intangible assets, including
      goodwill.




If we are
unable to successfully grow our business through acquisitions it could have an
adverse affect on our financial condition and results of
operations.




-23-


We
may become subject to professional malpractice liability, which could be costly
and negatively impact our business.




The
physicians employed by our contracted radiology practices are from
time to time subject to malpractice claims. We structure our relationships with
the practices under our management agreements in a manner that we believe does
not constitute the practice of medicine by us or subject us to professional
malpractice claims for acts or omissions of physicians employed by the
contracted radiology practices. Nevertheless, claims, suits or complaints
relating to services provided by the contracted radiology practices have been
asserted against us in the past and may be asserted against us in the future. In
addition, we may be subject to professional liability claims, including, without
limitation, for improper use or malfunction of our diagnostic imaging equipment
or for accidental contamination or injury from exposure to radiation. We may not
be able to maintain adequate liability insurance to protect us against those
claims at acceptable costs or at all.




Any claim made against us that is not
fully covered by insurance could be costly to defend, result in a substantial
damage award against us and divert the attention of our management from our
operations, all of which could have an adverse effect on our financial
performance. In addition, successful claims against us may adversely affect our
business or reputation. Although California places a $250,000 limit on
non-economic damages for medical malpractice cases, no limit applies to economic
damages and no such limits exist in the other states in which we now provide
services.




We
may not receive payment from some of our healthcare provider customers because
of their financial circumstances.




Some of
our healthcare provider customers do not have significant financial resources,
liquidity or access to capital. If these customers experience financial
difficulties they may be unable to pay us for the equipment and services that we
provide. A significant deterioration in general or local economic conditions
could have a material adverse affect on the financial health of certain of our
healthcare provider customers. As a result, we may have to increase the amounts
of accounts receivables that we write-off, which would adversely affect our
financial condition and results of operations.




Some
of our imaging modalities use radioactive materials, which generate regulated
waste and could subject us to liabilities for injuries or violations of
environmental and health and safety laws.




Some of
our imaging procedures use radioactive materials, which generate medical and
other regulated wastes. For example, patients are injected with a radioactive
substance before undergoing a PET scan. Storage, use and disposal of these
materials and waste products present the risk of accidental environmental
contamination and physical injury. We are subject to federal, state and local
regulations governing storage, handling and disposal of these materials. We
could incur significant costs and the diversion of our management’s attention in
order to comply with current or future environmental and health and safety laws
and regulations. Also, we cannot completely eliminate the risk of accidental
contamination or injury from these hazardous materials. Although we believe that
we maintain professional liability insurance coverage consistent with industry
practice in the event of an accident, we could be held liable for any resulting
damages, and any liability could exceed the limits of or fall outside the
coverage of our professional liability insurance.




We
experience competition from other diagnostic imaging companies and hospitals,
and this competition could adversely affect our revenue and
business.




The
market for diagnostic imaging services is highly competitive. We compete
principally on the basis of our reputation, our ability to provide multiple
modalities at many of our facilities, the location of our facilities and the
quality of our diagnostic imaging services. We compete locally with groups of
radiologists, established hospitals, clinics and other independent organizations
that own and operate imaging equipment. Our competitors include Alliance
Healthcare Services, Inc., Diagnostic Imaging Group, InSight Health Services
Corp. and American Radiology Services. Some of our competitors may now or in the
future have access to greater financial resources than we do and may have access
to newer, more advanced equipment. In addition, some physician practices have
established their own diagnostic imaging facilities within their group practices
and compete with us. We are experiencing increased competition as a result of
such activities, and if we are unable to successfully compete, our business and
financial condition would be adversely affected.




State
and federal anti-kickback and anti-self-referral laws may adversely affect
income.




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




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




-24-




In
addition, under the DRA, states enacting false claims statutes similar to the
federal False Claims Act, which establish liability for submission of fraudulent
claims to the State Medicaid program and contain qui tam or whistleblower
provisions, receive an increased percentage of any recovery from a State
Medicaid judgment or settlement. Adoption of new false claims statutes in states
where we operate may impose additional requirements or burdens on
us.




Technological
change in our industry could reduce the demand for our services and require us
to incur significant costs to upgrade our equipment.




The
development of new technologies or refinements of existing modalities may
require us to upgrade and enhance our existing equipment before we may otherwise
intend. Many companies currently manufacture diagnostic imaging equipment.
Competition among manufacturers for a greater share of the diagnostic imaging
equipment market may result in technological advances in the speed and imaging
capacity of new equipment. This may accelerate the obsolescence of our
equipment, and we may not have the financial ability to acquire the new or
improved equipment and may not be able to maintain a competitive equipment base.
In addition, advances in technology may enable physicians and others to perform
diagnostic imaging procedures without us. If we are unable to deliver our
services in the efficient and effective manner that payors, physicians and
patients expect and thus our revenue could substantially decrease.




A
failure to meet our capital expenditure requirements could adversely affect our
business.




We
operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations, particularly the initial
start-up and development expenses of new diagnostic imaging facilities and the
acquisition of additional facilities and new diagnostic imaging equipment. We
incur capital expenditures to, among other things, upgrade and replace existing
equipment for existing facilities and expand within our existing markets and
enter new markets. To the extent we are unable to generate sufficient cash from
our operations, funds are not available from our lenders or we are unable to
structure or obtain financing through operating leases, long-term installment
notes or capital leases, we may be unable to meet our capital expenditure
requirements.




Because
we have high fixed costs, lower scan volumes per system could adversely affect
our business.




The
principal components of our expenses, excluding depreciation, consist of debt
service, capital lease payments, compensation paid to technologists, salaries,
real estate lease expenses and equipment maintenance costs. Because a majority
of these expenses are fixed, a relatively small change in our revenue could have
a disproportionate effect on our operating and financial results depending on
the source of our revenue. Thus, decreased revenue as a result of lower scan
volumes per system could result in lower margins, which could materially
adversely affect our business.




Capitation
fee arrangements could reduce our operating margins.




For
the year ended December 31, 2009, we derived approximately 15% of our payments
from capitation arrangements, and we intend to increase the revenue we derive
from capitation arrangements in the future. Under capitation arrangements, the
payor pays a pre-determined amount per-patient per-month in exchange for us
providing all necessary covered services to the patients covered under the
arrangement. These contracts pass much of the financial risk of providing
diagnostic imaging services, including the risk of over-use, from the payor to
the provider. Our success depends in part on our ability to negotiate
effectively, on behalf of the contracted radiology practices and our diagnostic
imaging facilities, contracts with health maintenance organizations, employer
groups and other third-party payors for services to be provided on a capitated
basis and to efficiently manage the utilization of those services. If we are not
successful in managing the utilization of services under these capitation
arrangements or if patients or enrollees covered by these contracts require more
frequent or extensive care than anticipated, we would incur unanticipated costs
not offset by additional revenue, which would reduce operating
margins.




We
may be unable to effectively maintain our equipment or generate revenue when our
equipment is not operational.




Timely,
effective service is essential to maintaining our reputation and high use rates
on our imaging equipment. Although we have an agreement with GE Medical Systems
pursuant to which it maintains and repairs the majority of our imaging
equipment, this agreement does not compensate us for loss of revenue when our
systems are not fully operational and our business interruption insurance may
not provide sufficient coverage for the loss of revenue. Also, GE Medical
Systems may not be able to perform repairs or supply needed parts in a timely
manner, which could result in a loss of revenue. Therefore, if we experience
more equipment malfunctions than anticipated or if we are unable to promptly
obtain the service necessary to keep our equipment functioning effectively, our
ability to provide services would be adversely affected and our revenue could
decline.




-25-


Disruption
or malfunction in our information systems could adversely affect our
business.




Our
information technology system is vulnerable to damage or interruption
from:




·
            earthquakes,
      fires, floods and other natural
disasters;




·
            power
      losses, computer systems failures, internet and telecommunications or data
      network failures, operator negligence, improper operation by or
      supervision of employees, physical and electronic losses of data and
      similar events; and




·
            computer
      viruses, penetration by hackers seeking to disrupt operations or
      misappropriate information and other breaches of
  security.




We rely
on our information systems to perform functions critical to our ability to
operate, including patient scheduling, billing, collections, image storage and
image transmission. Accordingly, an extended interruption in the system’s
function could significantly curtail, directly and indirectly, our ability to
conduct our business and generate revenue.




We
are vulnerable to earthquakes, harsh weather and other natural
disasters.




Our
corporate headquarters and 97 of our facilities are located in California, an
area prone to earthquakes and other natural disasters. Three of our facilities
are located in an area of Florida that has suffered from hurricanes. Some of our
facilities have been affected by snow and other harsh weather conditions. An
earthquake, harsh weather conditions or other natural disaster could decrease
scan volume during affected periods and seriously impair our operations. Damage
to our equipment or interruption of our business would adversely affect our
financial condition and results of operations.




Complying
with federal and state regulations is an expensive and time-consuming process,
and any failure to comply could result in substantial penalties.




We are
directly or indirectly through the radiology practices with which we contract
subject to extensive regulation by both the federal government and the state
governments in which we provide services, including:




·
            the
      federal False Claims Act;




·
            the
      federal Medicare and Medicaid Anti-Kickback Laws, and state anti-kickback
      prohibitions;




·
            federal
      and state billing and claims submission laws and
    regulations;




·
            the
      federal Health Insurance Portability and Accountability Act of 1996, as
      amended by the Health Information Technology for Economic and Clinical
      Health Act of 2009, and comparable state
laws;




·
            the
      federal physician self-referral prohibition commonly known as the Stark
      Law and the state equivalent of the Stark
Law;




·
            state
      laws that prohibit the practice of medicine by non-physicians and prohibit
      fee-splitting arrangements involving
physicians;




·
            federal
      and state laws governing the diagnostic imaging and therapeutic equipment
      we use in our business concerning patient safety, equipment operating
      specifications and radiation exposure levels;
  and




·
            state
      laws governing reimbursement for diagnostic services related to services
      compensable under workers compensation
rules.




If our
operations are found to be in violation of any of the laws and regulations to
which we or the radiology practices with which we contract are subject, we may
be subject to the applicable penalty associated with the violation, including
civil and criminal penalties, damages, fines and the curtailment of our
operations.  Any penalties, damages, fines or curtailment of our
operations, individually or in the aggregate, could adversely affect our ability
to operate our business and our financial results.  The risks of our
being found in violation of these laws and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities
or the courts, and their provisions are open to a variety of
interpretations.  Any action brought against us for violation of these
laws or regulations, even if we successfully defend against it, could cause us
to incur significant legal expenses and divert our management’s attention from
the operation of our business.




-26-


If
we fail to comply with various licensure, certification and accreditation
standards, we may be subject to loss of licensure, certification or
accreditation, which would adversely affect our operations.




Ownership,
construction, operation, expansion and acquisition of our diagnostic imaging
facilities are subject to various federal and state laws, regulations and
approvals concerning licensing of personnel, other required certificates for
certain types of healthcare facilities and certain medical equipment. In
addition, freestanding diagnostic imaging facilities that provide services
independent of a physician’s office must be enrolled by Medicare as an
independent diagnostic treatment facility, or IDTF, to bill the Medicare
program. Medicare carriers have discretion in applying the IDTF requirements and
therefore the application of these requirements may vary from jurisdiction to
jurisdiction. In addition, federal legislation requires all suppliers that
provide the technical component of diagnostic MRI, PET/CT, CT, and nuclear
medicine to be accredited by an accreditation organization designated by CMS
(which currently includethe American College of
Radiology (ACR), the Intersocietal Accreditation Commission (IAC) and the Joint
Commission) by January 1, 2012. Our MRI, CT, nuclear medicine, ultrasound
and mammography facilities are currently accredited by the American College of
Radiology. We may not be able to receive the required regulatory approvals or
accreditation for any future acquisitions, expansions or replacements, and the
failure to obtain these approvals could limit the opportunity to expand our
services.




Our
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for licensure and certification. If any facility loses its certification under
the Medicare program, then the facility will be ineligible to receive
reimbursement from the Medicare and Medicaid programs. For the year ended
December 31, 2009, approximately 23% of our net revenue came from the Medicare
and Medicaid programs. A change in the applicable certification status of one of
our facilities could adversely affect our other facilities and in turn us as a
whole. We have experienced a slowdown in the credentialing of our physicians
over the last several years which has lengthened our billing and collection
cycle, and could negatively impact our ability to collect revenue from patients
covered by Medicare. Credentialing of physicians is required by our payors prior
to commencing payment.




Our
agreements with the contracted radiology practices must be structured to avoid
the corporate practice of medicine and fee-splitting.




State law
prohibits us from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as
splitting professional fees with physicians. These laws are enforced by state
courts and regulatory authorities, each with broad discretion. A component of
our business has been to enter into management agreements with radiology
practices. We provide management, administrative, technical and other
non-medical services to the radiology practices in exchange for a service fee
typically based on a percentage of the practice’s revenue. We structure our
relationships with the radiology practices, including the purchase of diagnostic
imaging facilities, in a manner that we believe keeps us from engaging in the
practice of medicine or exercising control over the medical judgments or
decisions of the radiology practices or their physicians, or violating the
prohibitions against fee-splitting. There can be no assurance that our present
arrangements with BRMG or the physicians providing medical services and medical
supervision at our imaging facilities will not be challenged, and, if
challenged, that they will not be found to violate the corporate practice of
medicine or fee splitting prohibitions, thus subjecting us to potential damages,
injunction and/or civil and criminal penalties or require us to restructure our
arrangements in a way that would affect the control or quality of our services
and/or change the amounts we receive under our management agreements. Any of
these results could jeopardize our business.




Future
federal legislation could limit the prices we can charge for our services, which
would reduce our revenue and adversely affect our operating
results.




In
addition to extensive existing government healthcare regulation, there have been
and continue to be numerous initiatives at the federal and state levels for
reforms affecting the payment for and availability of healthcare services,
including proposals that would significantly limit reimbursement under the
Medicare and Medicaid programs. Limitations on reimbursement amounts and other
cost containment pressures have in the past resulted in a decrease in the
revenue we receive for each scan we perform. For example, the DRA, which was
signed into law on February 8, 2006, contained provisions affecting Medicare
payment for imaging services furnished in a number of settings.




Currently
pending before the United States Congress is healthcare reform legislation
which, if enacted, could affect the amount of reimbursement from
federally-funded health care programs such as Medicare and Medicaid. Changes in
reimbursement for services rendered to beneficiaries of Medicare managed care or
Medicare Advantage plans, may also impact our finances in general. We cannot
predict at this time the nature of the final reform legislation, whether current
initiatives will be finalized and their effects on radiology service providers
such as us.




Our
substantial debt could adversely affect our financial condition and prevent us
from fulfilling our obligations.




Our
current substantial indebtedness and any future indebtedness we incur could
adversely affect our financial condition, which could make it more difficult for
us to satisfy our obligations to our creditors. As of December 31, 2009, our
total indebtedness was $423.6 million. Our substantial indebtedness could
also:




-27-




·
            require
      us to dedicate a substantial portion of our cash flow from operations to
      payments on our debt, reducing the availability of our cash flow to fund
      working capital, capital expenditures, acquisitions and other general
      corporate purposes;




·
            increase
      our vulnerability to adverse general economic and industry
      conditions;




·
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;




·
            place
      us at a competitive disadvantage compared to our competitors that have
      less debt; and




·
            limit
      our ability to borrow additional funds on terms that are satisfactory to
      us or at all.




We will
be able to incur substantial additional indebtedness in the future. Although our
existing credit facilities contain restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of significant
qualifications and exceptions, and under certain circumstances, the amount of
indebtedness that could be incurred in compliance with these restrictions could
be substantial. If new indebtedness is added to our current debt levels, the
related risks that we now face could intensify.




If
we are unable to generate or borrow sufficient cash to make payments on our
indebtedness or to refinance our indebtedness on acceptable terms, our financial
condition would be materially harmed, our business may fail and you may lose all
of your investment.
  Our
ability to make scheduled payments on or to refinance our obligations with
respect to our debt will depend on our financial and operating performance,
which will be affected by general economic, financial, competitive, business and
other factors beyond our control. As a result of the recent global market and
economic conditions, the cost and availability of credit and equity capital have
been severely impacted. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us in an amount sufficient to enable us to service our debt or to fund our
other liquidity needs. If we are unable to meet our debt obligations or fund our
other liquidity needs, we may need to restructure or refinance all or a portion
of our debt on or before maturity or sell certain of our assets. We cannot
assure you that we will be able to restructure or refinance any of our debt on
commercially reasonable terms, if at all, which could cause us to default on our
debt obligations and impair our liquidity. Any refinancing of our debt could be
at higher interest rates and may require us to comply with more onerous
covenants, which could further restrict our business
operations.




Possible
volatility in our stock price could negatively affect us and our
stockholders.




The
trading price of our common stock on the NASDAQ Global Market has fluctuated
significantly in the past. During the period from January 1, 2007 through
December 31, 2009, the trading price of our common stock fluctuated from a high
of $10.57 per share to a low of $0.85 per share. In the past, we have
experienced a drop in stock price following an announcement of disappointing
earnings or earnings guidance. Any such announcement in the future could lead to
a similar drop in stock price. The price of our common stock could also be
subject to wide fluctuations in the future as a result of a number of other
factors, including the following:




·
            changes
      in expectations as to future financial performance or buy/sell
      recommendations of securities
analysts;




·
            our,
      or a competitor’s, announcement of new services, or significant
      acquisitions, strategic partnerships, joint ventures or capital
      commitments; and




·
            the
      operating and stock price performance of other comparable
      companies.




In
addition, the U.S. securities markets have experienced significant price and
volume fluctuations.  These fluctuations often have been unrelated to
the operating performance of companies in these markets. Broad market and
industry factors may lead to volatility in the price of our common stock,
regardless of our operating performance.  Moreover, our stock has
limited trading volume, and this illiquidity may increase the volatility of our
stock price.




In the
past, following periods of volatility in the market price of an individual
company’s securities, securities class action litigation often has been
instituted against that company.  The institution of similar
litigation against us could result in substantial costs and a diversion of
management’s attention and resources, which could negatively affect our
business, results of operations or financial condition.




Provisions
of the Delaware General Corporation Law and our organizational documents may
discourage an acquisition of us.




In the
future, we could become the subject of an unsolicited attempted takeover of our
company.  Although an unsolicited takeover could be in the best
interests of our stockholders, our organizational documents and the General
Corporation Law of the State of Delaware both contain provisions that will
impede the removal of directors and may discourage a third-party from making a
proposal to acquire us.  For example, the provisions:




·
            permit
      the board of directors to increase its own size, within the maximum
      limitations set forth in the bylaws, and fill the resulting
      vacancies;




·
            authorize
      the issuance of additional shares of preferred stock in one or more series
      without a stockholder vote; and




·
            establish
      an advance notice procedure for stockholder proposals to be brought before
      an annual meeting of our stockholders, including proposed nominations of
      persons for election to the board of
directors.




We are
subject to Section 203 of the Delaware General Corporation Law, which could have
the effect of delaying or preventing a change in control.




Item
1B.                 Unresolved Staff
Comments




None.




-28-


Item
2.                    Properties




Our
corporate headquarters is located in adjoining premises at 1508, 1510 and 1516
Cotner Avenue, Los Angeles, California 90025, in approximately 21,500 square
feet occupied under leases, which expire (with options to extend) on June 30,
2017. In addition, we lease approximately 60,000 square feet of warehouse and
other space under leases nationwide, which expire at various dates through
August 2020. We also have a regional office of approximately 39,000 square feet
in Baltimore, Maryland under a lease, which expires September 30, 2012. Our
facility lease terms vary in length from month to month to 15 years with renewal
options upon prior written notice, from 1 year to 10 years depending upon the
agreed upon terms with the local landlord. Facility lease amounts generally
increase from 1% to 6% on an annual basis. We do not have options to purchase
the facilities we rent.




Item
3.                   
Legal
Proceedings




We are
engaged from time to time in the defense of lawsuits arising out of the ordinary
course and conduct of our business. We believe that the outcome of our current
litigation will not have a material adverse impact on our business, financial
condition and results of operations. However, we could be subsequently named as
a defendant in other lawsuits that could adversely affect us.




Item
4.                   
(Removed and
Reserved)




-29-


PART
II




Item
      5.
            Market for the
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities




Our
common stock is quoted on the NASDAQ Global Market under the symbol
“RDNT.”  The following table indicates the high and low prices for our
common stock for the periods indicated based upon information supplied by the
NASDAQ Global Market.




Low
                    
                    
                    HighQuarter EndedDecember 31,
      2009
                    
                    $
                    1.90
                    
                    
                    $
                    3.39September
      30, 2009
                    
                    
                    2.01
                    
                    
                    
                    3.18June
      30, 2009
                    
                    
                    1.00
                    
                    
                    
                    2.79March
      31, 2009
                    
                    
                    0.85
                    
                    
                    
                    3.96December 31,
      2008
                    
                    $
                    1.90
                    
                    
                    $
                    5.16September
      30, 2008
                    
                    
                    2.94
                    
                    
                    
                    6.90June
      30, 2008
                    
                    
                    6.00
                    
                    
                    
                    8.00March
      31, 2008
                    
                    
                    5.99
                    
                    
                    
                    10.12




The last
low and high prices for our common stock on the NASDAQ Global Market on March
10, 2010 were $2.36 and $2.40, respectively.  As of March 10, 2010,
the number of holders of record of our common stock was 685.  However,
Cede & Co., the nominee for The Depository Trust Company, the clearing
agency for most broker-dealers, owned a substantial number of our outstanding
shares of common stock of record on that date.  Our management
believes that the number of beneficial owners of our common stock is
approximately 4,000.




Stock
Performance Graph




The
following graph compares the yearly percentage change in cumulative total
stockholder return of the Company’s Common Stock during the period from 2004 to
2009 with (i) the cumulative total return of the S&P500 index and (ii) the
cumulative total return of the S&P500 – Healthcare Sector
index.  The comparison assumes $100 was invested in October 29, 2004
in the Common Stock and in each of the foregoing indices and the reinvestment of
dividends through January 1, 2010.  The stock price performance
on the following graph is not necessarily indicative of future stock price
performance.




This
graph shall not be deemed incorporated by reference by any general statement
incorporating by reference this Form 10-K into any filing under the Securities
Act or under the Exchange Act, except to the extent that RadNet specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.




We did
not pay dividends in fiscal 2008 or 2009 and we do not expect to pay any
dividends in the foreseeable future.




-30-







Total
Return To Stockholders


(Includes
reinvestment of dividends)





ANNUAL RETURN PERCENTAGEYears EndingCompany / Index
                
                10/31/05
                
                
                10/31/06
                
                
                12/29/06
                
                
                12/31/07
                
                
                12/31/08
                
                
                12/31/09RadNet,
      Inc.
                
                
                -33.93
                
                
                
                594.59
                
                
                
                -10.12
                
                
                
                119.70
                
                
                
                -67.00
                
                
                
                -39.10S&P
      500 Index
                
                
                8.72
                
                
                
                16.34
                
                
                
                3.33
                
                
                
                5.49
                
                
                
                -37.00
                
                
                
                26.46S&P
      Health Care Sector
                
                
                9.57
                
                
                
                11.36
                
                
                
                0.91
                
                
                
                7.15
                
                
                
                -22.81
                
                
                
                19.70





INDEXED RETURNSBase
                
                
                Years EndingPeriodCompany / Index
                
                10/29/04
                
                
                10/31/05
                
                
                10/31/06
                
                
                12/29/06
                
                
                12/31/07
                
                
                12/31/08
                
                
                12/31/09RadNet,
      Inc.
                
                
                100
                
                
                
                66.07
                
                
                
                458.93
                
                
                
                412.50
                
                
                
                906.25
                
                
                
                299.11
                
                
                
                182.14S&P
      500 Index
                
                
                100
                
                
                
                108.72
                
                
                
                126.49
                
                
                
                130.70
                
                
                
                137.88
                
                
                
                86.87
                
                
                
                109.86S&P
      Health Care Sector
                
                
                100
                
                
                
                109.57
                
                
                
                122.02
                
                
                
                123.13
                
                
                
                131.94
                
                
                
                101.84
                
                
                
                121.90


-31-





Recent
Sales of Unregistered Securities




During
the fiscal year ended December 31, 2009, we sold the following securities
pursuant to an exemption from registration provided under Section 4(2) of the
Securities Act of 1933, as amended:




·
            In
      October 2009, we issued 50,000 shares of our common stock to an individual
      as part of the purchase price for acquisition of an imaging center in
      Greece, New York.




-32-


Item
6.                    Selected Consolidated
Financial Data




The
following table sets forth our selected historical consolidated financial
data.  The selected consolidated statements of operations data set
forth below for the years ended December 31, 2009, 2008 and 2007, and the
consolidated balance sheet data as of December 31, 2009 and 2008, are
derived from our audited consolidated financial statements and notes thereto
included elsewhere herein.  The selected historical consolidated
statements of operations data set forth below for the years ended October 31,
2006 and 2005, and the consolidated balance sheet data set forth below as
of  October 31, 2006 and 2005 are derived from our audited
consolidated financial statements not included herein.  This data
should be read in conjunction with and is qualified in its entirety by reference
to the audited consolidated financial statements and the related notes included
elsewhere in this Form 10-K and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”




The
financial data set forth below and discussed in this Annual Report are derived
from the consolidated financial statements of RadNet, its subsidiaries and
certain affiliates.  As a result of the contractual and operational
relationship among BRMG, Dr. Berger and us, we are considered to have a
controlling financial interest in BRMG pursuant to applicable accounting
guidance.  Due to the deemed controlling financial interest, we are
required to include BRMG as a consolidated entity in our consolidated financial
statements.  This means, for example, that revenue generated by BRMG
from the provision of professional medical services to our patients, as well as
BRMG’s costs of providing those services, are included as net revenue in our
consolidated statement of operations, whereas the management fee that BRMG pays
to us under our management agreement with BRMG is eliminated as a result of the
consolidation of our results with those of BRMG.  Also, because BRMG
is a consolidated entity in our financial statements, any borrowings or advances
we have received from or made to BRMG have been eliminated in our consolidated
balance sheet.  If BRMG were not treated as a consolidated entity in
our consolidated financial statements, the presentation of certain items in our
income statement, such as net revenue and costs and expenses, would change but
our net income would not, because in operation and historically, the annual
revenue of BRMG from all sources closely approximates its expenses, including
Dr. Berger’s compensation, fees payable to us and amounts payable to third
parties.




Years Ended
                                                                          
                                                                          
                                                                          Two Months Ended
                                                                          
                                                                          
                                                                          Years EndedDecember
      31,
                                                                          
                                                                          
                                                                          December
      31,
                                                                          
                                                                          
                                                                          October
      31,2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2007
                                                                          
                                                                          
                                                                          2006
                                                                          
                                                                          
                                                                          2006
                                                                          
                                                                          
                                                                          2005
                                                                          
                                                                          
                                                                          2006
                                                                          
                                                                          
                                                                          2005(unaudited)
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          
                                                                          (unaudited)(dollars in thousands,
      except per share data)Statement
      of Operations Data:Net
      revenue
                                                                          
                                                                          $
                                                                          524,368
                                                                          
                                                                          
                                                                          $
                                                                          498,815
                                                                          
                                                                          
                                                                          $
                                                                          423,576
                                                                          
                                                                          
                                                                          $
                                                                          192,859
                                                                          
                                                                          
                                                                          $
                                                                          57,374
                                                                          
                                                                          
                                                                          $
                                                                          22,520
                                                                          
                                                                          
                                                                          $
                                                                          161,005
                                                                          
                                                                          
                                                                          $
                                                                          145,573Operating
      expenses
                                                                          
                                                                          
                                                                          397,753
                                                                          
                                                                          
                                                                          
                                                                          384,297
                                                                          
                                                                          
                                                                          
                                                                          330,550
                                                                          
                                                                          
                                                                          
                                                                          147,226
                                                                          
                                                                          
                                                                          
                                                                          46,033
                                                                          
                                                                          
                                                                          
                                                                          19,149
                                                                          
                                                                          
                                                                          
                                                                          120,342
                                                                          
                                                                          
                                                                          
                                                                          109,012Depreciation
      and amortization
                                                                          
                                                                          
                                                                          53,800
                                                                          
                                                                          
                                                                          
                                                                          53,548
                                                                          
                                                                          
                                                                          
                                                                          45,281
                                                                          
                                                                          
                                                                          
                                                                          19,542
                                                                          
                                                                          
                                                                          
                                                                          5,907
                                                                          
                                                                          
                                                                          
                                                                          2,759
                                                                          
                                                                          
                                                                          
                                                                          16,394
                                                                          
                                                                          
                                                                          
                                                                          17,536Provision
      for bad bebts
                                                                          
                                                                          
                                                                          32,704
                                                                          
                                                                          
                                                                          
                                                                          30,832
                                                                          
                                                                          
                                                                          
                                                                          27,467
                                                                          
                                                                          
                                                                          
                                                                          10,707
                                                                          
                                                                          
                                                                          
                                                                          3,907
                                                                          
                                                                          
                                                                          
                                                                          826
                                                                          
                                                                          
                                                                          
                                                                          7,626
                                                                          
                                                                          
                                                                          
                                                                          4,929Loss
      (gain) on disposal of equipment, net
                                                                          
                                                                          
                                                                          523
                                                                          
                                                                          
                                                                          
                                                                          516
                                                                          
                                                                          
                                                                          
                                                                          72
                                                                          
                                                                          
                                                                          
                                                                          335
                                                                          
                                                                          
                                                                          
                                                                          (38
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          373
                                                                          
                                                                          
                                                                          
                                                                          696Gain
      on bargin purchase
                                                                          
                                                                          
                                                                          (1,387
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Gain
      from sale of joint venture interests
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          (1,868
                                                                          )
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Net
      loss attributable to RadNet, Inc.common
      stockholders
                                                                          
                                                                          
                                                                          (2,267
                                                                          )
                                                                          
                                                                          
                                                                          (12,836
                                                                          )
                                                                          
                                                                          
                                                                          (18,131
                                                                          )
                                                                          
                                                                          
                                                                          (17,722
                                                                          )
                                                                          
                                                                          
                                                                          (10,983
                                                                          )
                                                                          
                                                                          
                                                                          (155
                                                                          )
                                                                          
                                                                          
                                                                          (6,894
                                                                          )
                                                                          
                                                                          
                                                                          (3,570
                                                                          )Basic
      and diluted loss per share
                                                                          
                                                                          
                                                                          (0.06
                                                                          )
                                                                          
                                                                          
                                                                          (0.36
                                                                          )
                                                                          
                                                                          
                                                                          (0.52
                                                                          )
                                                                          
                                                                          
                                                                          (0.57
                                                                          )
                                                                          
                                                                          
                                                                          (0.35
                                                                          )
                                                                          
                                                                          
                                                                          (0.01
                                                                          )
                                                                          
                                                                          
                                                                          (0.33
                                                                          )
                                                                          
                                                                          
                                                                          (0.17
                                                                          )Balance
      Sheet Data:Cash
      and cash equivalents
                                                                          
                                                                          $
                                                                          10,094
                                                                          
                                                                          
                                                                          $
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          18
                                                                          
                                                                          
                                                                          $
                                                                          3,221
                                                                          
                                                                          
                                                                          $
                                                                          3,221
                                                                          
                                                                          
                                                                          $
                                                                          2
                                                                          
                                                                          
                                                                          $
                                                                          2
                                                                          
                                                                          
                                                                          $
                                                                          2Total
      assets
                                                                          
                                                                          
                                                                          480,671
                                                                          
                                                                          
                                                                          
                                                                          495,572
                                                                          
                                                                          
                                                                          
                                                                          433,620
                                                                          
                                                                          
                                                                          
                                                                          394,766
                                                                          
                                                                          
                                                                          
                                                                          394,766
                                                                          
                                                                          
                                                                          
                                                                          119,112
                                                                          
                                                                          
                                                                          
                                                                          131,636
                                                                          
                                                                          
                                                                          
                                                                          117,784Total
      long-term liabilities
                                                                          
                                                                          
                                                                          456,727
                                                                          
                                                                          
                                                                          
                                                                          469,994
                                                                          
                                                                          
                                                                          
                                                                          428,743
                                                                          
                                                                          
                                                                          
                                                                          381,903
                                                                          
                                                                          
                                                                          
                                                                          381,903
                                                                          
                                                                          
                                                                          
                                                                          23,586
                                                                          
                                                                          
                                                                          
                                                                          179,288
                                                                          
                                                                          
                                                                          
                                                                          23,840Total
      liabilities
                                                                          
                                                                          
                                                                          555,432
                                                                          
                                                                          
                                                                          
                                                                          576,602
                                                                          
                                                                          
                                                                          
                                                                          503,244
                                                                          
                                                                          
                                                                          
                                                                          440,508
                                                                          
                                                                          
                                                                          
                                                                          440,508
                                                                          
                                                                          
                                                                          
                                                                          189,725
                                                                          
                                                                          
                                                                          
                                                                          210,430
                                                                          
                                                                          
                                                                          
                                                                          191,866Working
      capital (deficit)
                                                                          
                                                                          
                                                                          9,204
                                                                          
                                                                          
                                                                          
                                                                          2,720
                                                                          
                                                                          
                                                                          
                                                                          23,180
                                                                          
                                                                          
                                                                          
                                                                          31,230
                                                                          
                                                                          
                                                                          
                                                                          31,230
                                                                          
                                                                          
                                                                          
                                                                          (141,586
                                                                          )
                                                                          
                                                                          
                                                                          2,896
                                                                          
                                                                          
                                                                          
                                                                          (143,430
                                                                          )Stockholders'
      deficit
                                                                          
                                                                          
                                                                          (74,761
                                                                          )
                                                                          
                                                                          
                                                                          (81,030
                                                                          )
                                                                          
                                                                          
                                                                          (69,830
                                                                          )
                                                                          
                                                                          
                                                                          (46,996
                                                                          )
                                                                          
                                                                          
                                                                          (46,996
                                                                          )
                                                                          
                                                                          
                                                                          (70,613
                                                                          )
                                                                          
                                                                          
                                                                          (78,794
                                                                          )
                                                                          
                                                                          
                                                                          (74,082
                                                                          )


-33-





Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





Overview




Business
Overview




With 180
centers located in California, Delaware, Maryland, New Jersey, Florida, Kansas
and New York, we are the leading national provider of freestanding, fixed-site
outpatient diagnostic imaging services in the United States based on number of
locations.  Our centers provide physicians with imaging capabilities
to facilitate the diagnosis and treatment of diseases and disorders and may
reduce unnecessary invasive procedures, often minimizing the cost and amount of
care for patients.  Our services include magnetic resonance imaging
(MRI), computed tomography (CT), positron emission tomography (PET), nuclear
medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy and
other related procedures.  The vast majority of our centers offer
multi-modality imaging services, a key point of differentiation from our
competitors. Our multi-modality strategy diversifies revenue streams, reduces
exposure to reimbursement changes, and provides patients and referring
physicians one location to serve the needs of multiple
procedures.





We seek
to develop regional markets in order to leverage operational
efficiencies.  Our scale and density within our selected geographies
provides close, long-term relationships with key payors, radiology groups and
referring physicians.  Each of our facility managers is responsible
for meeting our standards of patient service, managing relationships with local
physicians and payors and maintaining profitability.  We provide
corporate training programs, standardized policies and procedures and sharing of
best practices among our regional networks.





As of
December 31, 2009, we had in operation 139 MRI systems, 79 CT systems, 32
PET or combination PET/CT systems, 40 nuclear medicine systems, 155 x-ray
systems, 122 mammography systems and 86 fluoroscopy systems.




Our
revenue is derived from a diverse mix of payors, including private payors,
managed care capitated payors and government payors.  We believe our
payor diversity mitigates our exposure to possible unfavorable reimbursement
trends within any one-payor class.  In addition, our experience with
capitation arrangements over the last several years has provided us with the
expertise to manage utilization and pricing effectively, resulting in a
predictable stream of revenue. As of December 31, 2009, we received
approximately 56% of our payments from commercial insurance payors, 15% from
managed care capitated payors, 20% from Medicare and 3% from
Medicaid.  With the exception of Blue Cross/Blue Shield and government
payors, no single payor accounted for more than 5% of our net revenue for the
twelve months ended December 31, 2009.




The
consolidated financial statements include the accounts of Radnet Management and
BRMG.  The consolidated financial statements also include Radnet
Management I, Inc., Radnet Management II, Inc.,  Radiologix, Inc.,
Radnet Management Imaging Services, Inc., Delaware Imaging Partners, Inc., New
Jersey Imaging Partners, Inc. and Diagnostic Imaging Services, Inc. (DIS), all
wholly owned subsidiaries of Radnet Management.  All of these
affiliated entities are referred to collectively as “RadNet”, “we”, “us,” “our”
or the “Company” in this report.




Recent
Developments




On February 28, 2010, we amended and
extended for approximately five additional years our arrangement with GE Medical
Systems under which it has agreed to be responsible for the maintenance and
repair of a majority of our equipment through 2017.  Under this
amended contract, we have obtained lower pricing for the maintenance and repair
of the majority of our advanced imaging equipment and we will be eligible to
earn rebates from purchasing other General Electric products and services, such
as medical equipment and information technology.  We believe this
revised GE Medical Systems contract will provide us significant cost savings
through the term of the agreement.





On March 12, 2010, as part of a plan
to refinance our existing revolving line of credit, term loan B and second lien
credit facility, that matures in 2011, 2012 and 2013, respectively, together
with Radnet Management, Inc., our wholly owned subsidiary, we entered into a
commitment  and term loan engagement letter (or, the Commitment
Letter) with Barclays Capital (the investment banking division of Barclays Bank
PLC), Deutsche Bank Securities Inc., Deutsche Bank Trust Company Americas,
General Electric Capital Corporation, GE Capital Markets, Inc., Royal Bank of
Canada, RBC Capital Markets (the brand name for the capital markets activities
of Royal Bank of Canada and its affiliates) and Jefferies Finance LLC (together,
the Banks).  Under the Commitment Letter, these Banks have severally
committed, subject to the terms and conditions set forth in the Commitment
Letter, to provide us with proposed new $100 million senior secured revolving
credit facility expiring on the fifth anniversary of the closing of the
financing (or, the new revolving credit facility), and we have agreed to seek
commitments for a new $275 million senior secured term loan maturing on the
sixth anniversary of the closing of the financing (or, the new term loan credit
facility and together with the new revolving credit facility, the new senior
secured credit facilities).


-34-





While the new term loan credit facility
will be raised using the Banks best efforts, the new revolving credit facility
is committed by the Banks, and would be undrawn at close and available to us
upon successfully raising the new term loan credit facility.  Radnet
Management, Inc. will be the borrower under the new senior secured credit
facilities.  The new senior secured credit facilities will be
unconditionally guaranteed by us, all current and future domestic restricted
subsidiaries as well as certain affiliates of Radnet Management,
Inc. The new senior secured credit facilities will be secured by a
perfected first priority security interest in all of our and the guarantors'
tangible and intangible assets, including, but not limited to, a stock pledge of
all current and future subsidiary guarantors.





In addition, we intend to offer
approximately $210 million aggregate principal amount of senior unsecured debt
securities due 2018 (or, the notes) to qualified institutional buyers in a
private placement, subject to market and other conditions. The notes will be
issued by Radnet Management, Inc., our wholly-owned subsidiary, and guaranteed
by us and the subsidiaries that guarantee our new senior secured credit
facilities, on a full and unconditional basis.





We expect to close the senior note
issuance and the new senior secured credit facilities concurrently in April
2010, and the closing of each would be conditioned upon the closing of the
other. The refinancing, upon completion, would extend the maturity of our debt,
increase the size of our revolving credit facility by approximately $45 million
and further enhance our liquidity by approximately $25 million of cash we intend
to fund to our balance sheet upon closing the refinancing
transaction.





On March 15, 2010, we announced that we
had entered into letters of intent to acquire the business of the Truxton Medical Group in
Bakersfield, California, and the New Jersey operating subsidiary of Health
Diagnostics, the cash consideration for which will be financed from a portion of
the net proceeds of the New Credit Facilities and the notes.  We
expect that aggregate consideration for the target acquisitions will be
approximately $24.5 million, plus the issuance of 375,000 shares of our common
stock. The
acquisitions are subject to the execution of definitive agreements and customary
closing conditions. Truxton Medical Group offers a broad range of
services, including MRI, CT, PET/CT, mammography, nuclear medicine, fluoroscopy,
ultrasound, x-ray and related procedures.  The facilities included in
the New Jersey acquisition operate a combination of MRI, CT, PET/CT,
mammography, ultrasound and x-ray.





Industry
Trends




Prior to 2007, for
services for which we bill Medicare directly, we were paid under the Medicare
Physician Fee Schedule, which is updated on an annual basis. Under the
Medicare statutory formula, payments under the Physician Fee Schedule would have
decreased for the past several years if Congress failed to intervene. For
example, for 2008, the fee schedule rates were to be reduced by approximately
10.1%. The Medicare, Medicaid and SCHIP Extension Act of 2007 eliminated the
10.1% reduction for 2008 and increased the annual payment rate update by 0.5%.
This increase to the annual Medicare Physician Fee Schedule payment update was
effective only for Medicare claims with dates of service between January 1, 2008
and June 30, 2008. Beginning July 1, 2008, under MIPPA, the 0.5% increase was
continued for the rest of 2008. In addition, MIPPA established a 1.1% increase
to the Medicare Physician Fee Schedule payment update for 2009. For 2010, the
CMS’ are projecting a rate reduction of 21.2% unless Congress intervenes again
to avoid the payment reduction. Federal legislative proposals have been
introduced to prevent the rate reduction.  In the meantime, under
legislation signed by President Obama, the 2009 Medicare Physician Fee Schedule
payment rates are effective for claims through March 31,
2010.




MIPPA
also modified the methodology by which the budget neutrality formula was applied
to the 2009 physician fee schedule payment rates, resulting in an overall
reduction in payment rates for services performed by many specialties, including
an estimated 1% reduction for nuclear medicine. The impact of the payment rates
on specific companies depends on their service mix.  Also with respect
to MIPPA, the legislation requires all suppliers that provide the technical
component of diagnostic MRI, PET/CT, CT, and nuclear medicine to be accredited
by an accreditation organization designated by CMS (which currently includethe American College of
Radiology (ACR), the Intersocietal Accreditation Commission (IAC) and The Joint
Commission) by January 1, 2012. Our MRI, CT, nuclear medicine,
ultrasound and mammography facilities are currently accredited by the American
College of Radiology.




A number
of other legislative changes impact our retail business. For example, beginning
on January 1, 2007, the DRA imposed caps on Medicare payment rates for certain
imaging services furnished in physician’s offices and other non-hospital based
settings. Under the cap, payments for specified imaging services cannot exceed
the hospital outpatient payment rates for those services. The limitation is
applicable to the technical components of the diagnostic imaging services only,
which is the payment we receive for the services for which we bill directly
under the Medicare Physician Fee Schedule. CMS issues on an annual basis the
hospital outpatient prospective payment rates, which are used to develop the
caps. If the technical component of the service established under the Physician
Fee Schedule (without including geographic adjustments) exceeds the hospital
outpatient payment amount for the service (also without including geographic
adjustments), then the payment is to be reduced. In other words, in those
instances where the technical component for the particular service is greater
for the non-hospital site, the DRA directs that the hospital outpatient payment
rate be substituted for the otherwise applicable Physician Fee Schedule payment
rate.




-35-




The DRA
also codified the reduction in reimbursement for multiple images on contiguous
body parts, which was previously announced by CMS. The DRA mandated payment at
100% of the technical component of the higher priced imaging procedure and 50%
for the technical component of each additional imaging procedure for multiple
images of contiguous body parts within a family of codes performed in the same
session. Initially, CMS announced that it would phase in this reimbursement
reduction over a two-year period, to include a 25% reduction for each additional
imaging procedure on contiguous body parts in 2006 and an additional 25%
reduction in 2007. To date, CMS has not yet implemented the additional 25%
reduction scheduled for 2007. Congress is currently considering legislative
proposals that would require CMS to implement the percentage reduction from 25%
to 50%. It is unclear whether this federal legislation will be
passed.




Regulatory
updates to payment rates for which we bill the Medicare program directly are
published annually by CMS. For payments under the Physician Fee Schedule for
calendar year 2010, CMS changed the way it calculates components of the Medicare
Physician Fee Schedule. First, CMS reduced payment rates for certain diagnostic
services using equipment costing more than $1 million through revisions to usage
assumptions from the current 50% usage rate to a 90% usage rate. This change
applied to MRI and CT scans. Congress is currently considering legislative
proposals that would result in lower usage assumptions and, if finalized, would
supersede CMS’s regulatory changes. Further with respect to its 2010 changes,
CMS also reduced payment for services primarily involving the technical
component rather than the physician work component, including the services we
provide, by adjusting downward malpractice payments for these services. The
reductions primarily impact radiology and other diagnostic tests. After 2010,
CMS will further reduce payments each year through 2013 by increasing the usage
assumption rate to 90% and further adjusting downward malpractice payments and
other components of the technical component on our reimbursement.  CMS
projects that the combined impact on Medicare reimbursement of these changes,
when fully implemented will result in an estimated 16% reduction in radiology,
23% reduction in nuclear medicine and 34% reduction for all suppliers providing
diagnostic tests generally. These impacts are calculated prior to any
application of the projected negative update factor of 21.2% related to MIPPA
(which will be implemented in April 2010 unless Congress intervenes) and may
impact our future revenues.




Currently
pending before the United States Congress is health care reform legislation
which, if enacted, could affect the amount of reimbursement from
federally-funded health care programs such as Medicare and
Medicaid.  Changes in reimbursement for services rendered to
beneficiaries of Medicare managed care or Medicare Advantage plans, may also
impact on our finances in general.  We cannot predict at this time the
nature of the final reform legislation, whether current initiatives will be
finalized or their effects on radiology service providers such as
us.




Recent
global market and economic conditions have been unprecedented. Concerns about
the potential long-term and wide-spread recession, inflation, energy costs,
geopolitical issues, the availability and cost of credit, the United States
mortgage market and a declining real estate market in the United States have
contributed to increased market volatility and diminished expectations for the
United States economy. These conditions, combined with declining business and
consumer confidence and increased unemployment, have contributed to unusual
volatility.  At this time, it is unclear what impact this might have
on our future revenues or business.




As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the markets generally and the
strength of counterparties specifically has led many lenders and institutional
investors to reduce, and in some cases, cease to provide funding to borrowers.
If market conditions continue, they may limit our ability to timely access the
capital markets to meet liquidity needs, resulting in adverse effects on our
financial condition and results of operations.




Results
of Operations




The
following table sets forth, for the periods indicated, the percentage that
certain items in the statement of operations bears to net revenue.




-36-




RADNET,  INC
..  AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS  OF OPERATIONS





Years Ended
      December 31,2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007NET
      REVENUE
                                                  
                                                  
                                                  100.0
                                                  %
                                                  
                                                  
                                                  100.0
                                                  %
                                                  
                                                  
                                                  100.0
                                                  %OPERATING
      EXPENSESOperating
      expenses
                                                  
                                                  
                                                  75.9
                                                  %
                                                  
                                                  
                                                  77.0
                                                  %
                                                  
                                                  
                                                  78.0
                                                  %Depreciation
      and amortization
                                                  
                                                  
                                                  10.3
                                                  %
                                                  
                                                  
                                                  10.7
                                                  %
                                                  
                                                  
                                                  10.7
                                                  %Provision
      for bad debts
                                                  
                                                  
                                                  6.2
                                                  %
                                                  
                                                  
                                                  6.2
                                                  %
                                                  
                                                  
                                                  6.5
                                                  %Loss
      on sale of equipment
                                                  
                                                  
                                                  0.1
                                                  %
                                                  
                                                  
                                                  0.1
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %Severance
      costs
                                                  
                                                  
                                                  0.1
                                                  %
                                                  
                                                  
                                                  0.1
                                                  %
                                                  
                                                  
                                                  0.2
                                                  %Total
      operating expenses
                                                  
                                                  
                                                  92.6
                                                  %
                                                  
                                                  
                                                  94.1
                                                  %
                                                  
                                                  
                                                  95.5
                                                  %INCOME
      FROM OPERATIONS
                                                  
                                                  
                                                  7.4
                                                  %
                                                  
                                                  
                                                  5.9
                                                  %
                                                  
                                                  
                                                  4.5
                                                  %OTHER
      EXPENSES (INCOME)Interest
      expense
                                                  
                                                  
                                                  9.4
                                                  %
                                                  
                                                  
                                                  10.4
                                                  %
                                                  
                                                  
                                                  10.5
                                                  %Gain
      on bargain purchase
                                                  
                                                  
                                                  -0.3
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %Gain
      from sale of joint venture interests
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  -0.4
                                                  %Other
      expenses (income)
                                                  
                                                  
                                                  0.2
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %Total
      other expenses
                                                  
                                                  
                                                  9.4
                                                  %
                                                  
                                                  
                                                  10.4
                                                  %
                                                  
                                                  
                                                  10.0
                                                  %LOSS
      BEFORE INCOME TAXES AND EQUITY IN EARNINGS OF JOINT
    VENTURES
                                                  
                                                  
                                                  -1.9
                                                  %
                                                  
                                                  
                                                  -4.5
                                                  %
                                                  
                                                  
                                                  -5.5
                                                  %Provision
      for income taxes
                                                  
                                                  
                                                  -0.1
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  -0.1
                                                  %Equity
      in earnings of joint ventures
                                                  
                                                  
                                                  1.6
                                                  %
                                                  
                                                  
                                                  2.0
                                                  %
                                                  
                                                  
                                                  1.4
                                                  %NET
      LOSS
                                                  
                                                  
                                                  -0.4
                                                  %
                                                  
                                                  
                                                  -2.6
                                                  %
                                                  
                                                  
                                                  -4.1
                                                  %Net
      income attributable to noncontrolling interests
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  0.0
                                                  %
                                                  
                                                  
                                                  0.1
                                                  %NET
      LOSS ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
                                                  
                                                  
                                                  -0.4
                                                  %
                                                  
                                                  
                                                  -2.6
                                                  %
                                                  
                                                  
                                                  -4.3
                                                  %





Year
Ended December 31, 2009 Compared to the Year Ended December 31,
2008




Net
Revenue




Net
revenue for the year ended December 31, 2009 was $524.4 million compared to
$498.8 million for the year ended December 31, 2008, an increase of $25.6
million, or 5.1%.




Net
revenue, including only those centers which were in operation throughout the
full fiscal years of both 2009 and 2008, increased $8.1 million, or 1.8%. This
1.8% increase is mainly due to an increase in procedure volumes.  This
comparison excludes revenue contributions from centers that were acquired or
divested subsequent to January 1, 2008.  For the year ended
December 31, 2009, net revenue from centers that were acquired subsequent
to January 1, 2008 and excluded from the above comparison was $71.0
million.  For the year ended December 31, 2008, net revenue from
centers that were acquired subsequent to January 1, 2008 and excluded from
the above comparison was $47.7 million.  Also excluded was $5.8
million from centers that were divested subsequent to January 1,
2008.




Operating
Expenses




Operating
expenses for the year ended December 31, 2009 increased approximately $13.5
million, or 3.5%, from $384.3 million for the year ended December 31, 2008
to $397.8 million for the year ended December 31, 2009.  The
following table sets forth our operating expenses for the years ended
December 31, 2009 and 2008 (in thousands):




-37-




Years Ended December 31,2009
                        
                        
                        2008Salaries and professional reading
      fees,excluding stock-based
      compensation
                        
                        $
                        215,095
                        
                        
                        $
                        210,450Stock-based
      compensation
                        
                        
                        3,607
                        
                        
                        
                        2,902Building
      and equipment rental
                        
                        
                        43,346
                        
                        
                        
                        43,478Medical
      supplies
                        
                        
                        32,507
                        
                        
                        
                        29,848Other
      operating expense *
                        
                        
                        103,198
                        
                        
                        
                        97,619Operating
      expenses
                        
                        
                        397,753
                        
                        
                        
                        384,297Depreciation
      and amortization
                        
                        
                        53,800
                        
                        
                        
                        53,548Provision
      for bad debts
                        
                        
                        32,704
                        
                        
                        
                        30,832Loss
      on sale of equipment, net
                        
                        
                        523
                        
                        
                        
                        516Severance
      costs
                        
                        
                        731
                        
                        
                        
                        335Total
      operating expenses
                        
                        $
                        485,511
                        
                        
                        $
                        469,528





*            Includes
billing fees, office supplies, repairs and maintenance, insurance, business tax
and license, outside services, utilities, marketing, travel and other
expenses.




·
            Salaries
      and professional reading fees, excluding stock-based compensation and
      severance




Salaries
and professional reading fees increased $4.6 million, or 2.2%, to $215.1 million
for the year ended December 31, 2009, compared to $210.5 million for the
year ended December 31, 2008.




Salaries
and professional reading fees, including only those centers which were in
operation throughout the full fiscal years of both 2009 and 2008, decreased $1.9
million, or 1.0%.  This 1.0% decrease is primarily due to cost cutting
measures implemented in the third quarter of 2008.  This comparison
excludes contributions from centers that were acquired or divested subsequent to
January 1, 2008.  For the year ended December 31, 2009,
salaries and professional reading fees from centers that were acquired
subsequent to January 1, 2008 and excluded from the above comparison was
$26.6 million.  For the year ended December 31, 2008, salaries
and professional reading fees from centers that were acquired subsequent to
January 1, 2008, and excluded from the above comparison was $17.1
million.  Also excluded was $3.0 million from centers that were
divested subsequent to January 1, 2008.




·
            Stock-based
      compensation




Stock-based
compensation increased $705,000, or 24.3%, to $3.6 million for the year ended
December 31, 2009 compared to $2.9 million for the year ended
December 31, 2008.  The increase is primarily due to additional
options granted during the first half of 2009, some of which were fully vested
on the date of grant.




·
            Building
      and equipment rental




Building
and equipment rental expenses decreased $132,000, or 0.3%, to $43.4 million for
the year ended December 31, 2009, compared to $43.5 million for the year
ended December 31, 2008.




Building
and equipment rental expenses, including only those centers which were in
operation throughout the full fiscal years of both 2009 and 2008, decreased $2.4
million, or 6.1%.  This 6.1% decrease is primarily due to the
conversion of certain equipment lease contracts from operating to capital leases
in the first quarter of 2009.  This comparison excludes contributions
from centers that were acquired or divested subsequent to January 1,
2008.  For the year ended December 31, 2009, building and
equipment rental expenses from centers that were acquired subsequent to
January 1, 2008, and excluded from the above comparison, was $6.2 million.
For the year ended December 31, 2008, building and equipment rental
expenses from centers that were acquired subsequent to January 1, 2008, and
excluded from the above comparison, was $3.6 million.  Also excluded
was $328,000 from centers that were divested subsequent to January 1,
2008.


-38-


·
            Medical
      supplies




Medical
supplies expense increased $2.7 million, or 8.9%, to $32.5 million for the year
ended December 31, 2009, compared to $29.8 million for the year ended
December 31, 2008.




Medical
supplies expenses, including only those centers which were in operation
throughout the full fiscal years of both 2009 and 2008, increased $1.3 million,
or 6.4%.  This 6.4% increase is in line with procedure volumes and net
revenues generated at these existing centers. This comparison excludes
contributions from centers that were acquired or divested subsequent to
January 1, 2008.  For the year ended December 31, 2009,
medical supplies expense from centers that were acquired subsequent to
January 1, 2008, and excluded from the above comparison was $11.5
million.  For the year ended December 31, 2008, medical supplies
expense from centers that were acquired subsequent to January 1, 2008, and
excluded from the above comparison was $9.6 million.  Also excluded
from the above comparison was $500,000 from centers that were divested
subsequent to January 1, 2008.




·
            Depreciation
      and amortization expense




Depreciation
and amortization expense increased $252,000, or 0.4%, to $53.8 million for the
year ended December 31, 2009 when compared to the same period last year.
The increase is due in part to increases to depreciation expense on new imaging
equipment offset by the completion of amortization schedules related to
covenant-not-to-compete contracts in early 2009.




·
            Provision
      for bad debts




Provision
for bad debts increased $1.9 million, or 6.0%, to $32.7 million, or 6.2% of net
revenue, for the year ended December 31, 2009 compared to $30.8 million, or
6.2% of net revenue, for the year ended December 31, 2008. This increase is
in line with the increase in net revenues.




·
            Loss on
      sale of equipment




Loss on
sale of equipment was $523,000 and $516,000 for the years ended
December 31, 2009 and 2008, respectively.  In both years, this
loss resulted from the sale of imaging equipment for scrape value upon
acquisition of upgraded equipment.




·
            Severance
      costs




During
the year ended December 31, 2009, we recorded severance costs of $731,000
compared to $335,000 recorded during the year ended December 31,
2008.  In each period, these costs were primarily associated with the
integration of Radiologix and other acquired operations.




Interest
expense




Interest
expense for the year ended December 31, 2009 was $49.2 million compared to
$51.8 million for the year ended December 31, 2008.  The interest
expense for the year ended December 31, 2009 includes $6.1 million of
amortization associated with a swap agreement that expired in April 2009 and the
modification of two interest rate swaps designated as cash flow hedges (see
Liquidity and Capital Resources below) and amortization of deferred loan costs
of $2.7 million. Excluding
the $6.1 million one-time amortization, interest expense for the year ended
December 31, 2009 decreased by $8.7 million when compared to the prior
year.  This decrease is primarily due to a $9.7 million decrease
in interest expense on our senior debt, partially offset by a $1.6
million increase in interest expense on our interest rate
swaps for the year ended December 31, 2009 as compared to the prior
year.




Gain
on bargain purchase




On June
12, 2009, we acquired the assets and business of nine imaging centers located in
New Jersey from Medical Resources, Inc. for approximately $2.1
million.  At the time of the acquisition, we immediately sold the
assets and business of one of those nine centers to an unrelated third party for
approximately $650,000. We have made a preliminary purchase price allocation of
the acquired assets and liabilities associated with the remaining eight centers
at their respective fair values.




In
accordance with accounting standards, any excess of fair value of acquired net
assets over the acquisition consideration results in a gain on bargain purchase.
Prior to recording a gain, the acquiring entity must reassess whether all
acquired assets and assumed liabilities have been identified and recognized and
perform re-measurements to verify that the consideration paid, assets acquired,
and liabilities assumed have been properly valued. The Company underwent such a
reassessment, and as a result, has recorded a gain on bargain purchase of
approximately $1.4 million.


-39-


We
believe that the gain on bargain purchase resulted from various factors that
impacted the sale of those New Jersey assets.  The seller was
performing a full liquidation of its assets for the benefit of its
creditors.  Upon liquidation of all of its assets, the seller intended
to close its business.  The New Jersey assets were the only remaining
assets to be sold before a full wind-down of the seller’s business could be
completed.  We believe that the seller was willing to accept a bargain
purchase price from us in return for our ability to act more quickly and with
greater certainty than any other prospective acquirer.  The decline in
the credit markets made it difficult for other acquirers who relied upon third
party financing to complete the transaction.  The relatively small
size of the transaction for us, the lack of required third-party financing and
our expertise in completing similar transactions in the past gave the seller
confidence that we could complete the transaction expeditiously and without
difficulty.




Other
expense (income)




For the
year ended December 31, 2009, we recorded $1.2 million of other expense
primarily related to litigation.




Income
tax expense




For the
year ended December 31, 2009 and 2008, we recorded $443,000 and $151,000,
respectively, for income tax expense primarily related to taxable income
generated in the states of Maryland and Delaware.




Equity
in earnings from unconsolidated joint ventures




For the
year ended December 31, 2009, we recognized equity in earnings from
unconsolidated joint ventures of $8.5 million compared to $9.8 million for the
year ended December 31, 2008.  This variance is due to a
combination of decreases in our collection rates and increases in our repair and
maintenance costs associated with new equipment transitioning from warranty to
maintenance contracts in the third quarter of 2009.




Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007




Net
Revenue




Net
revenue for the year ended December 31, 2008 was $498.8 million compared to
$423.6 million for the year ended December 31, 2007, an increase of $75.2
million, or 17.5%.




Net
revenue, including only those centers which were in operation throughout the
full fiscal years of both 2008 and 2007, increased $27.2 million, or
6.8%.  This 6.8% increase is mainly due to an increase in procedure
volumes.  This comparison excludes revenue contributions from centers
that were acquired or divested subsequent to January 1,
2007.  For the year ended December 31, 2008, net revenue from
centers that were acquired subsequent to January 1, 2007 and excluded from
the above comparison was $70.0 million.  For the year ended
December 31, 2007, net revenue from centers that were acquired subsequent
to January 1, 2007 and excluded from the above comparison was $10.6
million.  Also excluded was $11.4 million from centers that were
divested subsequent to January 1, 2007.




Operating
Expenses




Operating
expenses for the year ended December 31, 2008 increased approximately $53.7
million, or 16.3%, from $330.6 million for the year ended December 31, 2007
to $384.3 million for the year ended December 31, 2008.  The
following table sets forth our operating expenses for the years ended
December 31, 2008 and 2007 (in thousands):


-40-




Years Ended December 31,2008
                                              
                                              
                                              2007Salaries
      and professional reading fees, excluding stock-based
      compensation
                                              
                                              $
                                              210,450
                                              
                                              
                                              $
                                              178,573Stock-based
      compensation
                                              
                                              
                                              2,902
                                              
                                              
                                              
                                              3,313Building
      and equipment rental
                                              
                                              
                                              43,478
                                              
                                              
                                              
                                              41,299General
      administrative expenses
                                              
                                              
                                              127,467
                                              
                                              
                                              
                                              107,245NASDAQ
      one-time listing fee
                                              
                                              
                                              -
                                              
                                              
                                              
                                              120Operating
      expenses
                                              
                                              
                                              384,297
                                              
                                              
                                              
                                              330,550Depreciation
      and amortization
                                              
                                              
                                              53,548
                                              
                                              
                                              
                                              45,281Provision
      for bad debts
                                              
                                              
                                              30,832
                                              
                                              
                                              
                                              27,467Loss
      on sale of equipment, net
                                              
                                              
                                              516
                                              
                                              
                                              
                                              72Severance
      costs
                                              
                                              
                                              335
                                              
                                              
                                              
                                              934Total
      operating expenses
                                              
                                              $
                                              469,528
                                              
                                              
                                              $
                                              404,304





·
            Salaries
      and professional reading fees, excluding stock-based compensation and
      severance




Salaries
and professional reading fees increased $31.9 million, or 17.9%, to $210.5
million for the year ended December 31, 2008, compared to $178.6 million
for the year ended December 31, 2007.




Salaries
and professional reading fees, including only those centers which were in
operation throughout the full fiscal years of both 2008 and 2007, increased
$12.7 million, or 7.1%.  This 7.1% increase is primarily due to
increased salaries and staffing to support the revenue growth of these existing
imaging centers.  This comparison excludes contributions from centers
that were acquired or divested subsequent to January 1,
2007.  For the year ended December 31, 2008, salaries and
professional reading fees from centers that were acquired subsequent to
January 1, 2007, and excluded from the above comparison was $25.6
million.  For the year ended December 31, 2007, salaries and
professional reading fees from centers that were acquired subsequent to
January 1, 2007, and excluded from the above comparison was $3.2
million.  Also excluded was $3.2 million from centers that were
divested subsequent to January 1, 2007.




·
            Stock-based
      compensation




Stock-based
compensation decreased $411,000, or 12.4%, to $2.9 million for the year ended
December 31, 2008 compared to $3.3 million for the year ended
December 31, 2007.  Share-based compensation for the year ended
December 31, 2007, included $1.7 million of additional stock based
compensation expense as a result of the acceleration of vesting of certain
warrants.




·
            Building
      and equipment rental




Building
and equipment rental expenses increased $2.2 million, or 5.3%, to $43.5 million
for the year ended December 31, 2008, compared to $41.3 million for the
year ended December 31, 2007.




Building
and equipment rental expenses, including only those centers which were in
operation throughout the full fiscal years of both 2008 and 2007, decreased $1.7
million, or 4.2%.  This 4.2% decrease is primarily due to the
conversion of certain equipment leases contracts from operating to capital
leases. This comparison excludes contributions from centers that were acquired
or divested subsequent to January 1, 2007.  For the year ended
December 31, 2008, building and equipment rental expenses from centers that
were acquired subsequent to January 1, 2007, and excluded from the above
comparison, was $6.4 million. For the year ended December 31, 2007,
building and equipment rental expenses from centers that were acquired
subsequent to January 1, 2007, and excluded from the above comparison, was
$1.2 million.  Also excluded was $1.3 million from centers that were
divested subsequent to January 1, 2007.


-41-


·
            General and
      administrative expenses




General
and administrative expenses include billing fees, medical supplies, office
supplies, repairs and maintenance, insurance, business tax and license, outside
services, utilities, marketing, travel and other expenses.  Many of
these expenses are variable in nature including medical supplies and billing
fees, which increase with volume and repairs and maintenance under our GE
service agreement as a percentage of net revenue.  Overall, general
and administrative expenses increased $20.2 million, or 18.8%, for the year
ended December 31, 2008 compared to the previous period.  The
increase is consistent with our increase in procedure volumes at both existing
centers as well as newly acquired centers.




·
            Depreciation
      and amortization expense




Depreciation
and amortization expense increased $8.3 million, or 18.3%, to $53.6 million for
the year ended December 31, 2008 when compared to the same period last
year. The increase is primarily due to property and equipment additions for
existing centers and newly acquired centers.




·
            Provision
      for bad debts




Provision
for bad debts increased $3.3 million, or 12.3%, to $30.8 million, or 6.2% of net
revenue, for the year ended December 31, 2008 compared to $27.5 million, or
6.4% of net revenue, for the year ended December 31, 2007.  The
decrease in our provision for bad debts as a percentage of revenue is primarily
due to an increase in collection performance and the completion of our billing
system implementation which began in the first quarter of 2007.




·
            Loss on
      sale of equipment




Loss on
sale of equipment was $516,000 and $72,000 for the years ended December 31,
2008 and 2007, respectively.




·
            Severance
      costs




During
the year ended December 31, 2008, we recorded severance costs of $335,000
compared to $934,000 recorded during the year ended December 31,
2007.  In each period, these costs were primarily associated with the
integration of Radiologix and other acquired operations.




Interest
expense




Interest
expense for the year ended December 31, 2008 increased approximately $7.5
million, or 16.9%, from the same period in 2007.  The increase is
primarily due to the $60 million increase in Term Loans B & C and increased
borrowing on our line of credit.  Also included in interest expense
for the year ended December 31, 2008 and 2007 is amortization of deferred
loan costs of $2.6 million and $1.6 million, respectively, as well as realized
gains of $707,000 and realized losses of $820,000 on our fair value hedges for
the years ended December 31, 2008 and 2007, respectively.




Income
tax expense




For the
years ended December 31, 2008 and 2007, we recorded $151,000 and $337,000,
respectively, for income tax expense related to taxable income generated in the
state of Maryland.




Equity
in earnings from unconsolidated joint ventures




For the
year ended December 31, 2008, we recognized equity in earnings from
unconsolidated joint ventures of $9.8 million compared to $5.9 million for the
year ended December 31, 2007.  This increase is due to our
purchase of additional equity interests in certain existing joint ventures as
well as the deconsolidation in the fourth quarter of 2007 of a previously
consolidated joint venture.




Liquidity
and Capital Resources




We had a
working capital balance of $9.2 million and $2.7 million at December 31,
2009 and 2008, respectively.  We had a net loss attributable to our
common stockholders of $2.3 million, $12.8 million and $18.1 million for the
years ended December 31, 2009, 2008 and 2007, respectively.  We
also had a stockholder equity deficit of $74.8 million and $81.0 million at
December 31, 2009 and 2008, respectively.




We
operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations.  In addition to
operations, we require a significant amount of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations.


-42-


On
November 15, 2006, we entered into a $405 million senior secured credit
facility with GE Commercial Finance Healthcare Financial Services (the
“November 2006 Credit Facility”). This facility was used to finance our
acquisition of Radiologix, refinance existing indebtedness, pay transaction
costs and expenses relating to our acquisition of Radiologix and provide
financing for working capital needs post-acquisition.  The facility
consists of a revolving credit facility of up to $45 million, a $225 million
first lien term loan and a $135 million second lien term loan.  The
first lien term loan has a term of six years and the second lien term loan has a
term of six and one-half years. Interest is payable on all loans initially at an
Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the “base rate on corporate loans posted by
at least 75% of the nation’s largest 30 banks” or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each of the revolving credit
facility and the term loan is 2% and on the second lien term loan is 6%. We may
request that the interest rate instead be based on LIBOR plus the Applicable
LIBOR Margin, which is 3.5% for the revolving credit facility and the term loan
and 7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control and payment of consulting and management fees.




On August
23, 2007, we secured an incremental $35 million (“Incremental Facility”) as part
of our existing credit facilities with GE Commercial Finance Healthcare
Financial Services.  The Incremental Facility consists of an
additional $25 million as part of our first lien term loan and $10 million of
additional capacity under our existing revolving line of credit bringing the
total capacity to $55 million.  The Incremental Facility can be used
to fund certain identified strategic initiatives and for general corporate
purposes.




On February 22, 2008, we
secured a second incremental $35 million (“Second Incremental Facility”) of
capacity as part of our existing credit facilities with GE Commercial Finance
Healthcare Financial Services.  The Second Incremental Facility
consists of an additional $35 million as part of our second lien term loan and
the first lien term loan or revolving credit facility may be increased by up to
an additional $40 million sometime in the future.  As part of the
transaction, partly due to the drop in LIBOR of over 2.00% since the credit
facilities were established in November 2006, we increased the Applicable
LIBOR Margin to 4.25% for the revolving credit facility and first lien term loan
and to 9.0% for the second lien term loan.  The additions to our
existing credit facilities are intended to provide capital for near-term
opportunities and future expansion. As of
December 31, 2009, we qualified to borrow up to$30.4million
dollars under our existing credit
facilities.




On
November 15, 2006, we entered into an interest rate swap, designated as a
cash flow hedge, on $107.0 million fixing the LIBOR rate of interest at 5.02%
for a period of three years, and on November 28, 2006, we entered into an
interest rate swap, also designated as a cash flow hedge, on $90.0 million
fixing the LIBOR rate of interest at 5.03% for a period of three years.
Previously, the interest rate on the $270.0 million first lien term and
revolving credit facilities was based upon a spread over LIBOR which floats with
market conditions.




During
the first quarter of 2009 we modified the two interest rate swaps designated as
cash flow hedges described above.  The modifications, commonly
referred to as “blend and extends,” extended the maturity of, and re-priced
these two interest rate swaps for an additional 36 months, resulting in an
estimated annualized cash interest expense savings of $2.9 million.




With
respect to the $107 million interest rate swap, on January 28, 2009, we replaced
the existing fixed LIBOR rate of 5.02% with a new rate of 3.47% maturing on
November 15, 2012.  With respect to the $90 million interest rate
swap, on February 5, 2009 we replaced the existing fixed LIBOR rate of 5.03%
with a new rate of 3.62% also maturing on November 15, 2012. Both modified
interest swaps have been designated as cash flow hedges.




As part
of these modifications, the negative fair values of the original interest rate
swaps, as well as a certain amount of accrued interest, associated with the
original cash flow hedges were incorporated into the fair values of the new
modified cash flow hedges.   The related Accumulated Other
Comprehensive Loss (AOCL) associated with the negative fair values of the
original cash flow hedges on their dates of modification, which totaled $6.1
million, was on a straight-line basis to interest expense through
November 15, 2009, the maturity date of the original cash flow
hedges.




Our
ability to generate sufficient cash flow from operations to make payments on our
debt and other contractual obligations will depend on our future financial
performance.  A range of economic, competitive, regulatory,
legislative and business factors, many of which are outside of our control, will
affect our financial performance.  Although no assurance can be given,
taking these factors into account, including our historical experience, we
believe that through implementing our strategic plans and continuing to
restructure our financial obligations, we will obtain sufficient cash to satisfy
our obligations as they become due in the next twelve months.


-43-




Sources
and Uses of Cash




Cash
provided by operating activities was $76.6 million, $45.4 million and $25.3
million for the years ended December 31, 2009, 2008 and 2007,
respectively.




Cash used
in investing activities was $36.3 million, $56.0 million and $45.9 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.  For the year ended December 31, 2009, we purchased
property and equipment for approximately $30.8 million and acquired the assets
and businesses of additional imaging facilities for approximately $6.1 million,
which is net of proceeds generated from the immediate sale of one of these
acquired centers (see Note 3).  We also purchased additional equity
interests in joint ventures totaling $315,000.




Cash used
by financing activities was $30.2 million for the year ended December 31,
2009, compared to cash provided by financing activities of $10.6 million and
$17.3 million for the years ended December 31, 2008 and 2007,
respectively.  The cash used by financing activities for the year
ended December 31, 2009, was related to payments we made toward our term
loans, capital leases and line of credit balances, as well as $4.7 million of
cash payments, net of cash receipts, related to our modified cash flow
hedges.




Contractual
Commitments




Our
future obligations for notes payable, equipment under capital leases, lines of
credit, equipment and building operating leases and purchase and other
contractual obligations for the next five years and thereafter include (dollars
in thousands):





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  
                  Thereafter
                  
                  
                  TotalNotes  payable
      (1)
                  
                  $
                  6,927
                  
                  
                  $
                  7,207
                  
                  
                  $
                  239,097
                  
                  
                  $
                  170,395
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  423,626Capital
      leases  (2)
                  
                  
                  16,019
                  
                  
                  
                  9,597
                  
                  
                  
                  4,242
                  
                  
                  
                  810
                  
                  
                  
                  32
                  
                  
                  
                  -
                  
                  
                  
                  30,700Operating
      leases  (3)
                  
                  
                  35,105
                  
                  
                  
                  30,593
                  
                  
                  
                  26,417
                  
                  
                  
                  21,801
                  
                  
                  
                  16,541
                  
                  
                  
                  59,931
                  
                  
                  
                  190,388Total
                  
                  $
                  58,051
                  
                  
                  $
                  47,397
                  
                  
                  $
                  269,756
                  
                  
                  $
                  193,006
                  
                  
                  $
                  16,573
                  
                  
                  $
                  59,931
                  
                  
                  $
                  644,714





(1)
Includes variable rate debt for which the contractual obligation was estimated
using the applicable rate as of December 31, 2009.


(2)
Includes interest component of capital lease obligations.


(3)
Includes all existing options to extend lease terms that are reasonably assured
to be exercised.




We have
an arrangement with GE Medical Systems under which it has agreed to be
responsible for the maintenance and repair of a majority of our equipment for a
fee that is based upon a percentage of our revenue, subject to a minimum
payment.  Net revenue is reduced by the provision for bad debts,
mobile PET revenue and other professional reading service revenue to obtain
adjusted net revenue.




Critical
Accounting Policies




Use
of Estimates




Our
discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements that were prepared in accordance
with U.S. generally accepted accounting principles, or
GAAP.  Management makes estimates and assumptions when preparing
financial statements.  These estimates and assumptions affect various
matters, including:




·
            our
      reported amounts of assets and liabilities in our consolidated balance
      sheets at the dates of the financial
statements;




·
            our
      disclosure of contingent assets and liabilities at the dates of the
      financial statements; and




·
            our
      reported amounts of net revenue and expenses in our consolidated
      statements of operations during the reporting
  periods.




These
estimates involve judgments with respect to numerous factors that are difficult
to predict and are beyond management’s control.  As a result, actual
amounts could differ materially from these estimates.


-44-




The
Securities and Exchange Commission, or SEC, defines critical accounting
estimates as those that are both most important to the portrayal of a company’s
financial condition and results of operations and require management’s most
difficult, subjective or complex judgment, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.  In note 2 to our consolidated financial
statements, we discuss our significant accounting policies, including those that
do not require management to make difficult, subjective or complex judgments or
estimates.  The most significant areas involving management’s
judgments and estimates are described below.




Revenue
Recognition




Our
consolidated net revenue consists of net patient fee for service revenue and
revenue from capitation arrangements, or capitation revenue.  Net
patient service revenue is recognized at the time services are provided net of
contractual adjustments based on our evaluation of expected collections
resulting from the analysis of current and past due accounts, past collection
experience in relation to amounts billed and other relevant
information.  The amount of expected collection is continually
adjusted as more information is received and such adjustments are recorded in
current operations.  Contractual adjustments result from the
differences between the rates charged for services performed and reimbursements
by government-sponsored healthcare programs and insurance companies for such
services.  Capitation revenue is recognized as revenue during the
period in which we were obligated to provide services to plan enrollees under
contracts with various health plans. Under these contracts, we receive a
per-enrollee amount each month covering all contracted services needed by the
plan enrollees.




Accounts
Receivable




Substantially
all of our accounts receivable are due under fee-for-service contracts from
third party payors, such as insurance companies and government-sponsored
healthcare programs, or directly from patients.  Services are
generally provided pursuant to one-year contracts with healthcare
providers.  Receivables generally are collected within industry norms
for third-party payors.  We continuously monitor collections from our
payors and maintain an allowance for bad debts based upon specific payor
collection issues that we have identified and our historical
experience.




Depreciation
and Amortization of Long-Lived Assets




We
depreciate our long-lived assets over their estimated economic useful lives with
the exception of leasehold improvements where we use the shorter of the assets
useful lives or the lease term of the facility for which these assets are
associated.




Deferred
Tax Assets




We
evaluate the realizability of the net deferred tax assets and assess the
valuation allowance periodically.  If future taxable income or other
factors are not consistent with our expectations, an adjustment to our allowance
for net deferred tax assets may be required.  For net deferred tax
assets we consider estimates of future taxable income, including tax planning
strategies in determining whether our net deferred tax assets are more likely
than not to be realized.




Valuation
of Goodwill and Long-Lived Assets




Goodwill
at December 31, 2009 totaled $106.5 million. Goodwill is recorded as a
result of business combinations. Management evaluates goodwill, at a minimum, on
an annual basis and whenever events and changes in circumstances suggest that
the carrying amount may not be recoverable in accordance with Statement of
Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible
Assets,” codified in FASB ASC Topic 350. Impairment of goodwill
is tested at the reporting unit level by comparing the reporting unit’s carrying
amount, including goodwill, to the fair value of the reporting unit. The fair
value of a reporting unit is estimated using a combination of the income or
discounted cash flows approach and the market approach, which uses comparable
market data. If the carrying amount of the reporting unit exceeds its fair
value, goodwill is considered impaired and a second step is performed to measure
the amount of impairment loss, if any.  We tested goodwill for
impairment  on October 1, 2009.  Based on our review, we
noted no impairment related to goodwill as of October 1, 2009. However, if
estimates or the related assumptions change in the future, we may be required to
record impairment charges to reduce the carrying amount of
goodwill.




We
evaluate our long-lived assets (property and equipment) and definite-lived
intangibles for impairment whenever indicators of impairment exist. The
accounting standards require that if the sum of the undiscounted expected future
cash flows from a long-lived asset or definite-lived intangible is less than the
carrying value of that asset, an asset impairment charge must be recognized. The
amount of the impairment charge is calculated as the excess of the asset’s
carrying value over its fair value, which generally represents the discounted
future cash flows from that asset or in the case of assets we expect to sell, at
fair value less costs to sell. No indicators of impairment were identified with
respect to our long-lived assets as of December 31, 2009.


-45-


Derivative
Financial Instruments




The
Company holds derivative financial instruments for the purpose of hedging the
risks of certain identifiable and anticipated transactions. In general, the
types of risks hedged are those relating to the variability of cash flows caused
by movements in interest rates. The Company documents its risk management
strategy and hedge effectiveness at the inception of the hedge, and, unless the
instrument qualifies for the short-cut method of hedge accounting, over the term
of each hedging relationship. The Company’s use of derivative financial
instruments is limited to interest rate swaps, the purpose of which is to hedge
the cash flows of variable-rate indebtedness. The Company does not hold or issue
derivative financial instruments for speculative purposes.




In
accordance with ASC Topic 815, we designate our interest rate swaps as cash flow
hedges of floating-rate borrowings. For interest rate swaps that are designated
and qualify as a cash flow hedge (i.e., hedging the exposure to variability in
expected future cash flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative instrument is initially
reported as a component of other comprehensive income, then reclassified into
earnings in the same line item associated with the forecasted transaction and in
the same period or periods during which the hedged transaction affects earnings
(e.g., in “interest expense” when the hedged transactions are interest cash
flows associated with floating-rate debt). The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any (i.e., the ineffectiveness
portion), or hedge components excluded from the assessment of effectiveness, are
recognized in the statement of operations during the current
period.




Facility
Acquisitions




On
January 1, 2009, we adopted the provisions of SFAS No. 141(R), Business Combinations,
codified in FASB ASC Topic 805.  ASC Topic 805 changed how our
business acquisitions are accounted for and impacts our financial statements at
the acquisition date and in subsequent periods. Pursuant to ASC Topic 805, we
are required to recognize all of the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value, with limited exceptions, and
all transaction related costs are expensed. Subsequent changes, if any, to the
acquisition-date fair value that are the result of facts and circumstances that
did not exist as of the acquisition date will be recognized as part of our
on-going operations. In addition, Topic 805 impacts our goodwill impairment test
associated with acquisitions.  We applied the provisions of ASC Topic
805 to the facility acquisitions subsequent to January 1, 2009 as discussed
below.




On
October 1, 2009, we completed the acquisition of the imaging assets of
Chesapeake Urology Associates in Baltimore, Maryland for approximately
$950,000.  Chesapeake Urology operated CT scanners in three locations
in the greater Baltimore area. We have made a purchase price allocation of the
acquired assets and liabilities, and approximately $650,000 of fixed assets,
$275,000 of covenant not to compete contracts and $19,000 of goodwill were
recorded with respect to this transaction.




On
October 1, 2009, we completed the acquisition of the women’s imaging business of
Ridgewood Diagnostics, a multi-modality women’s imaging practice located near
Rochester, New York’s Unity Hospital for $1.1 million and 50,000 shares of our
common stock valued at approximately $129,000 on the date of
acquisition.  In conjunction with the Ridgewood Diagnostics
transaction, on October 16, 2009, we completed the acquisition of the women’s
imaging business of Unity Hospital for $100,000.  We plan to
consolidate the Ridgewood Diagnostics and Unity Hospital operations into one
facility during 2010. We have made a purchase price allocation of the acquired
assets and liabilities, and approximately $92,000 of fixed assets, $150,000 of
covenant not to compete contracts and $1.1 million of goodwill were recorded
with respect to these transactions.




On June
12, 2009, we acquired the assets and business of nine imaging centers located in
New Jersey from a single owner for approximately $2.1 million.  At the
time of the acquisition, we immediately sold the assets and business of one of
those nine centers to an unrelated third party for approximately $650,000. We
have made a purchase price allocation of the acquired assets and liabilities
associated with the remaining eight centers at their respective fair
values.




In
accordance with accounting standards, any excess of fair value of acquired net
assets over the acquisition consideration results in a gain on bargain purchase.
Prior to recording a gain, the acquiring entity must reassess whether all
acquired assets and assumed liabilities have been identified and recognized and
perform re-measurements to verify that the consideration paid, assets acquired,
and liabilities assumed have been properly valued. The Company underwent such a
reassessment, and as a result, has recorded a gain on bargain purchase of
approximately $1.4 million.




We
believe that the gain on bargain purchase resulted from various factors that
impacted the sale of those New Jersey assets.  The seller was
performing a full liquidation of its assets for the benefit of its
creditors.  Upon liquidation of all of its assets, the seller intended
to close its business.  The New Jersey assets were the only remaining
assets to be sold before a full wind-down of the seller’s business could be
completed.  We believe that the seller was willing to accept a bargain
purchase price from us in return for our ability to act more quickly and with
greater certainty than any other prospective acquirer.  The decline in
the credit markets made it difficult for other acquirers who relied upon third
party financing to complete the transaction.  The relatively small
size of the transaction for us, the lack of required third-party financing and
our expertise in completing similar transactions in the past gave the seller
confidence that we could complete the transaction expeditiously and without
difficulty.


-46-


In our
purchase price allocation we recorded approximately $3.1 million of land and
fixed assets, $250,000 of intangible assets and $121,000 of other current
assets.




On March
31, 2009, we acquired the assets and business of Inter-County Imaging in
Yonkers, NY for approximately $553,000.  We have made a purchase price
allocation of the acquired assets and liabilities, and approximately $500,000 of
fixed assets and no goodwill was recorded with respect to this
transaction.




On March
27, 2009, we acquired the assets and business of Elite Diagnostic Imaging, LLC
in Victorville, CA for approximately $1.3 million.  We have made a
purchase price allocation of the acquired assets and liabilities, and
approximately $1.2 million of fixed assets and $100,000 of goodwill was recorded
with respect to this transaction.




On
October 31, 2008, we acquired the assets and business of Middletown Imaging in
Middletown, Delaware for $210,000 in cash and the assumption of capital lease
debt of $1.2 million. We allocated the purchase price to the acquired assets and
liabilities.  Approximately $530,000 of goodwill was recorded with
respect to this transaction.




On August
15, 2008, we acquired the women’s imaging practice of Parvis Gamagami, M.D.,
Inc. in Van Nuys, CA for $600,000.  Upon acquisition, we relocated the
practice to a nearby center we recently acquired from InSight Health in Encino,
CA.  We rebranded the InSight center as the Encino Breast Care Center,
and focused it on Digital Mammography, Ultrasound, MRI and other modalities
pertaining to women’s health.  We have allocated the full purchase
price of $600,000 to goodwill.




On July
23, 2008, we acquired the assets and business of NeuroSciences Imaging Center in
Newark, Delaware for $4.5 million in cash. The center, which performs MRI, CT,
Bone Density, X-ray, Fluoroscopy and other specialized procedures, is located in
a highly specialized medical complex called the Neuroscience and Surgery
Institute of Delaware. The acquisition complements our recent purchase of the
Papastavros Associates Imaging centers completed in March, 2008.  We
made a purchase price allocation of the acquired assets and liabilities, and
approximately $2.6 million of goodwill was recorded with respect to this
transaction.




On June
18, 2008, we acquired the assets and business of Ellicott Open MRI for the
assumption of approximately $181,000 of capital lease debt.




On June
2, 2008, we acquired the assets and business of Simi Valley Advanced Medical, a
Southern California based multi-modality imaging center, for the assumption of
capital lease debt of $1.7 million.  We allocated the purchase price
to the acquired assets and liabilities, and approximately $313,000 of goodwill
was recorded with respect to this transaction.




On April
15, 2008, we acquired the net assets of five Los Angeles area imaging centers
from InSight Health Corp. We completed the purchase of a sixth center in Van
Nuys, CA from Insight Health Corp. on June 2, 2008.  The total
purchase price for the six centers was $8.5 million in cash.  The
centers provide a combination of imaging modalities, including MRI, CT, X-ray,
Ultrasound and Mammography.  We allocated the purchase price to the
acquired assets and liabilities, and approximately $5.6 million of goodwill was
recorded with respect to this transaction.




On April
1, 2008, we acquired the net assets and business of BreastLink Medical Group,
Inc., a prominent Southern California breast medical oncology business and a
leading breast surgery business, for the assumption of approximately $4.0
million of accrued liabilities and capital lease obligations.  We
allocated the purchase price to the acquired assets and liabilities, and
approximately $2.1 million of goodwill was recorded with respect to this
transaction.




On March
12, 2008, we acquired the net assets and business of Papastavros Associates
Medical Imaging for $9.0 million in cash and the assumption of capital leases of
$337,000.  Founded in 1958, Papastavros Associates Medical Imaging is
one of the largest and most established outpatient imaging practices in
Delaware. The 12 Papastavros centers offer a combination of MRI, CT, PET,
nuclear medicine, mammography, bone densitometry, fluoroscopy, ultrasound and
X-ray. We allocated the purchase price to the acquired assets and liabilities,
and approximately $3.6 million of goodwill, and $1.2 million for covenants not
to compete, were recorded with respect to this transaction.




On
February 1, 2008, we acquired the net assets and business of The Rolling Oaks
Imaging Group, located in Westlake and Thousand Oaks, California, for $6.0
million in cash and the assumption of capital leases of $2.7
million.  The practice consists of two centers, one of which is a
dedicated women’s center. The centers are multimodality and include a
combination of MRI, CT, PET/CT, mammography, ultrasound and X-ray. The centers
are positioned in the community as high-end, high-quality imaging facilities
that employ state-of-the-art technology, including 3 Tesla MRI and 64 slice CT
units. The facilities have been fixtures in the Westlake/Thousand Oaks market
since 2003.  We allocated the purchase price to the acquired assets
and liabilities, and approximately $5.6 million of goodwill was recorded with
respect to this transaction.


-47-


On
October 9, 2007, we acquired the assets and business of Liberty Pacific Imaging
located in Encino, California for $2.8 million in cash. The center operates a
successful MRI practice utilizing a 3T MRI unit, the strongest magnet strength
commercially available at this time.  The center was founded in
2003.  The acquisition allows us to consolidate a portion of our
Encino/Tarzana MRI volume onto the existing Liberty Pacific
scanner.  This consolidation allows us to move our existing 3T MRI
unit in that market to our Squadron facility in Rockland County, New
York.  Approximately $1.1 million of goodwill was recorded with
respect to this transaction.  Also, $200,000 was recorded for the fair
value of a covenant not to compete contract.




In
September 2007, we acquired the assets and business of three facilities
comprising Valley Imaging Center, Inc. located in Victorville, CA for $3.3
million in cash plus the assumption of approximately $866,000 of
debt.  The acquired centers offer a combination of MRI, CT, X-ray,
Mammography, Fluoroscopy and Ultrasound. The physician who provided the
interpretive radiology services to these three locations joined
BRMG.  The leased facilities associated with these centers includes a
total monthly rental of approximately $18,000.  Approximately $3.0
million of goodwill was recorded with respect to this
transaction.  Also, $150,000 was recorded for the fair value of a
covenant not to compete contract.




In
September 2007, we acquired the assets and business of Walnut Creek Open MRI
located in Walnut Creek, CA for $225,000.  The center provides MRI
services.  The leased facility associated with this center includes a
monthly rental of approximately $6,800 per month.  Approximately
$50,000 of goodwill was recorded with respect to this transaction.




In July
2007, we acquired the assets and business of Borg Imaging Group located in
Rochester, NY for $11.6 million in cash plus the assumption of approximately
$2.4 million of debt.  Borg was the owner and operator of six imaging
centers, five of which are multimodality, offering a combination of MRI, CT,
X-ray, Mammography, Fluoroscopy and Ultrasound.  After combining the
Borg centers with RadNet’s existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester.  The leased facilities
associated with these centers include a total monthly rental of approximately
$71,000 per month.  Approximately $8.9 million of goodwill was
recorded with respect to this transaction.  Also, $1.4 million was
recorded for the fair value of covenant not to compete contracts.




In March
2007, we acquired the assets and business of Rockville Open MRI, located in
Rockville, Maryland, for $540,000 in cash and the assumption of a capital lease
of $1.1 million.  The center provides MRI services.  The
center is 3,500 square feet with a monthly rental of approximately $8,400 per
month.  Approximately $365,000 of goodwill was recorded with respect
to this transaction.




On
November 15, 2006, we completed the acquisition of Radiologix,
Inc.  Radiologix, a Delaware corporation, then employing approximately
2,200 people through its subsidiaries, was a national provider of diagnostic
imaging services through the ownership and operation of freestanding, outpatient
diagnostic imaging centers.  Radiologix owned, operated and maintained
equipment in 69 locations, with imaging centers in seven states, including
primary operations in the Mid-Atlantic; the Bay Area, California; the Treasure
Coast area, Florida; Northeast, Kansas; and the Finger Lakes (Rochester) and
Hudson Valley areas of New York State.




Recent
Accounting Standards




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141. SFAS 141(R) (codified in FASB ASC
Topic 805, Business
Combinations) introduces significant changes in the accounting for and
reporting of business acquisitions.  ASC Topic 805 changes how
business acquisitions are accounted for and will impact financial statements at
the acquisition date and in subsequent periods. Pursuant to ASC Topic 805, an
acquiring entity is required to recognize all of the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and all transaction related costs are expensed. Subsequent
changes, if any, to the acquisition-date fair value that are the result of facts
and circumstances that did not exist as of the acquisition date will be
recognized as part of on-going operations. In addition, Topic 805 will have an
impact on the goodwill impairment test associated with acquisitions. The
provisions of ASC Topic 805 are effective for business combinations for which
the acquisition date is on or after January 1, 2009. The Company applied
the provisions of ASC Topic to the facility acquisitions subsequent to
January 1, 2009 as discussed in Note 3.


-48-


SFAS No.
160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51,codified in FASB ASC Topic 810,  is designed to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report minority interests in subsidiaries
in the same way as equity in the consolidated financial statements. Moreover,
ASC Topic 810 eliminates the diversity that accounting for transactions between
an entity and minority interests by requiring they be treated as equity
transactions.  The Company adopted the provisions of ASC Topic 810 on
January 1, 2009.  Such provisions are applied prospectively
except for the presentation and disclosure requirements which have been applied
retrospectively for all periods presented.  Accordingly, we have
reclassified minority interests as a component of equity deficit and renamed
this item “Non-controlling interests” on our consolidated balance sheets at
December 31, 2009 and 2008.  Additionally, our net loss for the
years ended December 31, 2009, 2008 and 2007 have been allocated between
RadNet, Inc.’s common stockholders and noncontrolling interests.




In May
2009, the FASB issued Statement No. 165, “Subsequent Events,” codified in FASB ASC Topic
855, which establishes general standards of accounting for, and requires
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The Company
adopted the provisions of ASC Topic 855 for the quarter ended September 30,
2009. The adoption of these provisions did not have a material effect on the
Company’s consolidated financial statements.




In
September 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC” or “Codification”) became the authoritative source
of accounting principles accepted in the United States (“GAAP”) recognized by
the FASB.  All existing FASB accounting standards and guidance were
superseded by the ASC.  Instead of issuing new accounting standards in
the form of statements, FASB staff positions and Emerging Issues Task Force
abstracts, the FASB now issues Accounting Standards Updates that update the
Codification.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws continue
to be additional sources of authoritative GAAP for SEC registrants.




In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU 2009-17 changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controller through
voting (or similar rights) should be consolidated. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. ASU 2009-17 is effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009, or January 1,
2010, for a calendar year entity. Early adoption is not permitted. We do not
expect that the adoption of ASU 2009-17 will have a material impact on our
financial position, results of operations or cash flows.




Item
      7A.
            Quantitative and
      Qualitative Disclosures About Market
Risk




Foreign Currency
Exchange Risk.We sell our services exclusively in the United
States and receive payment for our services exclusively in United States
dollars.  As a result, our financial results are unlikely to be
affected by factors such as changes in foreign currency, exchange rates or weak
economic conditions in foreign markets.




Interest Rate
Sensitivity.A large portion of our interest expense is not
sensitive to changes in the general level of interest in the United States
because the majority of our indebtedness has interest rates that were fixed when
we entered into the note payable or capital lease obligation. Our credit
facility however, which is classified as a long-term liability on our financial
statements, is interest expense sensitive to changes in the general level of
interest in the United States because it is based upon an index rate plus a
factor.  As noted in “Liquidity and Capital Resources” above, we have
entered into interest rate swaps to fix the interest rate on approximately $270
million of our credit facility.  The remaining portion of the credit
facility bears interest at rates that float as market conditions change, and as
such, is subject to market risk.




Item
      8.
            Financial Statements
      and Supplementary Data




The
Financial Statements are attached hereto and begin on page50.


-49-


Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders of RadNet, Inc.




We have
audited the accompanying consolidated balance sheets of RadNet, Inc. and
subsidiaries (the “Company” or “RadNet”) as of December 31, 2009 and 2008,
and the related consolidated statements of operations, equity deficit, and cash
flows for each of the three years in the period ended December 31,
2009.  Our audits also included the financial statement schedule
listed in the index at Item 15(a).  These financial statements and
schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.




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




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of RadNet, Inc. and
subsidiaries at December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.  Also, in our opinion, the related financial statement
schedule when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.




As
discussed in Notes 3 and 5 to the consolidated financial statements, the Company
changed its method of accounting for business combinations with the adoption of
the guidance originally in FASB Statement No. 141(R), Business Combinations(codified in FASB ASC Topic 805, Business Combinations)
effective January 1, 2009.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), RadNet’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 15, 2010, expressed an
unqualified opinion thereon.




/s/ Ernst
& Young LLP




Los
Angeles, California


March 15,
2010


-50-





RADNET,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS EXCEPT SHARE DATA)





December 31,
                                
                                
                                December 31,2009
                                
                                
                                2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                
                                $
                                10,094
                                
                                
                                $
                                -Accounts
      receivable, net
                                
                                
                                87,825
                                
                                
                                
                                96,097Refundable
      income taxes
                                
                                
                                -
                                
                                
                                
                                103Prepaid
      expenses and other current assets
                                
                                
                                9,990
                                
                                
                                
                                13,665Total
      current assets
                                
                                
                                107,909
                                
                                
                                
                                109,865PROPERTY
      AND EQUIPMENT, NET
                                
                                
                                182,571
                                
                                
                                
                                193,104OTHER
      ASSETSGoodwill
                                
                                
                                106,502
                                
                                
                                
                                105,278Other
      intangible assets
                                
                                
                                54,313
                                
                                
                                
                                56,861Deferred
      financing costs, net
                                
                                
                                8,229
                                
                                
                                
                                10,907Investment
      in joint ventures
                                
                                
                                18,741
                                
                                
                                
                                17,637Deposits
      and other
                                
                                
                                2,406
                                
                                
                                
                                2,457Total
      assets
                                
                                $
                                480,671
                                
                                
                                $
                                496,109LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                                
                                $
                                69,641
                                
                                
                                $
                                81,175Due
      to affiliates
                                
                                
                                7,456
                                
                                
                                
                                5,015Notes
      payable
                                
                                
                                6,927
                                
                                
                                
                                5,501Current
      portion of deferred rent
                                
                                
                                560
                                
                                
                                
                                390Obligations
      under capital leases
                                
                                
                                14,121
                                
                                
                                
                                15,064Total
      current liabilities
                                
                                
                                98,705
                                
                                
                                
                                107,145LONG-TERM
      LIABILITIESLine
      of credit
                                
                                
                                -
                                
                                
                                
                                1,742Deferred
      rent, net of current portion
                                
                                
                                8,920
                                
                                
                                
                                7,996Deferred
      taxes
                                
                                
                                277
                                
                                
                                
                                277Notes
      payable, net of current portion
                                
                                
                                416,699
                                
                                
                                
                                419,735Obligations
      under capital lease, net of current portion
                                
                                
                                13,568
                                
                                
                                
                                24,238Other
      non-current liabilities
                                
                                
                                17,263
                                
                                
                                
                                16,006Total
      liabilities
                                
                                
                                555,432
                                
                                
                                
                                577,139COMMITMENTS
      AND CONTINGENCIESEQUITY
      DEFICITCommon
      stock - $.0001 par value, 200,000,000 shares authorized;36,259,279
      and 35,911,474 shares issued and outstanding atDecember
      31, 2009 and 2008
                                
                                
                                4
                                
                                
                                
                                4Paid-in-capital
                                
                                
                                156,758
                                
                                
                                
                                153,006Accumulated
      other comprehensive loss
                                
                                
                                (1,588
                                )
                                
                                
                                (6,396
                                )Accumulated
      deficit
                                
                                
                                (229,989
                                )
                                
                                
                                (227,722
                                )Total
      RadNet, Inc.'s equity deficit
                                
                                
                                (74,815
                                )
                                
                                
                                (81,108
                                )Noncontrolling
      interests
                                
                                
                                54
                                
                                
                                
                                78Total
      equity deficit
                                
                                
                                (74,761
                                )
                                
                                
                                (81,030
                                )Total
      liabilities and equity deficit
                                
                                $
                                480,671
                                
                                
                                $
                                496,109





The accompanying notes are an integral
part of thesefinancial
statements.


-51-





RADNET,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(IN
THOUSANDS EXCEPT SHARE DATA)





Years Ended December 31,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2007NET
      REVENUE
                                                
                                                $
                                                524,368
                                                
                                                
                                                $
                                                498,815
                                                
                                                
                                                $
                                                423,576OPERATING
      EXPENSESOperating
      expenses
                                                
                                                
                                                397,753
                                                
                                                
                                                
                                                384,297
                                                
                                                
                                                
                                                330,550Depreciation
      and amortization
                                                
                                                
                                                53,800
                                                
                                                
                                                
                                                53,548
                                                
                                                
                                                
                                                45,281Provision
      for bad debts
                                                
                                                
                                                32,704
                                                
                                                
                                                
                                                30,832
                                                
                                                
                                                
                                                27,467Loss
      on sale of equipment
                                                
                                                
                                                523
                                                
                                                
                                                
                                                516
                                                
                                                
                                                
                                                72Severance
      costs
                                                
                                                
                                                731
                                                
                                                
                                                
                                                335
                                                
                                                
                                                
                                                934Total
      operating expenses
                                                
                                                
                                                485,511
                                                
                                                
                                                
                                                469,528
                                                
                                                
                                                
                                                404,304INCOME
      FROM OPERATIONS
                                                
                                                
                                                38,857
                                                
                                                
                                                
                                                29,287
                                                
                                                
                                                
                                                19,272OTHER
      EXPENSES (INCOME)Interest
      expense
                                                
                                                
                                                49,193
                                                
                                                
                                                
                                                51,811
                                                
                                                
                                                
                                                44,307Gain
      on bargain purchase
                                                
                                                
                                                (1,387
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Gain
      from sale of joint venture interests
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,868
                                                )Other
      expenses (income)
                                                
                                                
                                                1,239
                                                
                                                
                                                
                                                (151
                                                )
                                                
                                                
                                                (29
                                                )Total
      other expenses
                                                
                                                
                                                49,045
                                                
                                                
                                                
                                                51,660
                                                
                                                
                                                
                                                42,410LOSS BEFORE
      INCOME TAXES AND EQUITYIN EARNINGS OF
      JOINT VENTURES
                                                
                                                
                                                (10,188
                                                )
                                                
                                                
                                                (22,373
                                                )
                                                
                                                
                                                (23,138
                                                )Provision
      for income taxes
                                                
                                                
                                                (443
                                                )
                                                
                                                
                                                (151
                                                )
                                                
                                                
                                                (337
                                                )Equity
      in earnings of joint ventures
                                                
                                                
                                                8,456
                                                
                                                
                                                
                                                9,791
                                                
                                                
                                                
                                                5,944NET
      LOSS
                                                
                                                
                                                (2,175
                                                )
                                                
                                                
                                                (12,733
                                                )
                                                
                                                
                                                (17,531
                                                )Net
      income attributable to noncontrolling interests
                                                
                                                
                                                92
                                                
                                                
                                                
                                                103
                                                
                                                
                                                
                                                600NET
      LOSS ATTRIBUTABLE TO RADNET, INC. COMMON STOCKHOLDERS
                                                
                                                $
                                                (2,267
                                                )
                                                
                                                $
                                                (12,836
                                                )
                                                
                                                $
                                                (18,131
                                                )BASIC AND
      DILUTED NET LOSS PER SHARE ATTRIBUTABLETO RADNET,
      INC. COMMON STOCKHOLDERS
                                                
                                                $
                                                (0.06
                                                )
                                                
                                                $
                                                (0.36
                                                )
                                                
                                                $
                                                (0.52
                                                )WEIGHTED
      AVERAGE SHARES OUTSTANDINGBasic
      and Diluted
                                                
                                                
                                                36,047,033
                                                
                                                
                                                
                                                35,721,028
                                                
                                                
                                                
                                                34,592,716





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


-52-


RADNET,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF EQUITY DEFICIT


(IN
THOUSANDS EXCEPT SHARE DATA)





AccumulatedOther
                                                      
                                                      
                                                      TotalCommon Stock
                                                      
                                                      
                                                      Paid-in
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      Comprehensive
                                                      
                                                      
                                                      Radnet, Inc.’s
                                                      
                                                      
                                                      Noncontrolling
                                                      
                                                      
                                                      TotalShares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Deficit
                                                      
                                                      
                                                      Loss
                                                      
                                                      
                                                      Equity Deficit
                                                      
                                                      
                                                      Interests
                                                      
                                                      
                                                      Equity DeficitBALANCE
      - DECEMBER 31, 2006
                                                      
                                                      
                                                      34,973,780
                                                      
                                                      
                                                      $
                                                      3
                                                      
                                                      
                                                      $
                                                      146,056
                                                      
                                                      
                                                      $
                                                      (192,287
                                                      )
                                                      
                                                      $
                                                      (73
                                                      )
                                                      
                                                      $
                                                      (46,996
                                                      )
                                                      
                                                      $
                                                      1,254
                                                      
                                                      
                                                      $
                                                      (45,742
                                                      )Cumulative
      effect adjustment pursuantto
      adoption of SAB No. 108
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (4,468
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (4,468
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (4,468
                                                      )Issuance
      of common stock upon
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -exercise
      of options/warrants
                                                      
                                                      
                                                      1,178,278
                                                      
                                                      
                                                      
                                                      1
                                                      
                                                      
                                                      
                                                      957
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      958
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      958Retirement
      of treasury shares
                                                      
                                                      
                                                      (912,500
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (695
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Stock-based
      compensation
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,313
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,313
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,313Dividends
      paid to noncontrolling
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -interests
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,219
                                                      )
                                                      
                                                      
                                                      (1,219
                                                      )De-consolidation
      of joint venture
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (429
                                                      )
                                                      
                                                      
                                                      (429
                                                      )Change
      in fair value of
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -cash
      flow hedge
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (4,506
                                                      )
                                                      
                                                      
                                                      (4,506
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (4,506
                                                      )Net
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (18,131
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (18,131
                                                      )
                                                      
                                                      
                                                      600
                                                      
                                                      
                                                      
                                                      (17,531
                                                      )Comprehensive
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (22,637
                                                      )
                                                      
                                                      
                                                      600
                                                      
                                                      
                                                      
                                                      (22,037
                                                      )BALANCE
      - DECEMBER 31, 2007
                                                      
                                                      
                                                      35,239,558
                                                      
                                                      
                                                      $
                                                      4
                                                      
                                                      
                                                      $
                                                      149,631
                                                      
                                                      
                                                      $
                                                      (214,886
                                                      )
                                                      
                                                      $
                                                      (4,579
                                                      )
                                                      
                                                      $
                                                      (69,830
                                                      )
                                                      
                                                      $
                                                      206
                                                      
                                                      
                                                      $
                                                      (69,624
                                                      )Issuance
      of common stock uponexercise
      of options/warrants
                                                      
                                                      
                                                      671,916
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      473
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      473
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      473Stock-based
      compensation
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,902
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,902
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,902Dividends
      paid to noncontrolling
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -interests
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (231
                                                      )
                                                      
                                                      
                                                      (231
                                                      )Change
      in fair value of
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -cash
      flow hedge
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,817
                                                      )
                                                      
                                                      
                                                      (1,817
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,817
                                                      )Net
      loss
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (12,836
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (12,836
                                                      )
                                                      
                                                      
                                                      103
                                                      
                                                      
                                                      
                                                      (12,733
                                                      )Comprehensive
      loss
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (14,653
                                                      )
                                                      
                                                      
                                                      103
                                                      
                                                      
                                                      
                                                      (14,550
                                                      )BALANCE
      - DECEMBER 31, 2008
                                                      
                                                      
                                                      35,911,474
                                                      
                                                      
                                                      $
                                                      4
                                                      
                                                      
                                                      $
                                                      153,006
                                                      
                                                      
                                                      $
                                                      (227,722
                                                      )
                                                      
                                                      $
                                                      (6,396
                                                      )
                                                      
                                                      $
                                                      (81,108
                                                      )
                                                      
                                                      $
                                                      78
                                                      
                                                      
                                                      $
                                                      (81,030
                                                      )Issuance
      of common stock toshareholders
      of Ridgewood Diagnostics
                                                      
                                                      
                                                      50,000
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      129
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      
                                                      129
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      129Issuance
      of common stock upon
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -exercise
      of options/warrants
                                                      
                                                      
                                                      297,805
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      16Stock-based
      compensation
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,607
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,607
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,607Dividends
      paid to noncontrolling
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -interests
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (116
                                                      )
                                                      
                                                      
                                                      (116
                                                      )Change
      in fair value of
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -cash
      flow hedge
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,311
                                                      )
                                                      
                                                      
                                                      (1,311
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,311
                                                      )Change
      in fair value of cash flow hedge fromprior
      periods reclassified to earnings
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      6,119
                                                      
                                                      
                                                      
                                                      6,119
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      6,119Net
      loss
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,267
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,267
                                                      )
                                                      
                                                      
                                                      92
                                                      
                                                      
                                                      
                                                      (2,175
                                                      )Comprehensive
      income
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,541
                                                      
                                                      
                                                      
                                                      92
                                                      
                                                      
                                                      
                                                      2,633BALANCE
      - DECEMBER 31, 2009
                                                      
                                                      
                                                      36,259,279
                                                      
                                                      
                                                      $
                                                      4
                                                      
                                                      
                                                      $
                                                      156,758
                                                      
                                                      
                                                      $
                                                      (229,989
                                                      )
                                                      
                                                      $
                                                      (1,588
                                                      )
                                                      
                                                      $
                                                      (74,815
                                                      )
                                                      
                                                      $
                                                      54
                                                      
                                                      
                                                      $
                                                      (74,761
                                                      )





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


-53-
  RADNET,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
 
 Years
      Ended December 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                  
                                  $
                                  (2,175
                                  )
                                  
                                  $
                                  (12,733
                                  )
                                  
                                  $
                                  (17,531
                                  )Adjustments to reconcile net
      lossto net cash provided by operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  53,800
                                  
                                  
                                  
                                  53,548
                                  
                                  
                                  
                                  45,281Provision
      for bad debts
                                  
                                  
                                  32,704
                                  
                                  
                                  
                                  30,832
                                  
                                  
                                  
                                  27,467Equity
      in earnings of joint ventures
                                  
                                  
                                  (8,456
                                  )
                                  
                                  
                                  (9,791
                                  )
                                  
                                  
                                  (5,944
                                  )Distributions
      from joint ventures
                                  
                                  
                                  7,667
                                  
                                  
                                  
                                  7,982
                                  
                                  
                                  
                                  6,464Deferred
      rent amortization
                                  
                                  
                                  1,094
                                  
                                  
                                  
                                  3,514
                                  
                                  
                                  
                                  1,037Amortization
      of deferred financing cost
                                  
                                  
                                  2,678
                                  
                                  
                                  
                                  2,567
                                  
                                  
                                  
                                  1,632Net
      loss on disposal of assets
                                  
                                  
                                  523
                                  
                                  
                                  
                                  516
                                  
                                  
                                  
                                  72Gain
      on bargain purchase
                                  
                                  
                                  (1,387
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Gain
      from sale of joint venture interests
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,868
                                  )Gain
      on extinguishment of debt
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (47
                                  )Amortization
      of cash flow hedge
                                  
                                  
                                  6,119
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Stock-based
      compensation
                                  
                                  
                                  3,607
                                  
                                  
                                  
                                  2,902
                                  
                                  
                                  
                                  3,313Changes in operating assets and
      liabilities, net of assetsacquired and liabilities assumed
      in purchase transactions:Accounts
      receivable
                                  
                                  
                                  (24,432
                                  )
                                  
                                  
                                  (36,297
                                  )
                                  
                                  
                                  (42,923
                                  )Other
      current assets
                                  
                                  
                                  4,206
                                  
                                  
                                  
                                  (1,515
                                  )
                                  
                                  
                                  4,396Other
      assets
                                  
                                  
                                  51
                                  
                                  
                                  
                                  684
                                  
                                  
                                  
                                  588Accounts
      payable and accrued expenses
                                  
                                  
                                  619
                                  
                                  
                                  
                                  3,270
                                  
                                  
                                  
                                  3,337Net
      cash provided by operating activities
                                  
                                  
                                  76,618
                                  
                                  
                                  
                                  45,432
                                  
                                  
                                  
                                  25,321CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of imaging facilities
                                  
                                  
                                  (6,085
                                  )
                                  
                                  
                                  (28,859
                                  )
                                  
                                  
                                  (18,465
                                  )Proceeds
      from sale of imaging facilities
                                  
                                  
                                  650
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Purchase
      of property and equipment
                                  
                                  
                                  (30,752
                                  )
                                  
                                  
                                  (29,199
                                  )
                                  
                                  
                                  (27,207
                                  )Proceeds
      from sale of equipment
                                  
                                  
                                  219
                                  
                                  
                                  
                                  2,961
                                  
                                  
                                  
                                  845Proceeds
      from sale of joint venture interests
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,260Purchase
      of equity interest in joint ventures
                                  
                                  
                                  (315
                                  )
                                  
                                  
                                  (938
                                  )
                                  
                                  
                                  (4,413
                                  )Adjustment
      to purchase of Radio logix, net of cash acquired
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (370
                                  )Proceeds
      from the divestiture of imaging centers
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,625Purchase
      of covenant not to compete contract
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (250
                                  )Payments
      collected on notes receivable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  111Net
      cash used in investing activities
                                  
                                  
                                  (36,283
                                  )
                                  
                                  
                                  (56,035
                                  )
                                  
                                  
                                  (45,864
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIESPrincipal
      payments on notes and leases payable
                                  
                                  
                                  (23,660
                                  )
                                  
                                  
                                  (19,112
                                  )
                                  
                                  
                                  (10,398
                                  )Proceeds
      from borrowings on notes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  35,000
                                  
                                  
                                  
                                  33,137Proceeds
      from borrowings upon refinancing
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,212
                                  
                                  
                                  
                                  -Deferred
      financing costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,277
                                  )
                                  
                                  
                                  (1,351
                                  )Net
      payments on line of credit
                                  
                                  
                                  (1,742
                                  )
                                  
                                  
                                  (2,480
                                  )
                                  
                                  
                                  (3,787
                                  )Distributions
      to counterparties of cash flow hedges
                                  
                                  
                                  (4,739
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Distributions
      to noncontrolling interests
                                  
                                  
                                  (116
                                  )
                                  
                                  
                                  (231
                                  )
                                  
                                  
                                  (1,219
                                  )Proceeds
      from issuance of common stock
                                  
                                  
                                  16
                                  
                                  
                                  
                                  473
                                  
                                  
                                  
                                  958Net
      cash (used in) provided by financing activities
                                  
                                  
                                  (30,241
                                  )
                                  
                                  
                                  10,585
                                  
                                  
                                  
                                  17,340NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                  
                                  
                                  10,094
                                  
                                  
                                  
                                  (18
                                  )
                                  
                                  
                                  (3,203
                                  )CASH
      AND CAH EQUIVALENTS, beginning of period
                                  
                                  
                                  -
                                  
                                  
                                  
                                  18
                                  
                                  
                                  
                                  3,221CASH
      AND CASH EQUIVALENTS, end of period
                                  
                                  $
                                  10,094
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  18SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the period for interest
                                  
                                  $
                                  40,092
                                  
                                  
                                  $
                                  49,236
                                  
                                  
                                  $
                                  41,382Cash
      paid during the period for income taxes
                                  
                                  $
                                  348
                                  
                                  
                                  $
                                  389
                                  
                                  
                                  $
                                  186
 
 The
accompanying notes are an integral part of these financial
statements.
  -54-
  RADNET,
INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
  Supplemental
Schedule of Non-Cash Investing and Financing Activities
  We
entered into capital leases and equipment notes for approximately $10.4 million,
$23.7 million and $19.6 million, excluding capital leases assumed in
acquisitions, during the years ended December 31, 2009, 2008 and 2007,
respectively.  We also acquired equipment for approximately $12.3
million, $17.8 million and $4.4 million during the years ended December 31,
2009, 2008 and 2007, respectively, that we had not paid for as of
December 31, 2009, 2008 and 2007, respectively.  The offsetting
amount due was recorded in our consolidated balance sheet under accounts payable
and accrued expenses.
  As
discussed in Note 9, we entered into interest rate swap modifications in the
first quarter of 2009.  These modifications include a significant
financing element and, as such, all cash inflows and outflows subsequent to the
date of modification are presented as financing activities.
  We record
the change in fair value of the effective portion of our interest rate swaps
that are designated as cash flow hedges to accumulated other comprehensive
loss.  As such, we recorded unrealized losses as a component of other
comprehensive loss of $1.3 million, $1.8 million and $4.5 million for the years
ended December 31, 2009, 2008, and 2007, respectively.
  Detail of
investing activity related to acquisitions can be found in Note
3.
  -55-
  RADNET,
INC. AND AFFILIATES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE
1 – NATURE OF BUSINESS
  RadNet,
Inc. or RadNet was incorporated on October 21, 1985 in New York.  On
September 3, 2008, we reincorporated in the state of Delaware.  We
operate a group of regional networks comprised of 180 diagnostic imaging
facilities located in seven states with operations primarily in California,
Maryland, the Treasure Coast area of Florida, Kansas, Delaware, New Jersey and
the Finger Lakes (Rochester) and Hudson Valley areas of New York.  We
provide diagnostic imaging services including magnetic resonance imaging (MRI),
computed tomography (CT), positron emission tomography (PET), nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray, fluoroscopy and other
related procedures. The Company’s operations comprise a single segment for
financial reporting purposes.
  The
consolidated financial statements include the accounts of Radnet Management,
Inc. (or “Radnet Management”) and Beverly Radiology Medical Group III, a
professional partnership (“BRMG”).  The consolidated financial
statements also include Radnet Management I, Inc., Radnet Management II,
Inc.,  Radiologix, Inc., Radnet Management Imaging Services, Inc.,
Delaware Imaging Partners, Inc., New Jersey Imaging Partners, Inc. and
Diagnostic Imaging Services, Inc. (“DIS”), all wholly
owned subsidiaries of Radnet Management.  All of these affiliated
entities are referred to collectively in this report as “RadNet”, “we”, “us”,
“our” or the “Company” in this report.
  Howard
G. Berger, M.D. is our President and Chief Executive Officer, a member of our
Board of Directors and owns approximately 18% of our outstanding common stock.
Dr. Berger also owns, indirectly, 99% of the equity interests in BRMG. BRMG
provides all of the professional medical services at the majority of our
facilities located in California under a management agreement with us, and
contracts with various other independent physicians and physician groups to
provide the professional medical services at most of our other California
facilities. We generally obtain professional medical services from BRMG in
California, rather than provide such services directly or through subsidiaries,
in order to comply with California’s prohibition against the corporate practice
of medicine. However, as a result of our close relationship with Dr. Berger and
BRMG, we believe that we are able to better ensure that medical service is
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated physician groups. BRMG is a
partnership of ProNet Imaging Medical Group, Inc. (99%), Breastlink Medical
Group, Inc. (100%) and Beverly Radiology Medical Group, Inc. (99%), each of
which are 99% or 100% owned by Dr. Berger.  RadNet provides
non-medical, technical and administrative services to BRMG for which it receives
a management fee, per the management agreement. Through the management agreement
and our relationship with Dr. Berger, we have exclusive authority over all
non-medical decision making related to the ongoing business operations of BRMG.
Based on the provisions of the agreement, we have determined that BRMG is a
variable interest entity, and that we are the primary beneficiary, and
consequently, we consolidate the revenue and expenses of BRMG. All intercompany
balances and transactions have been eliminated in
consolidation.
  At the
remaining centers in California and at all of the centers which are located
outside of California, we have entered into long-term contracts with independent
radiology groups in the area to provide physician services at those
facilities.  These third party radiology practices provide
professional services, including supervision and interpretation of diagnostic
imaging procedures, in our diagnostic imaging centers.  The radiology
practices maintain full control over the provision of professional services. The
contracted radiology practices generally have outstanding physician and practice
credentials and reputations; strong competitive market positions; a broad
sub-specialty mix of physicians; a history of growth and potential for continued
growth.  In these facilities we enter into long-term agreements with
radiology practice groups (typically 40 years). Under these arrangements, in
addition to obtaining technical fees for the use of our diagnostic imaging
equipment and the provision of technical services, we provide management
services and receive a fee based on the practice group’s professional revenue,
including revenue derived outside of our diagnostic imaging
centers.  We own the diagnostic imaging equipment and, therefore,
receive 100% of the technical reimbursements associated with imaging
procedures.  The radiology practice groups retain the professional
reimbursements associated with imaging procedures after deducting management
service fees.  We have no financial controlling interest in the
independent (non-BRMG) radiology practices; accordingly, we do not consolidate
the financial statements of those practices in our consolidated financial
statements.


Liquidity
and Capital Resources
  We had a
working capital balance of $9.2 million and $2.7 million at December 31,
2009 and 2008, respectively.  We had a net loss attributable to
RadNet, Inc.’s common stockholders of $2.3 million, $12.8 million and $18.1
million for the years ended December 31, 2009, 2008 and 2007,
respectively.  We also had a RadNet, Inc. stockholder equity deficit
of $74.8 million and $81.0 million at December 31, 2009 and 2008,
respectively.
  We
operate in a capital intensive, high fixed-cost industry that requires
significant amounts of capital to fund operations.  In addition to
operations, we require a significant amount of capital for the initial start-up
and development expense of new diagnostic imaging facilities, the acquisition of
additional facilities and new diagnostic imaging equipment, and to service our
existing debt and contractual obligations.  Because our cash flows
from operations have been insufficient to fund all of these capital
requirements, we have depended on the availability of financing under credit
arrangements with third parties.
  Our
business strategy with regard to operations focuses on the
following:
  ·
              maximizing
      performance at our existing
facilities;
  ·
              focusing
      on profitable contracting;
  ·
              expanding
      MRI, CT and PET applications;
  ·
              optimizing
      operating efficiencies; and
  ·
              expanding
      our networks.
  -56-
  Our
ability to generate sufficient cash flow from operations to make payments on our
debt and other contractual obligations will depend on our future financial
performance.  A range of economic, competitive, regulatory,
legislative and business factors, many of which are outside of our control, will
affect our financial performance.  Although no assurance can be given,
taking these factors into account, including our historical experience, we
believe that through implementing our strategic plans and continuing to
restructure our financial obligations, we will obtain sufficient cash to satisfy
our obligations as they become due in the next twelve months.
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  PRINCIPLES
OF CONSOLIDATION - The operating activities of subsidiaries are included in the
accompanying consolidated financial statements from the date of acquisition.
Investments in companies in which the Company has the ability to exercise
significant influence, but not control, are accounted for by the equity method.
All intercompany transactions and balances have been eliminated in
consolidation.
  USE OF
ESTIMATES - The preparation of the financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. These estimates and assumptions affect various matters,
including our reported amounts of assets and liabilities in our consolidated
balance sheets at the dates of the financial statements; our disclosure of
contingent assets and liabilities at the dates of the financial statements; and
our reported amounts of revenues and expenses in our consolidated statements of
operations during the reporting periods. These estimates involve judgments with
respect to numerous factors that are difficult to predict and are beyond
management’s control. As a result, actual amounts could materially differ from
these estimates.
  RECLASSIFICATION
– Certain reclassifications have been made to the December 31, 2008 and 2007
consolidated financial statements and accompanying notes to conform with the
December 31, 2009 presentation including certain immaterial balance sheet
reclassifications as well as reclassifying out of revenue and into equity in
earnings of joint ventures a certain portion of managements fees billed to our
non-consolidated joint ventures that are intercompany in nature.
  REVENUE
RECOGNITION – Our consolidated net revenue consists of net patient fee for
service revenue and revenue from capitation arrangements, or capitation
revenue.   Net patient service revenue is recognized at the time
services are provided net of contractual adjustments based on our evaluation of
expected collections resulting from the analysis of current and past due
accounts, past collection experience in relation to amounts billed and other
relevant information. The amount of expected collection is continually adjusted
as more information is received and such adjustments are recorded in current
operations.  Contractual adjustments result from the differences
between the rates charged for services performed and reimbursements by
government-sponsored healthcare programs and insurance companies for such
services. Capitation revenue is recognized as revenue during the period in which
we were obligated to provide services to plan enrollees under contracts with
various health plans. Under these contracts, we receive a per-enrollee amount
each month covering all contracted services needed by the plan
enrollees.
  CONCENTRATION OF CREDIT RISKS -
Financial instruments that potentially subject us to credit risk are primarily
cash equivalents and accounts receivable. We have placed our cash and cash
equivalents with one major financial institution. At times, the cash in the
financial institution is temporarily in excess of the amount insured by the
Federal Deposit Insurance Corporation, or FDIC.  Substantially all of
our accounts receivable are due under fee-for-service contracts from third party
payors, such as insurance companies and government-sponsored healthcare
programs, or directly from patients.  Services are generally provided
pursuant to one-year contracts with healthcare providers.  Receivables
generally are collected within industry norms for third-party
payors.  We continuously monitor collections from our clients and
maintain an allowance for bad debts based upon any specific payor collection
issues that we have identified and our historical experience.  As of
December 31, 2009 and 2008, our allowance for bad debts was $13.0 million
and $12.1 million, respectively.
  CASH AND
CASH EQUIVALENTS - We consider all highly liquid investments that mature in
three months or less when purchased to be cash equivalents. The carrying amount
of cash and cash equivalents approximates their fair market value.
  DEFERRED
FINANCING COSTS - Costs of financing are deferred and amortized on a
straight-line basis over the life of the loan.
  PROPERTY
AND EQUIPMENT - Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization of property and
equipment are provided using the straight-line method over the estimated useful
lives, which range from 3 to 15 years. Leasehold improvements are amortized at
the lesser of lease term or their estimated useful lives, whichever is lower,
which range from 3 to 30 years. Only a few leasehold improvements are deemed to
have a life greater than 15 to 20 years. Maintenance and repairs are charged to
expenses as incurred.
  -57-


GOODWILL
- Goodwill at December 31, 2009 totaled $106.5 million. Goodwill is
recorded as a result of business combinations. Management evaluates goodwill, at
a minimum, on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable.  Impairment
of goodwill is tested at the reporting unit level by comparing the reporting
unit’s carrying amount, including goodwill, to the fair value of the reporting
unit. The fair value of a reporting unit is estimated using a combination of the
income or discounted cash flows approach and the market approach, which uses
comparable market data. If the carrying amount of the reporting unit exceeds its
fair value, goodwill is considered impaired and a second step is performed to
measure the amount of impairment loss, if any.  We tested goodwill for
impairment on October 1, 2009.  Based on our review, we noted no
impairment related to goodwill as of October 1, 2009. However, if estimates or
the related assumptions change in the future, we may be required to record
impairment charges to reduce the carrying amount of goodwill.




LONG-LIVED
ASSETS - We evaluate our long-lived assets (property and equipment) and
definite-lived intangibles for impairment whenever indicators of impairment
exist. The accounting standards require that if the sum of the undiscounted
expected future cash flows from a long-lived asset or definite-lived intangible
is less than the carrying value of that asset, an asset impairment charge must
be recognized. The amount of the impairment charge is calculated as the excess
of the asset’s carrying value over its fair value, which generally represents
the discounted future cash flows from that asset or in the case of assets we
expect to sell, at fair value less costs to sell. No indicators of impairment
were identified with respect to our long-lived assets as of December 31,
2009.




INCOME
TAXES - Income tax expense is computed using an asset and liability method and
using expected annual effective tax rates. Under this method, deferred income
tax assets and liabilities result from temporary differences in the financial
reporting bases and the income tax reporting bases of assets and liabilities.
The measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefit that, based on available evidence, is not expected to be
realized. When it appears more likely than not that deferred taxes will not be
realized, a valuation allowance is recorded to reduce the deferred tax asset to
its estimated realizable value. For net deferred tax assets we consider
estimates of future taxable income, including tax planning strategies in
determining whether our net deferred tax assets are more likely than not to be
realized. Income taxes are further explained in Note 10.




UNINSURED
RISKS – Prior to November 1, 2006 we maintained a self-insured workers’
compensation insurance program for which our third party administrator over this
program continues to make payments on behalf of the Company for claims incurred
from November 1, 2004 through October 31, 2006.  We are required
to maintain a cash collateral account with this administrator as guarantee of
our submission of full reimbursement of claims paid on our behalf.  We
record this collateral deposit as restricted cash and include it as other
current assets in our consolidated balance sheet which amounted to approximately
$869,000 and $1.3 million as of December 31, 2009 and 2008,
respectively.




With
respect to the above-mentioned claims incurred from November 1, 2004
through October 31, 2006, the estimated future cash obligation associated with
the unpaid portion of those claims that remain open but have not yet been
resolved is recorded to accrued expenses in our consolidated balance sheet. This
current liability is determined by the administrator’s estimate of loss
development of open claims and was approximately $358,000 and $364,000 at
December 31, 2009 and 2008, respectively.




For the
two years from November 1, 2006 through October 31, 2008, we pre-funded our
anticipated workers’ compensation claims’ losses through a third party
administrator.  As of December 31, 2009, we do not anticipate
that the loss development on the claims for these two years will exceed what has
already paid and expensed.




On
November 1, 2008 we obtained a fully funded and insured workers’
compensation policy, thereby eliminating any uninsured risks for employee
injuries occurring on or after that date.




We and
our affiliated physicians carry an annual medical malpractice insurance policy
that protects us for claims that are filed during the policy year and that fall
within policy limits.  The policy has a deductible for which we have
recorded liabilities and included it in our consolidated balance sheet at
December 31, 2009 and December 31, 2008 of approximately $207,000 and
$161,000, respectively.




In
December 2008, to eliminate the exposure for claims not reported during the
regular malpractice policy period, the Company purchased a medical malpractice
tail policy, which provides coverage for any claims reported in the event that
our medical malpractice policy expires.  As of December 31, 2009,
this policy remains in effect.




On
January 1, 2008 we entered into an arrangement with Blue Shield to
administer and process claims under a new self-insured plan that provides health
insurance coverage for our employees and dependents. We have recorded
liabilities as of December 31, 2009 and December 31, 2008 of $2.1 and
$1.7 million, respectively, for the estimated future cash obligations associated
with the unpaid portion of the medical and dental claims incurred by our
participants. Additionally, we entered into an agreement with Blue Shield for a
stop loss policy that provides coverage for any claims that exceed $200,000 up
to a maximum of $1.0 million in order for us to limit our exposure for unusual
or catastrophic claims.


-58-


LOSS
CONTRACTS – We assess the profitability of our contracts to provide management
services to our contracted physician groups and identify those contracts where
current operating results or forecasts indicate probable future
losses.  Anticipated future revenue is compared to anticipated
costs.  If the anticipated future cost exceeds the revenue, a loss
contract accrual is recorded.  In connection with the acquisition of
Radiologix in November 2006, we acquired certain management service
agreements for which forecasted costs exceeds forecasted revenue.  As
such, an $8.9 million loss contract accrual was established in purchase
accounting, and is included in other non-current liabilities. The recorded loss
contract accrual is being accreted into operations over the remaining term of
the acquired management service agreements.  As of December 31,
2009 and 2008, the remaining accrual balance is $8.3 million, and $9.0 million,
respectively.




EQUITY
BASED COMPENSATION – We have two long-term incentive plans that currently have
outstanding stock options which we refer to as the 2000 Plan and the 2006 Plan.
The 2000 Plan was terminated as to future grants when the 2006 Plan was approved
by the stockholders in 2006. We have reserved for issuance under the 2006 Plan
6,500,000 shares of common stock. Certain options granted under the 2006 Plan to
employees are intended to qualify as incentive stock options under existing tax
regulations. In addition, we issue non-qualified stock options and warrants
under the 2006 Plan from time to time to non-employees, in connection with
acquisitions and for other purposes and we may also issue stock under the 2006
Plan. Stock options and warrants generally vest over two to five years and
expire five to ten years from date of grant.




The
compensation expense recognized for all equity-based awards is net of estimated
forfeitures and is recognized over the awards’ service period. Equity-based
compensation is classified in operating expenses with the same line item as the
majority of the cash compensation paid to employees.




DERIVATIVE
FINANCIAL INSTRUMENTS - The Company holds derivative financial instruments for
the purpose of hedging the risks of certain identifiable and anticipated
transactions. In general, the types of risks hedged are those relating to the
variability of cash flows caused by movements in interest rates. The Company
documents its risk management strategy and hedge effectiveness at the inception
of the hedge, and, unless the instrument qualifies for the short-cut method of
hedge accounting, over the term of each hedging relationship. The Company’s use
of derivative financial instruments is limited to interest rate swaps, the
purpose of which is to hedge the cash flows of variable-rate indebtedness. The
Company does not hold or issue derivative financial instruments for speculative
purposes.




We
designate our interest rate swaps as cash flow hedges of floating-rate
borrowings. For interest rate swaps that are designated and qualify as a cash
flow hedge (i.e., hedging the exposure to variability in expected future cash
flows that is attributable to a particular risk), the effective portion of the
gain or loss on the derivative instrument is initially reported as a component
of other comprehensive income, then reclassified into earnings in the same line
item associated with the forecasted transaction and in the same period or
periods during which the hedged transaction affects earnings (e.g., in “interest
expense” when the hedged transactions are interest cash flows associated with
floating-rate debt). The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any (i.e., the ineffectiveness portion), or hedge components
excluded from the assessment of effectiveness, are recognized in the statement
of operations during the current period.




COMPREHENSIVE
INCOME - Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 210 (originally issued as SFAS No. 130, Reporting Comprehensive Income)establishes rules for reporting and displaying comprehensive income and
its components.  Unrealized gains or losses on the change in fair
value of the Company’s cash flow hedging activities are included in
comprehensive income (loss). The components of comprehensive income (loss) are
included in the Consolidated Statement of Stockholders Deficit.




FAIR VALUE MEASUREMENTS –We utilize a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value.
These tiers are: Level 1, defined as observable inputs such as quoted prices in
active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.




Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, receivables, trade accounts payable, capital leases,
long-term debt and other liabilities.  We consider the carrying
amounts of cash and cash equivalents, receivables, other current assets and
current liabilities to approximate their fair value because of the relatively
short period of time between the origination of these instruments and their
expected realization or payment.  Additionally, we consider the
carrying amount of our capital lease obligations to approximate their fair value
because the weighted average interest rate used to formulate the carrying
amounts approximates current market rates.




At
December 31, 2009, based on Level 2 inputs, we determined the fair values
of our first and second lien term loans issued on November 15, 2006 and
extended on August 23, 2007 to be $232.9 million and $160.7 million,
respectively.  The carrying amount of the first and second lien term
loans at December 31, 2009 was $242.6 million and $170.0 million,
respectively.




-59-




The
Company maintains interest rate swaps which are required to be recorded at fair
value on a recurring basis. At December 30, 2009 the fair value of these
swaps of a liability of $8.9 million was determined using Level 2
inputs.  More specifically, the fair value was determined by
calculating the value of the difference between the fixed interest rate of the
interest rate swaps and the counterparty’s forward LIBOR curve, which would be
the input used in the valuations.  The forward LIBOR curve is readily
available in the public markets or can be derived from information available in
the public markets.




On
January 1, 2009, the Company adopted, without material impact on its
consolidated financial statements, the provisions of FASB ASC Topic 820 related
to nonfinancial assets and nonfinancial liabilities that are not required or
permitted to be measured at fair value on a recurring basis, which include those
measured at fair value including goodwill impairment testing, indefinite-lived
intangible assets measured at fair value for impairment assessment, nonfinancial
long-lived assets measured at fair value for impairment assessment, asset
retirement obligations initially measured at fair value, and those initially
measured at fair value in a business combination.




EARNINGS
PER SHARE - Earnings per share is based upon the weighted average number of
shares of common stock and common stock equivalents outstanding, net of common
stock held in treasury,  as follows (in thousands except share and per
share data):




Years Ended December 31,2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Net
      loss attributable to RadNet, Inc.’s common stockholders
                                                  
                                                  $
                                                  (2,267
                                                  )
                                                  
                                                  $
                                                  (12,836
                                                  )
                                                  
                                                  $
                                                  (18,131
                                                  )BASIC
      LOSS PER SHARE ATTRIBUTABLE TO RADNET,
      INC.’SCOMMON
      STOCKHOLDERSWeighted
      average number of common shares outstanding during the
year
                                                  
                                                  
                                                  36,047,033
                                                  
                                                  
                                                  
                                                  35,721,028
                                                  
                                                  
                                                  
                                                  34,592,716Basic
      loss per share attributable to RadNet, Inc.’s common
      stockholders
                                                  
                                                  $
                                                  (0.06
                                                  )
                                                  
                                                  $
                                                  (0.36
                                                  )
                                                  
                                                  $
                                                  (0.52
                                                  )DILUTED
      LOSS PER SHARE ATTRIBUTABLE TO RADNET, INC.’SCOMMON
      STOCKHOLDERSWeighted
      average number of common shares outstanding during the
year
                                                  
                                                  
                                                  36,047,033
                                                  
                                                  
                                                  
                                                  35,721,028
                                                  
                                                  
                                                  
                                                  34,592,716Add
      additional shares issuable upon exercise of stock options and
      warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Weighted
      average number of common shares used in calculating dilutedloss
      per share
                                                  
                                                  
                                                  36,047,033
                                                  
                                                  
                                                  
                                                  35,721,028
                                                  
                                                  
                                                  
                                                  34,592,716Diluted
      loss per share attributable to RadNet, Inc.’s common
      stockholders
                                                  
                                                  $
                                                  (0.06
                                                  )
                                                  
                                                  $
                                                  (0.36
                                                  )
                                                  
                                                  $
                                                  (0.52
                                                  )




For all
periods presented we excluded all options and warrants in the calculation of
diluted earnings per share because their effect would be antidilutive. However,
these instruments could potentially dilute earnings per share in future
years.




INVESTMENT IN JOINT VENTURES -We have eight unconsolidated joint ventures with ownership interests
ranging from 22% to 50%. These joint ventures represent partnerships with
hospitals, health systems or radiology practices and were formed for the purpose
of owning and operating diagnostic imaging centers.  Professional
services at the joint venture diagnostic imaging centers are performed by
contracted radiology practices or a radiology practice that participates in the
joint venture.  Our investment in these joint ventures is accounted
for under the equity method.   Investment in joint ventures
increased $1.1 million to $18.7 million at December 31, 2009 compared to
$17.6 million at December 31, 2008.  This increase is primarily
related to our purchase of an additional $315,000 of share holdings in joint
ventures that were existing as of December 31, 2008 as well as our equity
earnings of $8.5 million for the year ended December 31, 2009, offset by
$7.7 of distributions received during the period.  We noted no other
than temporary impairment with respect to our joint venture ownership interests
at December 31, 2009.




We
received management service fees from the centers underlying these joint
ventures of approximately $7.1 million, $7.3 million and $4.4 million for the
years ended December 31, 2009, 2008 and 2007, respectively.




The
following table is a summary of key financial data for these joint ventures as
of December 31, 2009 and 2008 and for the years then ended (in
thousands):


-60-




December 31,Balance
      Sheet Data:
                      
                      2009
                      
                      
                      2008Current
      assets
                      
                      $
                      20,920
                      
                      
                      $
                      20,732Noncurrent
      assets
                      
                      
                      27,243
                      
                      
                      
                      23,557Current
      liabilities
                      
                      
                      (5,929
                      )
                      
                      
                      (4,634
                      )Noncurrent
      liabilities
                      
                      
                      (7,692
                      )
                      
                      
                      (7,848
                      )Total
      net assets
                      
                      $
                      34,542
                      
                      
                      $
                      31,807Book
      value of RadNet joint venture interests
                      
                      $
                      14,934
                      
                      
                      $
                      13,717Cost
      in excess of book value of acquired joint venture
interests
                      
                      
                      3,383
                      
                      
                      
                      3,383Elimination of intercompany
      profit remaining on RadNet’sconsolidated balance
      sheet
                      
                      
                      424
                      
                      
                      
                      537Total
      value of RadNet joint venture interests
                      
                      $
                      18,741
                      
                      
                      $
                      17,637Total
      book value of other joint venture partner interests
                      
                      $
                      19,608
                      
                      
                      $
                      18,090Net
      revenue
                      
                      $
                      76,557
                      
                      
                      $
                      80,948Net
      income
                      
                      $
                      12,744
                      
                      
                      $
                      17,758




NOTE
3 – FACILITY ACQUISITIONS




On
January 1, 2009, we adopted the provisions of SFAS No. 141(R), Business Combinations,
codified in FASB ASC Topic 805.  ASC Topic 805 changed how our
business acquisitions are accounted for and impacts our financial statements at
the acquisition date and in subsequent periods. Pursuant to ASC Topic 805, we
are required to recognize all of the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value, with limited exceptions, and
all transaction related costs are expensed. Subsequent changes, if any, to the
acquisition-date fair value that are the result of facts and circumstances that
did not exist as of the acquisition date will be recognized as part of our
on-going operations. In addition, Topic 805 impacts our goodwill impairment test
associated with acquisitions.  We applied the provisions of ASC Topic
805 to the facility acquisitions subsequent to January 1, 2009 as discussed
below.




On
October 1, 2009, we completed the acquisition of the imaging assets of
Chesapeake Urology Associates in Baltimore, Maryland for approximately
$950,000.  Chesapeake Urology operated CT scanners in three locations
in the greater Baltimore area. We have made a purchase price allocation of the
acquired assets and liabilities, and approximately $650,000 of fixed assets,
$275,000 of covenant not to compete contracts and $19,000 of goodwill was
recorded with respect to this transaction.




On
October 1, 2009, we completed the acquisition of the women’s imaging business of
Ridgewood Diagnostics, a multi-modality women’s imaging practice located near
Rochester, New York’s Unity Hospital for $1.1 million and 50,000 shares of
RadNet common stock valued at approximately $129,000 on the date of
acquisition.  In conjunction with the Ridgewood Diagnostics
transaction, on October 16, 2009, we completed the acquisition of the women’s
imaging business of Unity Hospital for $100,000.  We plan to
consolidate the Ridgewood Diagnostics and Unity Hospital operations into one
facility during 2010. We have made a purchase price allocation of the acquired
assets and liabilities, and approximately $92,000 of fixed assets, $150,000 of
covenant not to compete contracts and $1.1 million of goodwill was recorded with
respect to these transactions.




On June
12, 2009, we acquired the assets and business of nine imaging centers located in
New Jersey from an unrelated third party for approximately $2.1
million.  At the time of the acquisition, we immediately sold the
assets and business of one of those nine centers to an unrelated third party for
approximately $650,000. We have made a purchase price allocation of the acquired
assets and liabilities associated with the remaining eight centers at their
respective fair values.




In
accordance with accounting standards, any excess of fair value of acquired net
assets over the acquisition consideration results in a gain on bargain purchase.
Prior to recording a gain, the acquiring entity must reassess whether all
acquired assets and assumed liabilities have been identified and recognized and
perform re-measurements to verify that the consideration paid, assets acquired,
and liabilities assumed have been properly valued. The Company underwent such a
reassessment, and as a result, has recorded a gain on bargain purchase of
approximately $1.4 million.


-61-


We
believe that the gain on bargain purchase resulted from various factors that
impacted the sale of those New Jersey assets.  The seller was
performing a full liquidation of its assets for the benefit of its
creditors.  Upon liquidation of all of its assets, the seller intended
to close its business.  The New Jersey assets were the only remaining
assets to be sold before a full wind-down of the seller’s business could be
completed.  We believe that the seller was willing to accept a bargain
purchase price from us in return for our ability to act more quickly and with
greater certainty than any other prospective acquirer.  The decline in
the credit markets made it difficult for other acquirers who relied upon third
party financing to complete the transaction.  The relatively small
size of the transaction for us, the lack of required third-party financing and
our expertise in completing similar transactions in the past gave the seller
confidence that we could complete the transaction expeditiously and without
difficulty.




In our
purchase price allocation we recorded approximately $3.1 million of land and
fixed assets, $250,000 of intangible assets and $121,000 of other current
assets.




On March
31, 2009, we acquired the assets and business of Inter-County Imaging in
Yonkers, NY for approximately $553,000.  We have made a purchase price
allocation of the acquired assets and liabilities, and approximately $500,000 of
fixed assets and no goodwill was recorded with respect to this
transaction.




On March
27, 2009, we acquired the assets and business of Elite Diagnostic Imaging, LLC
in Victorville, CA for approximately $1.3 million.  We have made a
purchase price allocation of the acquired assets and liabilities, and
approximately $1.2 million of fixed assets and $100,000 of goodwill was recorded
with respect to this transaction.




On
October 31, 2008, we acquired the assets and business of Middletown Imaging in
Middletown, Delaware for $210,000 in cash and the assumption of capital lease
debt of $1.2 million. We allocated the purchase price to the acquired assets and
liabilities.  Approximately $530,000 of goodwill was recorded with
respect to this transaction.




On August
15, 2008, we acquired the women’s imaging practice of Parvis Gamagami, M.D.,
Inc. in Van Nuys, CA for $600,000.  Upon acquisition, we relocated the
practice to a nearby center we recently acquired from InSight Health in Encino,
CA.  We rebranded the InSight center as the Encino Breast Care Center,
and focused it on Digital Mammography, Ultrasound, MRI and other modalities
pertaining to women’s health.  We have allocated the full purchase
price of $600,000 to goodwill.




On July
23, 2008, we acquired the assets and business of NeuroSciences Imaging Center in
Newark, Delaware for $4.5 million in cash. The center, which performs MRI, CT,
Bone Density, X-ray, Fluoroscopy and other specialized procedures, is located in
a highly specialized medical complex called the Neuroscience and Surgery
Institute of Delaware. The acquisition complements our recent purchase of the
Papastavros Associates Imaging centers completed in March, 2008.  We
made a purchase price allocation of the acquired assets and liabilities, and
approximately $2.6 million of goodwill was recorded with respect to this
transaction.




On June
18, 2008, we acquired the assets and business of Ellicott Open MRI for the
assumption of approximately $181,000 of capital lease debt.




On June
2, 2008, we acquired the assets and business of Simi Valley Advanced Medical, a
Southern California based multi-modality imaging center, for the assumption of
capital lease debt of $1.7 million.  We allocated the purchase price
to the acquired assets and liabilities, and approximately $313,000 of goodwill
was recorded with respect to this transaction.




On April
15, 2008, we acquired the net assets of five Los Angeles area imaging centers
from InSight Health Corp. We completed the purchase of a sixth center in Van
Nuys, CA from Insight Health Corp. on June 2, 2008.  The total
purchase price for the six centers was $8.5 million in cash.  The
centers provide a combination of imaging modalities, including MRI, CT, X-ray,
Ultrasound and Mammography.  We allocated the purchase price to the
acquired assets and liabilities, and approximately $5.6 million of goodwill was
recorded with respect to this transaction.




On April
1, 2008, we acquired the net assets and business of BreastLink Medical Group,
Inc., a prominent Southern California breast medical oncology business and a
leading breast surgery business, for the assumption of approximately $4.0
million of accrued liabilities and capital lease obligations.  We
allocated the purchase price to the acquired assets and liabilities, and
approximately $2.1 million of goodwill was recorded with respect to this
transaction.




On March
12, 2008, we acquired the net assets and business of Papastavros Associates
Medical Imaging for $9.0 million in cash and the assumption of capital leases of
$337,000.  Founded in 1958, Papastavros Associates Medical Imaging is
one of the largest and most established outpatient imaging practices in
Delaware. The 12 Papastavros centers offer a combination of MRI, CT, PET,
nuclear medicine, mammography, bone densitometry, fluoroscopy, ultrasound and
X-ray. We allocated the purchase price to the acquired assets and liabilities,
and approximately $3.6 million of goodwill, and $1.2 million for covenants not
to compete, were recorded with respect to this transaction.




-62-




On
February 1, 2008, we acquired the net assets and business of The Rolling Oaks
Imaging Group, located in Westlake and Thousand Oaks, California, for $6.0
million in cash and the assumption of capital leases of $2.7
million.  The practice consists of two centers, one of which is a
dedicated women’s center. The centers are multimodality and include a
combination of MRI, CT, PET/CT, mammography, ultrasound and X-ray. The centers
are positioned in the community as high-end, high-quality imaging facilities
that employ state-of-the-art technology, including 3 Tesla MRI and 64 slice CT
units. The facilities have been fixtures in the Westlake/Thousand Oaks market
since 2003.  We allocated the purchase price to the acquired assets
and liabilities, and approximately $5.6 million of goodwill was recorded with
respect to this transaction.




On
October 9, 2007, we acquired the assets and business of Liberty Pacific Imaging
located in Encino, California for $2.8 million in cash. The center operates a
successful MRI practice utilizing a 3T MRI unit, the strongest magnet strength
commercially available at this time.  The center was founded in
2003.  The acquisition allows us to consolidate a portion of our
Encino/Tarzana MRI volume onto the existing Liberty Pacific
scanner.  This consolidation allows us to move our existing 3T MRI
unit in that market to our Squadron facility in Rockland County, New
York.  Approximately $1.1 million of goodwill was recorded with
respect to this transaction.  Also, $200,000 was recorded for the fair
value of a covenant not to compete contract.




In
September 2007, we acquired the assets and business of three facilities
comprising Valley Imaging Center, Inc. located in Victorville, CA for $3.3
million in cash plus the assumption of approximately $866,000 of
debt.  The acquired centers offer a combination of MRI, CT, X-ray,
Mammography, Fluoroscopy and Ultrasound. The physician who provided the
interpretive radiology services to these three locations joined
BRMG.  The leased facilities associated with these centers includes a
total monthly rental of approximately $18,000.  Approximately $3.0
million of goodwill was recorded with respect to this
transaction.  Also, $150,000 was recorded for the fair value of a
covenant not to compete contract.




In
September 2007, we acquired the assets and business of Walnut Creek Open MRI
located in Walnut Creek, CA for $225,000.  The center provides MRI
services.  The leased facility associated with this center includes a
monthly rental of approximately $6,800 per month.  Approximately
$50,000 of goodwill was recorded with respect to this transaction.




In July
2007, we acquired the assets and business of Borg Imaging Group located in
Rochester, NY for $11.6 million in cash plus the assumption of approximately
$2.4 million of debt.  Borg was the owner and operator of six imaging
centers, five of which are multimodality, offering a combination of MRI, CT,
X-ray, Mammography, Fluoroscopy and Ultrasound.  After combining the
Borg centers with RadNet’s existing centers in Rochester, New York, RadNet has a
total of 11 imaging centers in Rochester.  The leased facilities
associated with these centers includes a total monthly rental of approximately
$71,000 per month.  Approximately $8.9 million of goodwill was
recorded with respect to this transaction.  Also, $1.4 million was
recorded for the fair value of covenant not to compete contracts.




In March
2007, we acquired the assets and business of Rockville Open MRI, located in
Rockville, Maryland, for $540,000 in cash and the assumption of a capital lease
of $1.1 million.  The center provides MRI services.  The
center is 3,500 square feet with a monthly rental of approximately $8,400 per
month.  Approximately $365,000 of goodwill was recorded with respect
to this transaction.




On
November 15, 2006, we completed the acquisition of Radiologix,
Inc.  Radiologix, a Delaware corporation, then employing approximately
2,200 people through its subsidiaries was a national provider of diagnostic
imaging services through the ownership and operation of freestanding, outpatient
diagnostic imaging centers.  Radiologix owned, operated and maintained
equipment in 69 locations, with imaging centers in seven states, including
primary operations in the Mid-Atlantic; the Bay-Area, California; the Treasure
Coast area, Florida; Northeast Kansas; and the Finger Lakes (Rochester) and
Hudson Valley areas of New York State.




NOTE
4 – GOODWILL AND OTHER INTANGIBLE ASSETS




Goodwill
at December 31, 2009 totaled $106.5 million. Goodwill is recorded as a
result of business combinations.  Activity in goodwill for the years
ended December 31, 2007, 2008 and 2009 are provided below (in
thousands):


-63-




Balance
      as of December 31, 2007
                      
                      $
                      84,395Adjustments
      to our preliminary allocation of the purchase price of Borge Imaging
      Group
                      
                      
                      (254
                      )Adjustments
      to our preliminary allocation of the purchase price of Valley Imaging
      Center, Inc.
                      
                      
                      212Goodwill
      acquired through the acquisition of Rolling Oaks Imaging
    Group
                      
                      
                      5,612Goodwill
      acquired through the acquisition of Papastavros Associates Medical
      Imaging
                      
                      
                      3,649Goodwill
      acquired through the acquisition of BreastLink Medical Group,
      Inc
                      
                      
                      2,048Goodwill
      acquired through the acquisition of InSight Health Corp.
                      
                      
                      5,560Goodwill
      acquired through the acquisition of Simi Valley Advanced
      Medical
                      
                      
                      313Goodwill
      acquired through the acquisition of NeuroSciences Imaging
      Center
                      
                      
                      2,613Goodwill
      acquired through the acquisition of imaging practice of Parvis Gamagami, M
      .D
                      
                      
                      600Goodwill
      acquired through the acquisition of Middletown Imaging
                      
                      
                      530Balance
      as of December 31, 2008
                      
                      
                      105,278Goodwill
      acquired through the acquisition of Elite Diagnostic Imaging,
      LLC
                      
                      
                      100Goodwill
      acquired through the acquisition of Ridgewood Diagnostics and Unity
      Hospital
                      
                      
                      1,105Goodwill
      acquired through the acquisition of Chesapeake Urology
      Associates
                      
                      
                      19Balance
      as of December 31, 2009
                      
                      $
                      106,502




Other
intangible assets are primarily related to the value of management service
agreements obtained through our acquisition of Radiologix, Inc. in 2006 and are
recorded at cost of $57.9 million less accumulated amortization of $7.3 million
at December 31, 2009.  Also included in other intangible assets
is the value of covenant not to compete contracts associated with our recent
facility acquisitions (see note 3) totaling $6.8 million less accumulated
amortization of $4.7 million, as well as the value of trade names associated
with acquired imaging facilities totaling $2.5 million less accumulated
amortization of $1.0 million.   Amortization expense for the year
ended December 31, 2009, 2008 and 2007 was $3.2 million, $4.1million and
$4.5 million, respectively.  Intangible assets are amortized using the
straight-line method.  Management service agreements are amortized
over 25 years using the straight line method.




The
following table shows annual amortization expense, by asset classes that will be
recorded over the next five years (in thousands):





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  2014
                  
                  Thereafter
                  
                  
                  TotalManagement
      Service Contracts
                  
                  $
                  2,315
                  
                  
                  $
                  2,315
                  
                  
                  $
                  2,315
                  
                  
                  $
                  2,315
                  
                  
                  $
                  2,315
                  
                  
                  $
                  39,069
                  
                  
                  $
                  50,644Covenant
      not to compete contracts
                  
                  
                  745
                  
                  
                  
                  682
                  
                  
                  
                  510
                  
                  
                  
                  135
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  2,136Trade
      Names
                  
                  
                  150
                  
                  
                  
                  150
                  
                  
                  
                  150
                  
                  
                  
                  113
                  
                  
                  
                  -
                  
                  
                  
                  970
                  
                  
                  
                  1,533Total
      Annual Amortization
                  
                  $
                  3,210
                  
                  
                  $
                  3,147
                  
                  
                  $
                  2,975
                  
                  
                  $
                  2,563
                  
                  
                  $
                  2,379
                  
                  
                  $
                  40,039
                  
                  
                  $
                  54,313





NOTE
5 – RECENT ACCOUNTING STANDARDS




In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141. SFAS 141(R) (codified in FASB ASC
Topic 805, Business
Combinations) introduces significant changes in the accounting for and
reporting of business acquisitions.  ASC Topic 805 changes how
business acquisitions are accounted for and will impact financial statements at
the acquisition date and in subsequent periods. Pursuant to ASC Topic 805, an
acquiring entity is required to recognize all of the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value, with
limited exceptions, and all transaction related costs are expensed. Subsequent
changes, if any, to the acquisition-date fair value that are the result of facts
and circumstances that did not exist as of the acquisition date will be
recognized as part of on-going operations. In addition, Topic 805 will have an
impact on the goodwill impairment test associated with acquisitions. The
provisions of ASC Topic 805 are effective for business combinations for which
the acquisition date is on or after January 1, 2009. The Company applied
the provisions of ASC Topic to the facility acquisitions subsequent to
January 1, 2009 as discussed in Note 3.




SFAS No.
160, Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51,codified in FASB ASC Topic 810,  is designed to improve the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report minority interests in subsidiaries
in the same way as equity in the consolidated financial statements. Moreover,
ASC Topic 810 eliminates the diversity that accounting for transactions between
an entity and minority interests by requiring they be treated as equity
transactions.  The Company adopted the provisions of ASC Topic 810 on
January 1, 2009.  Such provisions are applied prospectively
except for the presentation and disclosure requirements which have been applied
retrospectively for all periods presented.  Accordingly, we have
reclassified minority interests as a component of equity deficit and renamed
this item “Non-controlling interests” on our consolidated balance sheets at
December 31, 2009 and 2008.  Additionally, our net loss for the
years ended December 31, 2009, 2008 and 2007 have been allocated between
RadNet, Inc.’s common stockholders and noncontrolling
interests.


-64-




In May
2009, the FASB issued Statement No. 165, “Subsequent Events,” codified in FASB ASC Topic
855, which establishes general standards of accounting for, and requires
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The Company
adopted the provisions of ASC Topic 855 for the quarter ended September 30,
2009. The adoption of these provisions did not have a material effect on the
Company’s consolidated financial statements.




In
September 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC” or “Codification”) became the authoritative source
of accounting principles accepted in the United States (“GAAP”) recognized by
the FASB.  All existing FASB accounting standards and guidance were
superseded by the ASC.  Instead of issuing new accounting standards in
the form of statements, FASB staff positions and Emerging Issues Task Force
abstracts, the FASB now issues Accounting Standards Updates that update the
Codification.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws continue
to be additional sources of authoritative GAAP for SEC registrants.




In
December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) –
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU 2009-17 changes how a reporting entity determines
when an entity that is insufficiently capitalized or is not controller through
voting (or similar rights) should be consolidated. ASU 2009-17 also requires a
reporting entity to provide additional disclosures about its involvement with
variable interest entities and any significant changes in risk exposure due to
that involvement. ASU 2009-17 is effective at the start of a reporting entity’s
first fiscal year beginning after November 15, 2009, or January 1,
2010, for a calendar year entity. Early adoption is not permitted. We do not
expect that the adoption of ASU 2009-17 will have a material impact on our
financial position, results of operations or cash flows.




NOTE
6 - PROPERTY AND EQUIPMENT




Property
and equipment and accumulated depreciation and amortization are as follows (in
thousands):




December 31,2009
                  
                  
                  2008Land
                  
                  $
                  250
                  
                  
                  $
                  -Buildings
                  
                  
                  2
                  
                  
                  
                  2Medical
      equipment
                  
                  
                  200,471
                  
                  
                  
                  173,884Office
      equipment, furniture and fixtures
                  
                  
                  56,134
                  
                  
                  
                  49,676Leasehold
      improvements
                  
                  
                  101,904
                  
                  
                  
                  93,573Equipment
      under capital lease
                  
                  
                  57,421
                  
                  
                  
                  59,543416,182
                  
                  
                  
                  376,678Accumulated
      depreciation and amortization
                  
                  
                  (233,611
                  )
                  
                  
                  (183,574
                  )$
                  182,571
                  
                  
                  $
                  193,104





Depreciation
and amortization expense on property and equipment, including amortization of
equipment under capital leases, for the years ended December 31, 2009, 2008
and 2007 $50.6 million, $49.4 million and $40.7 million,
respectively.


-65-




NOTE
7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES (IN THOUSANDS)





December 31,2009
                  
                  
                  2008Accounts
      payable
                  
                  $
                  17,717
                  
                  
                  $
                  26,071Accrued
      expenses
                  
                  
                  32,305
                  
                  
                  
                  35,449Accrued
      payroll and vacation
                  
                  
                  13,153
                  
                  
                  
                  11,506Accrued
      professional fees
                  
                  
                  6,466
                  
                  
                  
                  8,149Total
                  
                  $
                  69,641
                  
                  
                  $
                  81,175




NOTE
8 - NOTES PAYABLE, LINE OF CREDIT AND CAPITAL LEASES




On
November 15, 2006, we entered into a $405 million senior secured credit
facility with GE Commercial Finance Healthcare Financial Services (the
“November 2006 Credit Facility”). This facility was used to finance our
acquisition of Radiologix, refinance existing indebtedness, pay transaction
costs and expenses relating to our acquisition of Radiologix, and provide
financing for working capital needs post-acquisition.  The facility
consists of a revolving credit facility of up to $45 million, a $225 million
first lien Term Loan and a $135 million second lien Term Loan.  The
first lien term loan has a term of six years and the second lien term loan has a
term of six and one-half years. Interest is payable on all loans initially at an
Index Rate plus the Applicable Index Margin, as defined. The Index Rate is
initially a floating rate equal to the higher of the rate quoted from time to
time by The Wall Street Journal as the “base rate on corporate loans posted by
at least 75% of the nation’s largest 30 banks” or the Federal Funds Rate plus 50
basis points. The Applicable Index Margin on each of the revolving credit
facility and the term loan is 2% and on the second lien term loan is 6%. We may
request that the interest rate instead be based on LIBOR plus the Applicable
LIBOR Margin, which is 3.5% for the revolving credit facility and the term loan
and 7.5% for the second lien term loan. The credit facility includes customary
covenants for a facility of this type, including minimum fixed charge coverage
ratio, maximum total leverage ratio, maximum senior leverage ratio, limitations
on indebtedness, contingent obligations, liens, capital expenditures, lease
obligations, mergers and acquisitions, asset sales, dividends and distributions,
redemption or repurchase of equity interests, subordinated debt payments and
modifications, loans and investments, transactions with affiliates, changes of
control, and payment of consulting and management fees.




On August
23, 2007, we secured an incremental $35 million (“Incremental Facility”) as part
of our existing credit facilities with GE Commercial Finance Healthcare
Financial Services.  The Incremental Facility consists of an
additional $25 million as part of our first lien Term Loan and $10 million of
additional capacity under our existing revolving line of credit bringing the
total capacity to $55 million.  As of December 31, 2008, the
Company qualified to borrow up to $34 million on the revolver. The Incremental
Facility will be used to fund certain identified strategic initiatives and for
general corporate purposes.




On
February 22, 2008, we secured a second incremental $35 million (“Second
Incremental Facility”) of capacity as part of our existing credit facilities
with GE Commercial Finance Healthcare Financial Services.  The Second
Incremental Facility consists of an additional $35 million as part of our second
lien term loan and the first lien term loan or revolving credit facility may be
increased by up to an additional $40 million sometime in the
future.  As part of the transaction, partly due to the drop in LIBOR
of over 2.00% since the credit facilities were established in
November 2006, we increased the Applicable LIBOR Margin to 4.25% for the
revolving credit facility and first lien term loan and to 9.0% for the second
lien term loan.  The additions to our existing credit facilities are
intended to provide capital for near-term opportunities and future
expansion.




As part
of our senior secured credit facility financing, we swapped 50% of the aggregate
principal amount of the facilities to a floating rate within 90 days of the
closing. On April 11, 2006, effective April 28, 2006, we entered into an
interest rate swap on $73.0 million fixing the LIBOR rate of interest at 5.47%
for a period of three years. This swap was made in conjunction with the $161.0
million credit facility that closed on March 9, 2006. In addition, on
November 15, 2006, we entered into an interest rate swap, designated as a
cash flow hedge, on $107.0 million fixing the LIBOR rate of interest at 5.02%
for a period of three years, and on November 28, 2006, we entered into an
interest rate swap, also designated as a cash flow hedge, on $90.0 million
fixing the LIBOR rate of interest at 5.03% for a period of three years.
Previously, the interest rate on the above $270.0 million portion of the credit
facility was based upon a spread over LIBOR which floats with market
conditions.




During
the first quarter of 2009 we modified the two interest rate swaps designated as
cash flow hedges mentioned above.  The modifications, commonly
referred to as “blend and extends”, extended the maturity of, and re-priced
these two interest rate swaps originally executed in 2006, for an additional 36
months, resulting in an estimated annualized cash interest expense savings of
$2.9 million.


-66-




On the
LIBOR hedge modification for a notional amount of $107 million of LIBOR
exposure, the Company on January 29, 2009 replaced the existing fixed LIBOR
rate of 5.02% with a new rate of 3.47% maturing on November 15,
2012.  On the second LIBOR hedge modification for a notional amount of
$90 million of LIBOR exposure, the Company on February 5, 2009 replaced the
existing fixed LIBOR rate of 5.03% with a new rate of 3.61% also maturing on
November 15, 2012. Both modified interest swaps have been designated as
cash flow hedges.




As part
of these modifications, the negative fair values of the original interest rate
swaps, as well as a certain amount of accrued interest, associated with the
original cash flow hedges were incorporated into the fair values of the new
modified cash flow hedges.   The related Accumulated Other
Comprehensive Loss (AOCL) associated with the negative fair values of the
original cash flow hedges on their dates of modification, which totaled $6.1
million, was amortized on a straight-line basis to interest expense through
November 15, 2009, the maturity date of the original cash flow
hedges.




We
document our risk management strategy and hedge effectiveness at the inception
of the hedge, and, unless the instrument qualifies for the short-cut method of
hedge accounting, over the term of each hedging relationship. Our use of
derivative financial instruments is limited to interest rate swaps, the purpose
of which is to hedge the cash flows of variable-rate
indebtedness.   See Note 10 for more detail regarding our
accounting treatment of interest rate swaps.




Notes
payable, line of credit and capital lease obligations consist of the following
(in thousands):





December 31,2009
                                
                                
                                2008Revolving
      lines of credit
                                
                                $
                                -
                                
                                
                                $
                                1,742Notes payable at interest rates
      ranging from 8.8% to 13.5%,due through 2013, collateralized
      by medical equipment
                                
                                
                                423,626
                                
                                
                                
                                425,236Obligations under capital leases
      at interest rates rangingfrom 9.1% to 13.0%, due through
      2010, collateralized bymedical and office
      equipment
                                
                                
                                27,689
                                
                                
                                
                                39,302451,315
                                
                                
                                
                                466,280Less:
      current portion
                                
                                
                                (21,048
                                )
                                
                                
                                (20,565
                                )$
                                430,267
                                
                                
                                $
                                445,715




The
following is a listing of annual principal maturities of notes payable exclusive
of capital leases and repayments on our revolving credit facilities for years
ending December 31 (in thousands):




2010
                        
                        $
                        6,9272011
                        
                        
                        7,2072012
                        
                        
                        239,0972013
                        
                        
                        170,395$
                        423,626




We lease
equipment under capital lease arrangements.  Future minimum lease
payments under capital leases for years ending December 31 (in thousands)
is as follows:


-67-




2010
                              
                              $
                              16,0192011
                              
                              
                              9,5972012
                              
                              
                              4,2422013
                              
                              
                              8102014
                              
                              
                              32Total
      minimum payments
                              
                              
                              30,700Amount
      representing interest
                              
                              
                              (3,011
                              )Present
      value of net minimumlease
      payments
                              
                              
                              27,689Less
      current portion
                              
                              
                              (14,121
                              )Long-term
      portion
                              
                              $
                              13,568




NOTE
9 – DERIVATIVE INSTRUMENTS




We are
exposed to certain risks relating to our ongoing business
operations.  The primary risk managed by using derivative instruments
is interest rate risk.  We have entered into interest rate swap
agreements to manage interest rate risk exposure.  The interest rate
swap agreements utilized by us effectively modifies our exposure to interest
rate risk by converting our floating-rate debt to a fixed rate basis during the
period of the interest rate swap, thus reducing the impact of interest-rate
changes on future interest expense.




We
designate our interest rate swaps as cash flow hedges of floating-rate
borrowings.  For interest rate swaps that are designated and qualify
as a cash flow hedge (i.e., hedging the exposure to variability in expected
future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is initially reported
as a component of other comprehensive income, then reclassified into earnings in
the same line item associated with the forecasted transaction and in the same
period or periods during which the hedged transaction affects earnings (e.g., in
“interest expense” when the hedged transactions are interest cash flows
associated with floating-rate debt).  The remaining gain or loss on
the derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any (i.e., the ineffectiveness
portion), or hedge components excluded from the assessment of effectiveness, are
recognized in the statement of operations during the current
period.




As part
of our senior secured credit facility financing, we swapped 50% of the aggregate
principal amount of the facilities to a floating rate within 90 days of the
closing.  On April 11, 2006, effective April 28, 2006, we entered into
an interest rate swap on $73.0 million fixing the LIBOR rate of interest at
5.47% for a period of three years.  This swap was made in conjunction
with the $161.0 million credit facility that closed on March 9, 2006. In
addition, on November 15, 2006, we entered into an interest rate swap,
designated as a cash flow hedge, on $107.0 million fixing the LIBOR rate of
interest at 5.02% for a period of three years, and on November 28, 2006, we
entered into an interest rate swap, also designated as a cash flow hedge, on
$90.0 million fixing the LIBOR rate of interest at 5.03% for a period of three
years.  Previously, the interest rate on the above $270.0 million
portion of the credit facility was based upon a spread over LIBOR which floats
with market conditions.




During
the first quarter of 2009 we modified the two interest rate swaps designated as
cash flow hedges mentioned above.  The modifications, commonly
referred to as “blend and extends”, extended the maturity of, and re-priced
these two interest rate swaps originally executed in 2006, for an additional 36
months, resulting in an estimated annualized cash interest expense savings of
$2.9 million.




On the
LIBOR hedge modification for a notional amount of $107 million of LIBOR
exposure, the Company on January 29, 2009 replaced the existing fixed LIBOR
rate of 5.02% with a new rate of 3.47% maturing on November 15,
2012.  On the second LIBOR hedge modification for a notional amount of
$90 million of LIBOR exposure, the Company on February 5, 2009 replaced the
existing fixed LIBOR rate of 5.03% with a new rate of 3.62% also maturing on
November 15, 2012. Both modified interest swaps have been designated as
cash flow hedges.




As part
of these modifications, the negative fair values of the original interest rate
swaps, as well as a certain amount of accrued interest, associated with the
original cash flow hedges were incorporated into the fair values of the new
modified cash flow hedges.   The related Accumulated Other
Comprehensive Loss (AOCL) associated with the negative fair values of the
original cash flow hedges on their dates of modification, which totaled $6.1
million, was amortized on a straight-line basis to interest expense through
November 15, 2009, the maturity date of the original cash flow
hedges.


-68-




We
document our risk management strategy and hedge effectiveness at the inception
of the hedge, and, unless the instrument qualifies for the short-cut method of
hedge accounting, over the term of each hedging relationship. Our use of
derivative financial instruments is limited to interest rate swaps, the purpose
of which is to hedge the cash flows of variable-rate indebtedness. We do not
hold or issue derivative financial instruments for speculative purposes. In
accordance with ASC Topic 815, derivatives that have been designated and qualify
as cash flow hedging instruments are reported at fair value. The gain or loss on
the effective portion of the hedge (i.e., change in fair value) is initially
reported as a component of accumulated other comprehensive loss in the Company’s
Consolidated Statement of Stockholders’ Equity Deficit. The remaining gain or
loss, if any, is recognized currently in earnings.




A tabular
presentation of the fair value of derivative instruments as of December 31,
2009 is as follows (amounts in thousands):




Balance Sheet Location
                
                Fair Value – Asset (Liability)
                  DerivativesDerivatives
      designated as hedging instrumentsInterest
      rate contracts
                Other
      non-current liabilities
                
                $
                (8,901
                )




A tabular
presentation of the effect of derivative instruments on our statement of
operations is as follows (amounts in thousands):




For the year Ended December 31, 2009Cash Flow Hedging
                            Relationships
                          
                          Amount of Gain
                            (Loss) Recognized
                            in OCI on
                            Derivative
                            (Effective Portion)
                          
                          Location of Gain
                            (Loss) Reclassified
                            from Accumulated
                            OCI into Income
                            (Effective Portion)
                          
                          Amount of Gain
                            (Loss) Recognized in
                            OCI During the
                            Term of the Hedge
                            Relationship
                            Reclassified into
                            Income (Effective
                            Portion)
                          
                          Location of Gain (Loss)
                            Recognized in OCI
                            During the Term of the
                            Hedge Relationship
                            Reclassified into Income
                            (Effective Portion)Interest
      rate contracts
                          
                          $
                          (1,311
                          )
                          Interest
      income/
                            (expense)
                          
                          $
                          (6,119
                          )*
                          Interest
      income/(expense)




*    Amortization
of OCI associated with the original cash flow hedges prior to modification (see
discussion above).




NOTE
10 – INCOME TAXES
  Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial and income tax
reporting purposes and operating loss carryforwards.  For the years
ended December 31, 2009, 2008 and 2007, we recognized $443,000, $151,000
and $337,000, respectively, of state income tax primarily  related to
profitable imaging centers.
  Years Ended
                      December 31,2009
                    
                    
                    2008
                    
                    
                    2007Federal
      tax
                    
                    
                    34.00
                    %
                    
                    
                    34.00
                    %
                    
                    
                    34.00
                    %State
      franchise tax, net of federal benefit
                    
                    
                    -16.03
                    %
                    
                    
                    -1.26
                    %
                    
                    
                    -2.12
                    %Non
      deductible expenses
                    
                    
                    -2.47
                    %
                    
                    
                    -1.44
                    %
                    
                    
                    -1.14
                    %Changes
      in valuation allowance
                    
                    
                    -39.78
                    %
                    
                    
                    -32.56
                    %
                    
                    
                    -32.86
                    %Income
      tax expense
                    
                    
                    -24.28
                    %
                    
                    
                    -1.26
                    %
                    
                    
                    -2.12
                    %




-69-








Deferred Tax Assets &
      Liabilities:December 31,2009
                                      
                                      
                                      2008Deferred
      tax assets:Net
      operating losses
                                      
                                      $
                                      67,671
                                      
                                      
                                      $
                                      68,860Accrued
      expenses
                                      
                                      
                                      6,232
                                      
                                      
                                      
                                      5,270Unfavorable
      contract liability
                                      
                                      
                                      3,256
                                      
                                      
                                      
                                      3,647Equity
      compensation
                                      
                                      
                                      3,701
                                      
                                      
                                      
                                      2,296Allowance
      for doubtful accounts
                                      
                                      
                                      1,823
                                      
                                      
                                      
                                      1,510Other
                                      
                                      
                                      370
                                      
                                      
                                      
                                      498Valuation
      Allowance
                                      
                                      
                                      (55,268
                                      )
                                      
                                      
                                      (57,407
                                      )Total
      Deferred Tax Assets
                                      
                                      $
                                      27,785
                                      
                                      
                                      $
                                      24,674Deferred
      tax liabilities:Property
      Plant & Equipment
                                      
                                      
                                      (10,006
                                      )
                                      
                                      
                                      (7,421
                                      )Goodwill
                                      
                                      
                                      (9,239
                                      )
                                      
                                      
                                      (8,411
                                      )Intangibles
                                      
                                      
                                      (8,461
                                      )
                                      
                                      
                                      (8,619
                                      )Other
                                      
                                      
                                      (356
                                      )
                                      
                                      
                                      (500
                                      )Total
      Deferred Tax Liabilities
                                      
                                      $
                                      (28,062
                                      )
                                      
                                      $
                                      (24,951
                                      )Net
      deferred tax Asset (Liability)
                                      
                                      $
                                      (277
                                      )
                                      
                                      $
                                      (277
                                      )
  As of
December 31, 2009, we had federal and state net operating loss
carryforwards of approximately $181.5 million and $118.1 million, respectively,
which expire at various intervals from the years 2010 to 2029.  As of
December 31, 2009, $17.9 million of our federal net operating loss
carryforwards acquired in connection with the 1998 acquisition of Diagnostic
Imaging Services, Inc. and the 2006 acquisition of Radiologix Inc. were subject
to limitations related to their utilization under Section 382 of the Internal
Revenue Code. Future ownership changes as determined under Section 382 of the
Internal Revenue Code could further limit the utilization of net operating loss
carryforwards.  Realization of deferred tax assets is dependent upon
future earnings, if any, the timing and amount of which are
uncertain.  Accordingly, the net deferred tax assets have been fully
offset by a valuation allowance.  Cumulative excess tax benefits of
$3.9 million, related to the exercise of nonqualified stock options, will be
recorded in equity when realized.
  We
consider all evidence available when determining whether deferred tax assets are
more likely-than-not to be realized, including tax planning strategies that
would be employed to prevent an NOL from expiring unutilized. As of
December 31, 2009, we have determined that deferred tax assets of $27.8
million are more-likely than not to be realized. We have also determined that
net deferred tax liabilities of $10.0 million relate to goodwill that has an
indefinite life.
  For the
next five years, and thereafter, federal net operating loss carryforwards expire
as follows (in thousands):


-70-




Total Net Operating
                              
                              
                              Amount SubjectYear Ended
                              
                              Loss Carryforwards
                              
                              
                              to 382 limitation2010
                              
                              
                              13,283
                              
                              
                              
                              1,7372011
                              
                              
                              -
                              
                              
                              
                              -2012
                              
                              
                              -
                              
                              
                              
                              -2013
                              
                              
                              -
                              
                              
                              
                              -2014
                              
                              
                              -
                              
                              
                              
                              -Thereafter
                              
                              
                              168,262
                              
                              
                              
                              16,195$
                              181,545
                              
                              
                              $
                              17,932


NOTE
11 – STOCK-BASED COMPENSATION





Stock
Incentive Plans





We have
two long-term incentive plans that currently have outstanding stock options
which we refer to as the 2000 Plan and the 2006 Plan. The 2000 Plan was
terminated as to future grants when the 2006 Plan was approved by the
stockholders in 2006. We have reserved for issuance under the 2006 Plan
6,500,000 shares of common stock. Certain options granted under the 2006 Plan to
employees are intended to qualify as incentive stock options under existing tax
regulations. In addition, we issue non-qualified stock options and warrants
under the 2006 Plan from time to time to non-employees, in connection with
acquisitions and for other purposes and we may also issue stock under the Plan.
Stock options and warrants generally vest over two to five years and expire five
to ten years from date of grant.




As of
December 31, 2009, 2,133,584, or approximately 53.9%, of all the
outstanding stock options and warrants under our option plans are fully
vested.  During the year ended December 31, 2009, we granted
options and warrants to acquire 1,733,750 shares of common stock.




We have
issued warrants outside the Plan under various types of arrangements to
employees, in conjunction with debt financing and in exchange for outside
services.  All warrants issued after our February 2007 listing on the
NASDAQ Global Market have been characterized as awards under the 2006
Plan.  All warrants outside the Plan have been issued with an exercise
price equal to the fair market value of the underlying common stock on the date
of grant. The warrants expire from five to seven years from the date of
grant.  Vesting terms are determined by the board of directors or the
compensation committee of the board of directors at the date of
grant.




As of
December 31, 2009, 2,614,566, or approximately 85.5%, of all the
outstanding warrants outside the 2006 Plan are fully
vested.   During the year ended December 31, 2009, we did
not grant any warrants outside the 2006 Plan.




The
following tables illustrate the impact of equity-based compensation on reported
amounts (in thousands except per share data):




For the Years Ended December 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007Impact of Stock-Based CompensationAs Reported
                                        
                                        
                                        Comp.
                                        
                                        
                                        AsReported
                                        
                                        
                                        Comp.
                                        
                                        
                                        As Reported
                                        
                                        
                                        Comp.Income
      from operations
                                        
                                        $
                                        38,857
                                        
                                        
                                        $
                                        (3,607
                                        )
                                        
                                        $
                                        29,287
                                        
                                        
                                        $
                                        (2,902
                                        )
                                        
                                        $
                                        19,272
                                        
                                        
                                        $
                                        (3,313
                                        )Net
      loss attributable to RadNet, Inc.’scommon
      stockholders before income taxes
                                        
                                        $
                                        (1,824
                                        )
                                        
                                        $
                                        (3,607
                                        )
                                        
                                        $
                                        (12,685
                                        )
                                        
                                        $
                                        (2,902
                                        )
                                        
                                        $
                                        (17,794
                                        )
                                        
                                        $
                                        (3,313
                                        )Net
      loss attributable to RadNet, Inc.’scommon
      stockholders
                                        
                                        $
                                        (2,267
                                        )
                                        
                                        $
                                        (3,607
                                        )
                                        
                                        $
                                        (12,836
                                        )
                                        
                                        $
                                        (2,902
                                        )
                                        
                                        $
                                        (18,131
                                        )
                                        
                                        $
                                        (3,313
                                        )Basic
      and diluted net loss per shareattributable
      to RadNet, Inc.’s commonstockholders
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.10
                                        )
                                        
                                        $
                                        (0.36
                                        )
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (0.52
                                        )
                                        
                                        $
                                        (0.10
                                        )Net
      diluted earnings per share attributableto
      RadNet, Inc.’s common stockholders
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.10
                                        )
                                        
                                        $
                                        (0.36
                                        )
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (0.52
                                        )
                                        
                                        $
                                        (0.10
                                        )




-71-


The following summarizes all of our
option and warrant transactions in 2009:


Weighted
      AverageWeighted
      Average
                                      
                                      
                                      Remaining
                                      
                                      
                                      AggregateOutstanding
      Options and Warrants
                                        Under
      the 2006 Plan
                                      
                                      Shares
                                      
                                      
                                      Exercise
      price
                                        PerCommon
      Share
                                      
                                      
                                      Contractual
      Life
                                        (in
      years)
                                      
                                      
                                      Intrinsic
                                        ValueBalance,
      December 31, 2008
                                      
                                      
                                      2,451,000
                                      
                                      
                                      $
                                      5.44Granted
                                      
                                      
                                      1,733,750
                                      
                                      
                                      
                                      2.41Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Canceled
      or expired
                                      
                                      
                                      (225,000
                                      )
                                      
                                      
                                      4.72Balance,
      December 31, 2009
                                      
                                      
                                      3,959,750
                                      
                                      
                                      
                                      4.15
                                      
                                      
                                      
                                      4.13
                                      
                                      
                                      $
                                      226,770Exercisable
      at December 31, 2009
                                      
                                      
                                      2,133,584
                                      
                                      
                                      
                                      4.09
                                      
                                      
                                      
                                      3.96
                                      
                                      
                                      
                                      226,770




Weighted AverageWeighted Average
                                        
                                        
                                        Remaining
                                        
                                        
                                        AggregateNon-Plan
                                        
                                        
                                        
                                        
                                        Exercise price
                                        
                                        
                                        Contractual Life
                                        
                                        
                                        IntrinsicOutstanding Warrants
                                        
                                        Shares
                                        
                                        
                                        Per Common Share
                                        
                                        
                                        (in years)
                                        
                                        
                                        ValueBalance,
      December 31, 2008
                                        
                                        
                                        3,432,898
                                        
                                        
                                        $
                                        2.07Granted
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Exercised
                                        
                                        
                                        (375,000
                                        )
                                        
                                        
                                        0.64Canceled
      or expired
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Balance,
      December 31, 2009
                                        
                                        
                                        3,057,898
                                        
                                        
                                        
                                        2.24
                                        
                                        
                                        
                                        2.32
                                        
                                        
                                        $
                                        1,847,266Exercisable
      at December 31, 2009
                                        
                                        
                                        2,614,566
                                        
                                        
                                        
                                        1.91
                                        
                                        
                                        
                                        2.35
                                        
                                        
                                        
                                        1,797,666




The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value (the difference between our closing stock price on
December 31, 2009 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holder had all
option holders exercised their options on December 31, 2009. Total
intrinsic value of options and warrants exercised during the year ended
December 31, 2009 was approximately $848,000.  As of
December 31, 2009, total unrecognized share-based compensation expense
related to non-vested employee awards was approximately $4.9 million, which is
expected to be recognized over a weighted average period of approximately 2.0
years.




The fair
value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model which takes into account as of the grant date
the exercise price and expected life of the option, the current price of the
underlying stock and its expected volatility, expected dividends on the stock
and the risk-free interest rate for the term of the option. The following is the
average of the data used to calculate the fair value:




Risk-free
                        
                        
                        Expected
                        
                        Expected
                        
                        
                        ExpectedInterest Rate
                        
                        
                        Life
                        
                        Volatility
                        
                        
                        DividendsDecember
      31, 2009
                        
                        
                        2.65
                        %
                        
                        3.1
      years
                        
                        
                        91.45
                        %
                        
                        
                        -December
      31, 2008
                        
                        
                        2.75
                        %
                        
                        3.41
      years
                        
                        
                        71.75
                        %
                        
                        
                        -December
      31, 2007
                        
                        
                        4.54
                        %
                        
                        4.19
      years
                        
                        
                        94.38
                        %
                        
                        
                        -


We have
determined the expected term assumption under the “Simplified Method” as defined
in ASC Topic 718, originally issued as SAB No. 110. The expected stock price
volatility is based on the historical volatility of our stock. The risk-free
interest rate is based on the U.S. Treasury yield in effect at the time of grant
with an equivalent remaining term. We have not paid dividends in the past and do
not currently plan to pay any dividends in the near future.





-72-


The
weighted-average grant date fair value of stock options and warrants granted
during the years ended December 31, 2009, 2008 and 2007 was $1.43, $2.54
and $3.43, respectively.




NOTE
12 – COMMITMENTS AND CONTINGENCIES





Leases– We lease various
operating facilities and certain medical equipment under operating leases with
renewal options expiring through 2025.  Certain leases contain renewal
options from two to ten years and escalation based either on the consumer price
index or fixed rent escalators.  The schedule below includes lease
renewals that are reasonably assured.  Leases with fixed rent
escalators are recorded on a straight-line basis.  We record deferred
rent for tenant leasehold improvement allowances received from a lessor and
amortize the deferred rent expense over the term of the lease
agreement.  Minimum annual payments under operating leases for future
years, including all options to extend, ending December 31 are as follows
(in thousands):




Facilities
                            
                            
                            Equipment
                            
                            
                            Total2010
                            
                            $
                            28,105
                            
                            
                            $
                            7,000
                            
                            
                            $
                            35,1052011
                            
                            
                            24,644
                            
                            
                            
                            5,949
                            
                            
                            
                            30,5932012
                            
                            
                            22,247
                            
                            
                            
                            4,169
                            
                            
                            
                            26,4162013
                            
                            
                            19,197
                            
                            
                            
                            2,605
                            
                            
                            
                            21,8022014
                            
                            
                            16,395
                            
                            
                            
                            146
                            
                            
                            
                            16,541Thereafter
                            
                            
                            59,931
                            
                            
                            
                            -
                            
                            
                            
                            59,931$
                            170,519
                            
                            
                            $
                            19,869
                            
                            
                            $
                            190,388




Total
rent expense, including equipment rentals, for the years ended December 31,
2009, 2008 and 2007 was $43.4 million, $43.5 million and $41.3 million,
respectively.




Salaries
and consulting agreements – We have a variety of arrangements for the payment of
professional and employment services.  The agreements provide for the
payment of professional fees to physicians under various arrangements, including
a percentage of revenue collected from 15.0% to 21.0%, fixed amounts per periods
and combinations thereof.




We have
an arrangement with GE Medical Systems under which it has agreed to be
responsible for the maintenance and repair of a majority of our equipment for a
fee that is based upon a percentage of our revenue, subject to a minimum
payment.  Net revenue is reduced by the provision for bad debts,
mobile PET revenue and other professional reading service revenue to obtain
adjusted net revenue.




We are
engaged from time to time in the defense of lawsuits arising out of the ordinary
course and conduct of our business. We believe that the outcome of our current
litigation will not have a material adverse impact on our business, financial
condition and results of operations.  However, we could be
subsequently named as a defendant in other lawsuits that could adversely affect
us.





NOTE
13 – EMPLOYEE BENEFIT PLAN





We
adopted a profit-sharing/savings plan pursuant to Section 401(k) of the Internal
Revenue Code that covers substantially all non-professional
employees.  Eligible employees may contribute on a tax-deferred basis
a percentage of compensation, up to the maximum allowable under tax
law.  Employee contributions vest immediately.  The plan
does not require a matching contribution by us.  There was no expense
for any periods presented in the report.




NOTE
14 – QUARTERLY RESULTS OF OPERATIONS (unaudited)





The
following table sets forth a summary of our unaudited quarterly operating
results for each of the last eight quarters in the years ended December 31,
2009 and 2008.  This quarterly data has been derived from our
unaudited consolidated interim financial statements which, in our opinion, have
been prepared on substantially the same basis as the audited financial
statements contained elsewhere in this report and include all normal recurring
adjustments necessary for a fair presentation of the financial information for
the periods presented. These unaudited quarterly results should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this report. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future period (in
thousands except for earnings per share).




-73-




2009 Quarter Ended
                      
                      
                      2008 Quarter EndedMar 31
                      
                      
                      June 30
                      
                      
                      Sept 30
                      
                      
                      Dec 31
                      
                      
                      Mar 31
                      
                      
                      June 30
                      
                      
                      Sept 30
                      
                      
                      Dec 31Statement
      of Operations Data:Net
      revenue
                      
                      $
                      128,003
                      
                      
                      $
                      131,146
                      
                      
                      $
                      133,404
                      
                      
                      $
                      131,815
                      
                      
                      $
                      113,897
                      
                      
                      $
                      126,559
                      
                      
                      $
                      130,902
                      
                      
                      $
                      127,457Total
      operating expenses
                      
                      
                      118,204
                      
                      
                      
                      120,527
                      
                      
                      
                      124,261
                      
                      
                      
                      121,132
                      
                      
                      
                      107,961
                      
                      
                      
                      119,011
                      
                      
                      
                      121,362
                      
                      
                      
                      121,194Total
      other expense
                      
                      
                      13,219
                      
                      
                      
                      13,370
                      
                      
                      
                      12,365
                      
                      
                      
                      11,478
                      
                      
                      
                      13,556
                      
                      
                      
                      12,495
                      
                      
                      
                      12,047
                      
                      
                      
                      13,562Equity
      in earnings of joint ventures
                      
                      
                      2,635
                      
                      
                      
                      2,453
                      
                      
                      
                      1,751
                      
                      
                      
                      1,617
                      
                      
                      
                      2,292
                      
                      
                      
                      2,837
                      
                      
                      
                      2,686
                      
                      
                      
                      1,976Income
      tax expense
                      
                      
                      37
                      
                      
                      
                      13
                      
                      
                      
                      231
                      
                      
                      
                      162
                      
                      
                      
                      123
                      
                      
                      
                      14
                      
                      
                      
                      14
                      
                      
                      
                      -Net
      income (loss)
                      
                      
                      (822
                      )
                      
                      
                      (311
                      )
                      
                      
                      (1,702
                      )
                      
                      
                      660
                      
                      
                      
                      (5,451
                      )
                      
                      
                      (2,124
                      )
                      
                      
                      165
                      
                      
                      
                      (5,323
                      )Net
      income attributable to noncontrollinginterests
                      
                      
                      20
                      
                      
                      
                      25
                      
                      
                      
                      24
                      
                      
                      
                      23
                      
                      
                      
                      24
                      
                      
                      
                      25
                      
                      
                      
                      27
                      
                      
                      
                      27Net
      income (loss) attributable to RadNet, Inc. common
    stockholders
                      
                      
                      (842
                      )
                      
                      
                      (336
                      )
                      
                      
                      (1,726
                      )
                      
                      
                      637
                      
                      
                      
                      (5,475
                      )
                      
                      
                      (2,149
                      )
                      
                      
                      138
                      
                      
                      
                      (5,350
                      )Basic
      net income (loss) per shareattributable
      to RadNet, Inc.common
      stockholders
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      (0.05
                      )
                      
                      
                      0.02
                      
                      
                      
                      (0.15
                      )
                      
                      
                      (0.06
                      )
                      
                      
                      0.00
                      
                      
                      
                      (0.15
                      )Diluted
      net income (loss) pershare
      attributable to RadNet, Inc.common
      stockholders
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )
                      
                      
                      (0.05
                      )
                      
                      
                      0.02
                      
                      
                      
                      (0.15
                      )
                      
                      
                      (0.06
                      )
                      
                      
                      0.00
                      
                      
                      
                      (0.15
                      )Weighted
      average shares outstandingBasic
                      
                      
                      35,916
                      
                      
                      
                      35,924
                      
                      
                      
                      36,105
                      
                      
                      
                      36,238
                      
                      
                      
                      35,561
                      
                      
                      
                      35,672
                      
                      
                      
                      35,760
                      
                      
                      
                      35,875Diluted
                      
                      
                      35,916
                      
                      
                      
                      35,924
                      
                      
                      
                      36,105
                      
                      
                      
                      37,418
                      
                      
                      
                      35,561
                      
                      
                      
                      35,672
                      
                      
                      
                      37,015
                      
                      
                      
                      35,875




NOTE
15 – RELATED PARTY TRANSACTIONS





On June
1, 2009 we entered into a 10 year operating lease for a building at one of our
imaging centers located in Wilmington, Delaware in which our Senior Vice
President of Materials Management is a 50% owner.  The monthly rent
under this operating lease is approximately $25,000.   We believe
that the monthly lease amount is in line with similar 10 year lease contracts
available for comparable buildings in the area.




NOTE
16 – SUBSEQUENT EVENTS




On
January 1, 2010, we completed the acquisition of Union Imaging Center in Union,
New Jersey from Modern Medical Modalities Corporation for approximately $5.4
million and the issuance of 75,000 shares of RadNet, Inc. common stock valued at
approximately $161,000 as of December 31, 2009.  The center operates
imaging modalities including MRI, CT, PET/CT, mammography, ultrasound, nuclear
medicine and X-ray.




On February 28, 2010, the Company
amended and extended for approximately five additional years its arrangement
with GE Medical Systems under which GE Medical Systems has agreed to be
responsible for the maintenance and repair of a majority of the Company’s
equipment through 2017.





On March
1, 2010, we completed the acquisition of Anaheim Open MRI in Anaheim, CA for
cash consideration of $0.9 million.  The facility operates MRI, CT,
ultrasound and X-ray, and has been rebranded as Anaheim Advanced
Imaging.




On
March 12, 2010, as part of a plan to refinance our existing revolving line of
credit, term loan B and second lien credit facility, that matures in 2011, 2012
and 2013, respectively, together with Radnet Management, Inc., our wholly owned
subsidiary, we entered into a commitment  and term loan engagement
letter (or, the Commitment Letter) with Barclays Capital (the investment banking
division of Barclays Bank PLC), Deutsche Bank Securities Inc., Deutsche Bank
Trust Company Americas, General Electric Capital Corporation, GE Capital
Markets, Inc., Royal Bank of Canada, RBC Capital Markets (the brand name for the
capital markets activities of Royal Bank of Canada and its affiliates) and
Jefferies Finance LLC (together, the Banks).  Under the Commitment
Letter, these Banks have severally committed, subject to the terms and
conditions set forth in the Commitment Letter, to provide us with proposed new
$100 million senior secured revolving credit facility expiring on the fifth
anniversary of the closing of the financing (or, the new revolving credit
facility), and we have agreed to seek commitments for a new $275 million senior
secured term loan maturing on the sixth anniversary of the closing of the
financing (or, the new term loan credit facility and together with the new
revolving credit facility, the new senior secured credit
facilities).
  -74-




In addition, we intend to offer
approximately $210 million aggregate principal amount of senior unsecured debt
securities due 2018 (or, the notes) to qualified institutional buyers in a
private placement, subject to market and other conditions. The notes will be
issued by Radnet Management, Inc., our wholly-owned subsidiary, and guaranteed
by us and the subsidiaries that guarantee our new senior secured credit
facilities, on a full and unconditional basis.
 
 We expect to close the senior note
issuance and the new senior secured credit facilities concurrently in April
2010, and the closing of each would be conditioned upon the closing of the
other.


Also, on March 15, 2010, we
announced that we had entered into letters of intent to acquire the business of
the Truxton Medical Group in Bakersfield, California, and the New Jersey
operating subsidiary of Health Diagnostics, the cash consideration for which
will be financed from a portion of the net proceeds of the New Credit Facilities
and the notes.  We expect that aggregate consideration for the target
acquisitions will be approximately $24.5 million, plus the issuance of 375,000
shares of our common stock. The
acquisitions are subject to the execution of definitive agreements and customary
closing conditions.


-75-


Item 9.
            Changes In and
      Disagreements with Accountants on Accounting and Financial
      Disclosure





None.




Item 9A.
            Controls and
      Procedures





Disclosure
Controls and Procedures





Our
disclosure controls and procedures are designed to provide reasonable assurances
that material information related to our company is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms, and that such information is accumulated and reported to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.




We have
performed an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures, as defined under
the Securities Exchange Act of 1934. Based on that evaluation, our management,
including our Chief Executive Officer, and Chief Financial Officer, concluded
that, effective as of December 31, 2009, our disclosure controls and procedures
were at that “reasonable assurance” level.




Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer, and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2009 based on the guidelines
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our internal control over
financial reporting includes policies and procedures that provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles GAAP.




Based on
the results of our evaluation, our management concluded that our internal
control over financial reporting was effective as of December 31, 2009. We
reviewed the results of management’s assessment with our Audit
Committee.




The
effectiveness of the Company’s internal control over financial reporting has
been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report appearing on the page immediately
following, which expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31,
2009.




Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during the last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


-76-


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders of


RadNet,
Inc.





We
have audited RadNet Inc. and subsidiaries' (“RadNet’s”) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). RadNet’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying “Management’s Annual Report on Internal
Control over Financial Reporting.”  Our responsibility is to express
an opinion on RadNet’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, RadNet, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO
criteria.





We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated balance sheets of
RadNet, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of operations, equity deficit, and cash flows
for each of the three years in the period ended December 31, 2009 of RadNet,
Inc. and subsidiaries and our report dated March 15, 2010 expressed an
unqualified opinion thereon.


/s/
      Ernst & Young LLP





Los
Angeles, California


March 15,
2010


-77-




Item 9B
              Other
      Information
 
 Commitment
and Term Loan Engagement Letter.
  Overview.  On March
12, 2010, RadNet Management, Inc. (or the “Borrower”) confirmed its intent to
obtain $375 million of senior secured first lien bank financing pursuant to the
Commitment and Term Loan Engagement Letter described below.  The
following summary of the material terms of the Commitment and Term Loan
Engagement Letter, dated as of March 12, 2010 (the “Commitment Letter”), is
qualified in its entirety by the terms of the actual Commitment Letter, which is
filed as exhibit 10.30 to this annual report.  The following summary
may not contain all of the information about the Commitment Letter that is
important to you.  We encourage you to read the Commitment Letter
carefully and in its entirety.  The foregoing are forward-looking
statements subject to known and unknown risks.
  Subject
to the terms and conditions set forth in the Commitment Letter, Barclays Bank
PLC (“Barclays Bank”), Deutsche Bank Trust Company Americas, General Electric
Capital Corporation, Royal Bank of Canada and Jefferies Finance LLC
(collectively referred to herein as the “Lenders”) have committed severally (but
not jointly) to provide to the Borrower a $100 million senior secured first lien
revolving credit facility expiring in April, 2015 (the “New Revolving Credit
Facility”).  The commitments are subject to certain conditions,
including, but not limited to, the Borrower having received commitments (from
institutional lenders reasonably acceptable to the Lenders and the other parties
to the Commitment Letter) to provide a senior secured first lien term loan
facility in an aggregate principal amount of at least $275 million, maturing in
April, 2016 (the “New Term Loan Credit Facility”).  We refer to the
New Term Loan Credit Facility and New Revolving Credit Facility collectively as
the “New Credit Facilities”.  Pursuant to the Commitment Letter,
Barclays Bank has agreed to act as sole and exclusive administrative agent and
collateral agent, and each of Barclays Capital (the investment banking division
of Barclays Bank), Deutsche Bank Securities Inc., GE Capital Markets, Inc. and
RBC Capital Markets has agreed to act as joint lead arrangers and joint
bookrunners (the “Joint Lead Arrangers”), in each case, in connection with the
New Credit Facilities.
  RadNet
Management, Inc. will be the borrower under the New Credit
Facilities.  The New Credit Facilities will be unconditionally
guaranteed by RadNet, Inc., all of the Borrower’s current and future domestic
subsidiaries as well as certain affiliates of the Borrower, including Beverly
Radiology Medical Group III, Beverly Radiology Medical Group, Inc., Breastlink
Medical Group, Inc. and ProNet Imaging Medical Group, Inc. (the
“Guarantors”).  The New Credit Facilities will be secured by perfected
first priority security interests in all of the Borrower’s and the Guarantors’
tangible and intangible assets, including, but not limited to, pledges of the
equity interests of the Borrower and all of its subsidiaries.
  The
consummation of the New Credit Facilities is contingent upon the issuance of
$210.0 million (or such lesser amount as may be otherwise agreed by the Borrower
and the Joint Lead Arrangers) in aggregate principal amount of unsecured senior
notes (the “Notes”) and upon the satisfaction of various other conditions as
described further below.
  The
Borrower intends to use the net proceeds of the borrowings under the New Credit
Facilities, together with the net proceeds from the issuance of the Notes, to
refinance existing debt and to finance certain acquisitions and to pay fees and
expenses related thereto.
  Interest
Rates.Interest on the outstanding balances under the New
Credit Facilities is payable on a quarterly basis for loans bearing interest
based upon the Base Rate; on the last day of selected interest periods for loans
bearing interest based upon the reserve adjusted Eurodollar Rate (and at the end
of every three months, in the case of interest periods longer than three
months); and upon prepayment, in each case payable in arrears.  With
respect to loans made under the New Term Loan Credit Facility and the New
Revolving Credit Facility, all amounts outstanding are expected to bear
interest, at the Borrower’s option, at a rate per annum equal to the Base
Rate plus 2.75-3.00%per
annum; or the reserve adjusted Eurodollar Rate plus 3.75-4.00%per annum.  At no
time will the Base Rate be deemed to be less than 3.00% per annum or the reserve
adjusted Eurodollar Rate be deemed to be less than 2.00% per annum.  As used
herein, the terms “Base Rate” and “Eurodollar Rate” will have meanings customary
and appropriate for financings of this type.
  Voluntary
Prepayments.The Borrower may optionally prepay loans in whole
or in part without premium or penalty; provided that loans bearing interest
based upon the reserve adjusted Eurodollar Rate will be prepayable only on the
last day of the applicable interest period unless the Borrower pays any related
breakage costs.  Voluntary prepayments of the New Term Loan Credit
Facility will be applied to scheduled amortization payments and the payment at
final maturity on a pro
rata basis and may not be reborrowed.
  Mandatory
Prepayments.  The Borrower would be required to prepay loans
upon certain events, including, but not limited to, (i) the receipt of net cash
proceeds from the sale or other disposition of any property or assets of RadNet,
Inc., the Borrower or any of its subsidiaries, (ii) the receipt of net cash
proceeds from insurance or condemnation proceeds paid on account of any loss of
any property or assets of RadNet, Inc., the Borrower or any of its subsidiaries,
(iii) the receipt of net cash proceeds from the incurrence of indebtedness by
RadNet, Inc., the Borrower or any of its subsidiaries (other than certain
indebtedness otherwise permitted under the loan documents relating to the New
Credit Facilities), (iv) 50% of annual “Consolidated Excess Cash Flow” (to be
defined in the loan documents relating to the New Credit Facilities) of RadNet,
Inc. and its subsidiaries, and (v) the receipt of net cash proceeds by RadNet,
Inc., the Borrower or any of its subsidiaries from “Extraordinary Receipts” (to
be defined in the loan documents relating to the New Credit
Facilities).


-78-




Conditions
Precedent.The Lenders’ several obligations to furnish the New
Credit Facilities are subject to closing conditions usual and customary for
financings of this kind generally, including, but not limited to, the closing of
the issuance of the Notes, the Borrower’s receipt of the proceeds of the Notes,
delivery of certain financial information, satisfaction of due diligence and
satisfactory delivery of other customary closing
documentation.




-79-


PART
III





Item
10.                Directors, Executive
Officers and Corporate Governance





The
information required by this item regarding the Company’s directors and
executive officers is incorporated herein by reference to the sections entitled
“Proposal 1 – Election Of Directors” and “Compensation of Directors and
Executive Officers” and “Corporate Governance – Board Committees – Section 16(a)
Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year (the
“Proxy Statement”).  Information regarding the Company’s executive
officers is set forth below.




The
Company adopted a code of financial ethics applicable to its chief executive
officer, chief financial officer, controller and other finance leaders, which is
a “code of ethics” as defined by applicable rules of the SEC.  This
code is publicly available on the Company’s web site at www.radnet.com.  If
the Company makes any amendments to this code other than technical,
administrative or other non-substantive amendments, or grants any waivers,
including implicit waivers, from a provision of this code to the Company’s chief
executive officer, chief financial officer or controller, the Company will
disclose the nature of the amendment or waiver, its effective date and to whom
it applies on its web site or in a report on Form 8-K filed with the
SEC.




Executive
Officers




Our
executive officers are:




Name
                    
                    Age
                    
                    OfficerSince
                    
                    PositionHoward
      G. Berger, M.D.
                    
                    64
                    
                    1992
                    
                    President
      and Chief Executive OfficerJohn
      V. Crues, III, M.D.
                    
                    60
                    
                    2000
                    
                    Medical
      DirectorStephen
      M. Forthuber
                    
                    49
                    
                    2006
                    
                    Executive
      Vice President and Chief Operating Officer-Eastern
    OperationsNorman
      R. Hames
                    
                    53
                    
                    1996
                    
                    Executive
      Vice President, Secretary, Chief Operating Officer-Western
      OperationsJeffrey
      L. Linden
                    
                    67
                    
                    2001
                    
                    Executive
      Vice President and General CounselMark
      D. Stolper
                    
                    38
                    
                    2004
                    
                    Executive
      Vice President and Chief Financial OfficerMichael
      N. Murdock
                    
                    55
                    
                    2007
                    
                    Executive
      Vice President and Chief Development
Officer





Howard G.
Berger, M.D. has served as President and Chief Executive Officer of our company
and its predecessor entities since 1987.  Dr. Berger is also the
president of the entities that own BRMG.  Dr. Berger has over 25 years
of experience in the development and management of healthcare
businesses.  He began his career in medicine at the University of
Illinois Medical School, is Board Certified in Nuclear Medicine and trained in
an Internal Medicine residency, as well as in a masters program in medical
physics in the University of California system.




John V.
Crues, III, M.D. is a world-renowned radiologist.  Dr. Crues has
served as our Vice President and Medical Director since 2000. Dr. Crues plays a
significant role as a musculoskeletal specialist for many of our patients as
well as a resource for physicians providing services at our
facilities.  Dr. Crues received his M.D. at Harvard University,
completed his internship at the University of Southern California in Internal
Medicine, and completed a residency at Cedars-Sinai in Internal Medicine and
Radiology.  Dr. Crues has authored numerous publications while
continuing to actively participate in radiological societies such as the
Radiological Society of North America, American College of Radiology, California
Radiological Society, International Society for Magnetic Resonance Medicine and
the International Skeletal Society.




Stephen
M. Forthuber became our Executive Vice President and Chief Operating Officer for
Eastern Operations subsequent to the Radiologix acquisition.  He
joined Radiologix in January 2000 as Regional Director of Operations,
Northeast.  From July 2002 until January 2005 he served as
Regional Vice President of Operations, Northeast and from February until
December 2005 he was Senior Vice President and Chief Development Officer
for Radiologix.  Prior to working at Radiologix, Mr. Forthuber was
employed from 1982 until 1999 by Per-Se Technologies, Inc. and its predecessor
companies, where he had significant physician practice management and radiology
operations responsibilities.




-80-




Norman R.
Hames has served as our Chief Operating Officer since 1996 and currently as our
Executive Vice President and Chief Operating Officer - Western
Operations.  Applying his 20 years of experience in the industry, Mr.
Hames oversees all aspects of facility operations.  His management
team, comprised of regional directors, managers and sales managers, are
responsible for responding to all of the day-to-day concerns of our facilities,
patients, payors and referring physicians.  Prior to joining our
company, Mr. Hames was President and Chief Executive Officer of his own company,
Diagnostic Imaging Services, Inc. (which we acquired), which owned and operated
14 multi-modality imaging facilities throughout Southern
California.  Mr. Hames gained his initial experience in operating
imaging centers for American Medical International, or AMI, and was responsible
for the development of AMI’s single and multi-modality imaging
centers.




Jeffrey
L. Linden joined us in 2001 and currently serves as our Executive Vice President
and General Counsel.  Prior to joining us, Mr. Linden had been engaged
in the private practice of law.  He has lectured before numerous
organizations on various topics, including the California State Bar, American
Society of Therapeutic Radiation Oncologists, California Radiological
Association, and National Radiology Business Managers Association.




Mark D.
Stolper has served as our Chief Financial Officer since 2004 and prior to that
was an independent member of our Board of Directors.  Prior to joining
us, he had diverse experiences in investment banking, private equity, venture
capital investing and operations.  Mr. Stolper began his career as a
member of the corporate finance group at Dillon, Read and Co., Inc., executing
mergers and acquisitions, public and private financings and private equity
investments with Saratoga Partners LLP, an affiliated principal investment group
of Dillon Read.  After Dillon Read, Mr. Stolper joined Archon Capital
Partners, which made private equity investments in media and entertainment
companies.  Mr. Stolper received his operating experience with Eastman
Kodak, where he was responsible for business development for Kodak’s
Entertainment Imaging subsidiary ($1.5 billion in sales).  Mr. Stolper
was also co-founder of Broadstream Capital Partners, a Los Angeles-based
investment banking firm focused on advising middle market companies engaged in
financing and merger and acquisition transactions.




Michael
N. Murdock has served as our Executive Vice President and Chief Development
Officer since 2007. Mr. Murdock has spent the majority of his career in senior
financial positions with health care companies, ranging in size from
venture-backed startups to multi-billion dollar corporations, including
positions with American Medical International (“AMI”) and its successor American
Medical Holding, Inc., a publicly traded owner and operator of acute care
facilities, that was acquired by National Medical Enterprises, now Tenet
Healthcare. From 1999 through 2004, Mr. Murdock served as Chief Financial
Officer of Dental One, a venture capital-backed owner and operator of 48 dental
practices in Texas, Arizona, Colorado and Utah. From 2005 to 2006, Mr. Murdock
served as Chief Financial Officer of Radiologix and joined the Company following
the Radiologix acquisition.  Mr. Murdock began his career in 1978 as
an auditor with Arthur Andersen after receiving a B.S. degree from California
State University, Northridge.




Our
officers are elected annually and serve at the discretion of the Board of
Directors. There are no family relationships among any of our officers and
directors.




Item
      11.
            Executive
      Compensation





The
information required by this item is incorporated by reference to the Proxy
Statement for the 2010 Annual Meeting of Stockholders to be filed with 120 days
after the end of the company’s fiscal year.




Item
      12.
            Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters





The
information as to Securities Authorized for Issuance under Equity Compensation
Plans and Related Stockholder Matters is incorporated by reference to the Proxy
Statement for the 2010 Annual Meeting of Stockholders to be filed within
120 days after the end of the company’s fiscal year.




Security
Ownership of Certain Beneficial Owners




The following table presents
information concerning the beneficial ownership of the shares of our common
stock as of December 31, 2009, by:




·
            each
      person we know to be the beneficial owner of 5% or more of our outstanding
      shares of common stock,




·
            each
      of our Named Executive Officers and directors,
  and




·
            all
      of our current executive officers and directors as a
  group.




-81-




Unless otherwise noted below, the
address of each beneficial owner listed in the table is c/o RadNet, Inc., 1510
Cotner Ave., Los Angeles, CA 90025.




We have determined beneficial ownership
in accordance with the rules of the SEC.  Except as indicated by the
footnotes below, we believe, based on the information furnished to us, that the
persons and entities named in the table below have sole voting and investment
power with respect to all shares of common stock that they beneficially own,
subject to applicable community property laws.




Applicable percentage ownership is
based on36,259,279
shares of common stock outstanding on December 31, 2009.  In computing
the number of shares of common stock beneficially owned by a person and the
percentage ownership of that person, we deemed as outstanding shares of common
stock subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of December 31, 2009.  We
did not deem these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person.




Name of Beneficial Owner
                                                
                                                Shares
                                                  Beneficially
                                                  Owned
                                                
                                                
                                                Percent of
                                                  Shares
                                                  Beneficially
                                                  OwnedHoward
      G. Berger, M.D.(1)
                                                
                                                
                                                6,505,140
                                                
                                                
                                                
                                                17.9
                                                %Marvin
      S. Cadwell
                                                
                                                
                                                125,178
                                                (2)
                                                
                                                
                                                
                                                *John
      v. Crues, III, M.D.
                                                
                                                
                                                773,262
                                                (3)
                                                
                                                
                                                2.1
                                                %Norman
      R. Hames
                                                
                                                
                                                1,347,898
                                                (4)
                                                
                                                
                                                3.7
                                                %Lawrence
      L. Levitt
                                                
                                                
                                                156,250
                                                (5)
                                                
                                                
                                                
                                                *Michael
      L. Sherman, M.D.
                                                
                                                
                                                155,065
                                                (6)
                                                
                                                
                                                
                                                *David
      L. Swartz
                                                
                                                
                                                191,250
                                                (7)
                                                
                                                
                                                
                                                *Jeffrey
      L. Linden
                                                
                                                
                                                985,000
                                                (8)
                                                
                                                
                                                2.7
                                                %Mark
      D. Stolper
                                                
                                                
                                                360,538
                                                (9)
                                                
                                                
                                                1
                                                %Stephen
      M. Forthuber
                                                
                                                
                                                391,667
                                                (10)
                                                
                                                
                                                1
                                                %Michael
      N. Murdock
                                                
                                                
                                                85,000
                                                (11)
                                                
                                                
                                                
                                                *All
      directors and executive officers as a group (11
    persons)
                                                
                                                
                                                11,076,298
                                                (12)
                                                
                                                
                                                30.5
                                                %




*
            Represents
      less than 1%.


**
            Subject
      to applicable community property statutes and except as otherwise noted,
      each holder named in the table has sole voting and investment power with
      respect to all shares of common stock shown as beneficially
      owned.


(1)
            As
      a result of his stock ownership and positions as president and director,
      Dr. Berger may be deemed to be a controlling person of our
      company.


(2)
            Beneficial
      ownership includes 106,250 shares subject to options exercisable within 60
      days of December 31, 2009.


(3)
            Beneficial
      ownership includes 350,000 shares subject to options and warrant
      exercisable within 60 days of December 31,
  2009.


(4)
            Beneficial
      ownership includes 1,322,898 shares subject to options and warrants
      exercisable within 60 days of December 31,
2009.


(5)
            Beneficial
      ownership includes 131,250 shares subject to options and warrants
      exercisable within 60 days of December 31,
2009.


(6)
            Beneficial
      ownership includes 106,250 shares subject to options exercisable within 60
      days of December 31, 2009.


(7)
            Beneficial
      ownership includes 156,250 shares subject to options and warrants
      exercisable within 60 days of December 31,
2009.


(8)
            Beneficial
      ownership includes 437,500 shares subject to options and warrants
      exercisable within 60 days of December 31,
2009.


(9)
            Beneficial
      ownership includes 283,334 shares subject to options and warrants
      exercisable within 60 days of December 31,
2009.


(10)
            Beneficial
      ownership includes 391,667 shares subject to options exercisable within 60
      days of December 31, 2009.


(11)
              Beneficial
      ownership includes 85,000 shares subject to options exercisable within 60
      days of December 31, 2009.(12)
              Beneficial
      ownership includes 3,370,399 shares subject to options and warrants
      exercisable within 60 days of December 31,
  2009.




-82-


Item
      13.
            Certain Relationships
      and Related Transactions, and Director
  Independence





Certain
Relationships and Related Transactions




Review and Approval of Related Party
Transactions




As
a matter of policy, the Board of Directors reviews any transaction in which we
are proposed to be a party, directly or indirectly, and any of the following
persons or entities is or is entitled to be a party, directly or indirectly, to
the transaction or any director has a material financial interest in the
transaction:  (i) any of our executive officers or any related person
of any such officer or a director, (ii) any person or entity of which the
executive officer or director or any related person is the owner of more than 5%
of the securities, (iii) any person or entity that controls one or more of the
persons specified in subparagraph (ii) or a person that is controlled by, or is
under common control with one or more of the persons specified in subparagraph
(ii), or (iv) an individual who is a general partner, principal or employer of a
director.  Additionally, any transaction which would be required to be
disclosed pursuant to Item 404 by Regulation S-K of the Regulations of the SEC
is reviewed by the Board of Directors.





Related Party Transactions




Howard G.
Berger, M.D. is our President and Chief Executive Officer, chair of our board of
directors, and owns approximately 18% of our outstanding common stock. Dr.
Berger also owns, indirectly, 99% of the equity interests in Beverly Radiology
Medical Group ("BRMG"). BRMG provides all of the professional medical services
at most of our California facilities under a management agreement and contracts
with various other independent physicians and physician groups to provide all of
the professional medical services at most of our other California facilities. We
obtain professional medical services from BRMG in California, rather than
providing such services directly or through subsidiaries, in order to comply
with California's prohibition against the corporate practice of medicine.
However, as a result of this close relationship with Dr. Berger and BRMG, we
believe that we are able to better ensure that professional medical services are
provided at our California facilities in a manner consistent with our needs and
expectations and those of our referring physicians, patients and payors than if
we obtained these services from unaffiliated practice groups.




Under
our management agreement with BRMG, which expires on January 1, 2014, BRMG pays
us, as compensation for the use of our facilities and equipment and for our
services, a percentage of the gross amounts collected for the professional
services it renders. The percentage, which was 79%, at December 31, 2009,
is adjusted annually, if necessary, to ensure that the parties receive fair
value for the services they render. In operation and historically, the annual
revenue of BRMG from all sources closely approximates its expenses, including
Dr. Berger's compensation, fees payable to us and amounts payable to third
parties. For administrative convenience and in order to avoid inconveniencing
and confusing our payors, a single bill is prepared for both the professional
medical services provided by the radiologists and our non-medical, or technical,
services, generating a receivable for BRMG. BRMG is a guarantor
under revolving credit facility with General Electric Capital
Corporation.




Dr. Crues
and Dr. Berger receive all or a portion of their salary from BRMG.





On June
1, 2009 we entered into a 10 year operating lease for a building at one of our
imaging centers located in Wilmington, Delaware in which our Senior Vice
President of Materials Management is a 50% owner.  The monthly rent
under this operating lease is approximately $25,000.  We believe that
the monthly lease amount is in line with similar 10 year lease contracts
available for comparable buildings in the area.




Director
Independence




The
information as to Director Independence is incorporated by reference to the
Proxy Statement for the 2010 Annual Meeting of Stockholders to be filed within
120 days after the end of the company’s fiscal year.




Item
      14.
            Principal Accountant
      Fees and Services





The
information required by this item is incorporated by reference to the sections
entitled “Independent Registered Public Accounting Firm Fees” and “Policy on
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the
Independent Registered Public Accounting Firm” in the Proxy
Statement.




-83-




PART
IV





Item
      15.               Exhibits
      andFinancialStatementSchedules
                            
                            PageNo.(a)
      Financial Statements – The following financial statements are filed
      herewith:Report
      of Independent Registered Public Accounting Firm
                            
                            50Consolidated Balance Sheets
                            
                            51Consolidated Statements of Operations
                            
                            52Consolidated Statements of Equity
      Deficit
                            
                            53Consolidated Statements of Cash Flows
                            
                            54Notes to Consolidated Financial Statements
                            
                            56
      to 75(b)
      Financial Statements Schedules




Schedules – The Following financial statement schedules are filed herewith:Schedule II – Valuation and Qualifying Accounts




All other schedules are omitted because
they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.





RADNET,
INC. AND SUBSIDIARIES


SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS





Balance at
                                    
                                    
                                    ChargesBeginning of
                                    
                                    
                                    Against
                                    
                                    
                                    Deductions
                                    
                                    
                                    Balance at EndYear
                                    
                                    
                                    Income
                                    
                                    
                                    from Reserve
                                    
                                    
                                    of YearYear
      Ended December 31, 2009Accounts  Receivable-Allowance
      for Bad Debts
                                    
                                    $
                                    12,065
                                    
                                    
                                    $
                                    32,704
                                    
                                    
                                    $
                                    (31,818
                                    )
                                    
                                    $
                                    12,951Year
      Ended  December 31, 2008Accounts  Receivable-Allowance
      for Bad Debts
                                    
                                    $
                                    11,571
                                    
                                    
                                    $
                                    30,832
                                    
                                    
                                    $
                                    (30,338
                                    )
                                    
                                    $
                                    12,065Year
      Ended  December 31, 2007Accounts  Receivable-Allowance
      for Bad Debts
                                    
                                    $
                                    8,486
                                    
                                    
                                    $
                                    27,467
                                    
                                    
                                    $
                                    (24,382
                                    )
                                    
                                    $
                                    11,571


-84-


(c)
Exhibits – The following exhibits are filed herewith or incorporated by
reference herein:





ExhibitNo.
              
              DescriptionofExhibit
              
              Incorporated by
                Referenceto2.1
              
              Agreement
      and Plan of Merger, dated as of July 6, 2006, by and among Primedex,
      Radiologix, Radnet Management, Inc. and Merger Sub
              
              (E)2.2
              
              Agreement
      and Plan of Merger and Reorganization, dated as of September 3,
      2008
              
              (M)3.1
              
              Certificate
      of Incorporation of RadNet, Inc., a Delaware corporation
              
              (M)3.2
              
              Certificate
      of Amendment to Certificate of Incorporation of RadNet, Inc., a Delaware
      corporation, dated September 2, 2008
              
              (M)3.3
              
              Bylaws
              
              (M)4.1
              
              Form
      of Common Stock Certificate
              
              (G)10.1
              
              2000
      Incentive Stock Option Plan (as amended)*
              
              (C)10.2
              
              2006
      Equity Incentive Plan*
              
              (E)10.3
              
              First
      Amendment to the 2006 Equity Incentive Plan*
              
              (K)10.4
              
              Form
      of Warrant recharacterized as under the 2006 Equity Incentive plan – Form
      A
              
              (K)10.5
              
              Form
      of Warrant recharacterized as under the 2006 Equity Incentive plan – Form
      B
              
              (K)10.6
              
              Form
      of Indemnification Agreement between the registrant and each of its
      officers and directors*
              
              (L)10.7
              
              Employment
      Agreement dated as of June 12, 1992 between RadNet and Howard G. Berger,
      M.D.
              
              (A)and
      amendment to agreement.*
              
              (D)10.8
              
              Employment
      Agreement dated April 16, 2001, with Jeffrey L. Linden
              
              (B)and
      amendment to agreement*
              
              (D)10.9
              
              Employment
      Agreement with Norman R. Hames dated May 1, 2001
              
              (B)and
      amendment to agreement*
              
              (D)10.10
              
              Employment
      Agreement with Mark Stolper effective January 1,
2009*
              
              (N)10.11
              
              Retention
      Agreement with Stephen Forthuber dated November 15,
    2006*
              
              (H)10.12
              
              Amended
      and Restated Management and Service Agreement between Radnet Management,
      Inc. and Beverly Radiology Medical Group III dated January 1,
      2004
              
              (C)10.14
              
              Credit
      Agreement, dated as November 15, 2006, among Radnet Management, Inc.,
      the Credit Parties designated therein, General Electric Capital
      Corporation, as Agent, the lenders described therein, and GE Capital
      Markets, Inc.
              
              (F)10.15
              
              Amendment
      No. 1 of Existing Credit Agreement with General Electric Capital dated
      April 2007.
              
              (N)10.16
              
              Amendment
      No. 2 of Existing Credit Agreement with General Electric Capital dated May
      2007.
              
              (N)10.17
              
              Amendment
      No. 3 of Existing Credit Agreement with General Electric Capital
      Corporation dated August 2007.
              
              (I)10.18
              
              Amendment
      No. 4 of Existing Credit Agreement with General Electric Capital
      Corporation dated November 2007.
              
              (N)


-85-





ExhibitNo.
              
              DescriptionofExhibit
              
              Incorporated by
                Referenceto10.19
              
              Amendment
      No. 5 of Existing Credit Agreement with General Electric Capital
      Corporation dated February 2008.
              
              (J)10.20
              
              Amendment
      No. 6 of Existing Credit Agreement with General Electric Capital
      Corporation dated April 2008.
              
              (N)10.21
              
              Second
      Lien Credit Agreement, dated as of November 15, 2006, among Radnet
      Management, Inc., the Credit Parties designated therein, General Electric
      Capital Corporation, as Agent, the Lenders described therein, and GE
      Capital Markets, Inc.
              
              (F)10.22
              
              Amendment
      of Second Lien Credit Agreement with General Electric Capital Corporation
      dated May 2007.
              
              (N)10.23
              
              Amendment
      of Second Lien Credit Agreement with General Electric Capital Corporation
      dated August 2007.
              
              (I)10.24
              
              Amendment
      of Second Lien Credit Agreement with General Electric Capital Corporation
      dated November 2007.
              
              (N)10.25
              
              Guaranty,
      dated as of November 15, 2006, by and among the Guarantors identified
      therein and General Electric Capital Corporation.
              
              (F)10.26
              
              Second
      Lien Guaranty, dated as of November 15, 2006, by and among the
      Guarantors identified therein and General Electric Capital
      Corporation.
              
              (F)10.27
              
              Pledge
      Agreement, dated as of November 15, 2006, by and among the Pledgors
      identified therein and General Electric Capital
    Corporation.
              
              (F)10.28
              
              Security
      Agreement, dated as of November 15, 2006, by and among the Grantors
      identified therein and General Electric Capital
    Corporation.
              
              (F)10.29
              
              Second
      Lien Security Agreement, dated as of November 15, 2006, by and among
      the Grantors identified therein and General Electric Capital
      Corporation.
              
              (F)10.30
              
              Commitment
      and Term Loan Engagement Letter dated March 12, 2010.
              
              (N)14
              
              Code
      of Financial Ethics
              
              (C)21
              
              List
      of Subsidiaries
              
              (N)23.1
              
              Consent
      of Registered Independent Public Accounting Firm
              
              (N)24
              
              Power
      of Attorney
              
              (O)31.1
              
              CEO
      Certification pursuant to Section 302
              
              (N)31.2
              
              CFO
      Certification pursuant to Section 302
              
              (N)32.1
              
              CEO
      Certification pursuant to Section 906
              
              (N)32.2
              
              CFO
      Certification pursuant to Section 906
              
              (N)








*
Management contract with compensatory arrangement.





(A)
            Incorporated
      by reference to exhibit filed in an amendment to Form 8-K report for June
      12, 1992.





(B)
            Incorporated
      by reference to exhibit filed with the Form 10-K for the year ended
      October 31, 2001.





(C)
            Incorporated
      by reference to exhibit filed with the Form 10-K for the year ended
      October 31, 2003.


-86-




(D)
            Incorporated
      by reference to exhibit filed with the Form 10-Q for the quarter ended
      January 31, 2004.





(E)
            Incorporated
      by reference to exhibit filed with Registrant’s Registration Statement on
      Form S-4 (File No. 333-136800).





(F)
            Incorporated
      by reference to exhibit filed with Form 8-K for November 21,
      2006.





(G)
            Incorporated
      by reference to exhibit filed with Form 10-K for October 31,
      2006.





(H)
            Incorporated
      by reference to exhibit filed with Form 10-K/T for December 31,
      2006.





(I)
            Incorporated
      by reference to exhibit filed with Form 8-K for August 24,
      2007.





(J)
            Incorporated
      by reference to exhibit filed in an amendment to Form 10-K for
      December 31, 2007.





(K)
            Incorporated
      by reference to exhibit filed with Form 10-Q for the quarter ended June
      30, 2008.





(L)
            Incorporated
      by reference to exhibit filed with Form 10-Q for the quarter ended March
      31, 2008.





(M)
            Incorporated
      by reference to exhibit filed with Form 8-K for September 4,
      2008.





(N)
            Filed
      herewith.





(O)
            Included
      on signature page.


-87-


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





RADNET,
      INC.Date:  March
      15, 2010
            
            /s/    HOWARDG.BERGER,M.D.Howard
      G. Berger, M.D., President,Chief
      Executive Officer and Director




POWER OF
ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints Howard G. Berger, M.D. and Mark D. Stolper,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Commission, granting unto said attorney-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that each
said attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of registrant in the capacities
and on the dates indicated.




By
                            /s/HOWARDG.BERGER,M.D.Howard
      G. Berger, M.D., Director, Chief Executive Officer and
      PresidentDate:  March
      15, 2010By
                            /s/
      MARVIN S. CADWELLMarvin
      S. Cadwell, DirectorDate:  March
      15, 2010By
                            /s/
      JOHN V.
      CRUES, III, M.D.John
      V. Crues, III, M.D., DirectorDate:  March
      15, 2010By
                            /s/
      NORMAN
      R. HAMESNorman
      R. Hames, DirectorDate:  March
      15, 2010By
                            /s/
      DAVID L. SWARTZDavid
      L. Swartz,
Director


-88-





Date:  March
      15, 2010By
                        /s/
      LAWRENCE L. LEVITTLawrence
      L. Levitt, DirectorDate:  March
      15, 2010By
                        /s/
      MICHAEL L. SHERMAN,
    M.D.Michael
      L. Sherman, M.D., DirectorDate:  March
      15, 2010By
                        /s/
      MARK D. STOLPERMark D. Stolper,Chief Financial Officer(Principal Accounting Officer)Date:  March
      15,
2010


-89-