<PAGE>

                                  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 OF1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

                         COMMISSION FILE NUMBER 0-19019

                                  RADNET, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

                NEW YORK                                         13-3326724
     (STATE OR OTHER JURISDICTION OF                          (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)

           1510 COTNER AVENUE
         LOS ANGELES, CALIFORNIA                                  90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 478-7808
           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                         COMMON STOCK, $.0001 PAR VALUE
           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $.0001 PAR VALUE

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]

      NOTE--Checking the box above will not relieve any registrant required to
file reports pursuant to section 13 or (15(d) of the exchange Act from their
obligations under those Sections.

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 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.

     Large Accelerated Filer [ ]
     Non-Accelerated Filer [ ] (Do not check if a smaller reporting company)
     Accelerated Filer  [X]
     Smaller Reporting Company  [ ]

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 $190,029,896
on June 30, 2007 (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, 2007.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

The number of shares of the registrant's common stock outstanding on March 31,
2008, was 35,639,558 shares (excluding treasury shares).

<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are herein incorporated by reference into
the Part of the Form 10-K indicated.

Document                                                      Where Incorporated
--------                                                      ------------------
Proxy Statement for the 2008 Annual Meeting of Shareholders   Part III

                                  RADNET, INC.

                                TABLE OF CONTENTS

FORM 10-K ITEM                                                              PAGE
--------------                                                              ----
PART I.
   Item 1.   Business                                                          3
   Item 1A.  Risk Factors                                                     22
   Item 1B.  Unresolved Staff Comments                                        31
   Item 2.   Properties                                                       31
   Item 3.   Legal Proceedings                                                31
   Item 4.   Submission of Matters to a Vote of Security Holders              32

PART II.
   Item 5.   Market for Registrant's Common Equity, Related Stockholder
               Matters and Issuer Purchases of Equity Securities              32
   Item 6.   Selected Financial Data                                          34
   Item 7.   Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                      35
   Item 7A.  Quantitative and Qualitative Disclosures About Market Risk       51
   Item 8.   Financial Statements and Supplementary Data                      51
   Item 9.   Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                       79
   Item 9A.  Controls and Procedures                                          79
   Item 9B.  Other Information                                                83

PART III.
   Item 10.  Directors and Executive Officers of the Registrant               83
   Item 11.  Executive Compensation                                           83
   Item 12.  Security Ownership of Certain Beneficial Owners and
               Management and Related Stockholder Matters                     83
   Item 13.  Certain Relationships and Related Transactions                   83
   Item 14.  Principal Accountant Fees and Services                           83

PART IV.
   Item 15.  Exhibits, 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 cost savings, and our statements regarding increased
business from new equipment or 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.

                                      -2-
<PAGE>

                                     PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

      We operate a group of regional networks comprised of 141 diagnostic
imaging facilities located in six states with operations primarily in
California, the Mid Atlantic, the Treasure Coast area of Florida, Kansas and the
Finger Lakes (Rochester) and Hudson Valley areas of New York, providing
diagnostic imaging services including magnetic resonance imaging, or MRI,
computed tomography, or CT, positron emission tomography, or PET, nuclear
medicine, mammography, ultrasound, diagnostic radiology, or X-ray, and
fluoroscopy. The Company's operations comprise a single segment for financial
reporting purposes.

      At our facilities, we provide all of the equipment as well as all
non-medical operational, management, financial and administrative services
necessary to provide diagnostic imaging services. We give our facility managers
authority to run our facilities to meet the demands of local market conditions,
while our corporate structure provides economies of scale, corporate training
programs, standardized policies and procedures and sharing of best practices
across our networks. 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 also provide administrative, management and information services to
certain radiology practices that provide professional services in connection
with diagnostic imaging centers and to hospitals and radiology practices with
which we operate joint ventures. The services we provide leverage our existing
infrastructure, and we believe the services improve the profitability,
efficiency and effectiveness of the radiology practice or joint venture.

      Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 16% of our outstanding
common stock. Dr. Berger also owns, indirectly, 99% of the equity interests in
Beverly Radiology Medical Group III, or BRMG. BRMG provides all of the
professional medical services at 77 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. At eleven centers in California and at all of the
centers which are located outside of California, we have entered into long-term
contracts with prominent radiology groups in the area to provide physician
services at those facilities.

      We derive substantially all of our revenue, directly or indirectly, from
fees charged for the diagnostic imaging services performed at our facilities.
For the twelve months ended December 31, 2007, we performed 2,709,502 diagnostic
imaging procedures and generated net revenue from continuing operations of
$425.5 million.

      The following table illustrates our work performed over the five-year
period ended December 31, 2007:

<TABLE>
                                                       Years Ended                   Year Ended
                                                       October 31,                  December 31,
                                           ----------------------------------  ----------------------
                                              2003        2004        2005        2006        2007
                                           ----------  ----------  ----------  ----------  ----------
<S>                                                <C>         <C>         <C>         <C>        <C>
Total number of MRI, CT and PET systems            63          68          68          74         200
Total number of procedures performed*         947,032     946,928     958,414     919,342   2,709,502**

----------------
* All procedures.  Excludes discontinued operations.
** Excludes procedures of unconsolidated joint ventures.
</TABLE>

COMPANY WEBSITE

We maintain a website at www.radnet.com. 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 are made available on its website as soon as is reasonably
practicable after the material is electronically filed with the Securities and
Exchange Commission.

                                      -3-
<PAGE>

RADIOLOGIX ACQUISITION

      On November 15, 2006, we completed the acquisition of Radiologix, Inc.
Radiologix, a Delaware corporation, 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
shareholders 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.

      The results of operations of Radiologix and its wholly owned subsidiaries
have been included in our consolidated financial statements from the date of
acquisition.

      In connection with our acquisition of Radiologix, we changed to a
calendar-year basis of reporting financial results. As a requirement of this
change under Rule 13a-10 of the Securities Exchange Act of 1934, we reported
results for November and December 2006 as a separate transition ("stub") period
on a Form 10-K/T and filed on April 17, 2007.

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.

      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 recent introduction of
reimbursement by payors of PET procedures. 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.

      IMV, a provider of database and market information products and services
to the analytical, clinical diagnostic, biotechnology, life science and medical
imaging industries, estimates that over 24.2 million MRI procedures and 50.1
million CT procedures were conducted in the United States in 2003, representing
a 10% increase over the 2002 volume of both the MRI and CT procedures,
respectively. This data is particularly relevant to us, given that revenue from
MRI and CT scans constituted approximately 58% of our net revenue for the 12
months ended December 31, 2007. In addition, IMV estimates that over 706,100
clinical PET patient studies were performed in the United States in 2003,
representing a 58% increase over the 2002 volume of 447,200 clinical PET patient
studies. Revenue from PET scans constituted approximately 7% of our net revenue
for the year ended December 31, 2007.

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 14% from 2000 to 2010.
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:

      o     MRI spectroscopy, which can differentiate malignant from benign
            lesions;
      o     MRI angiography, which can produce three-dimensional images of body
            parts and assess the status of blood vessels;
      o     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
      o     The development of combined PET/CT scanners, which combine the
            technology from PET and CT to create a powerful diagnostic imaging
            system.

                                      -4-
<PAGE>

      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 continue the increased
use of imaging services. In addition, we believe the growing popularity of
elective full-body scans will further increase the use of imaging services. At
the same time, we believe 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 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 is increasingly being used as a screening tool for
preventive care such as elective full-body scans. Consumer awareness of and
demand for diagnostic imaging as a less invasive and preventive screening method
has added to the growth in diagnostic imaging procedures. We believe that
further technological advancements will create demand for diagnostic imaging
procedures as less invasive procedures for early diagnosis of diseases and
disorders.

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 not generally 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 OR CLINICS

      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.

     MOBILE FACILITIES

      Using specially designed trailers, 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 an on-site setting access to advanced
diagnostic imaging technology. Diagnostic imaging providers contract directly
with the hospital or clinic and are typically reimbursed directly by them.

                                      -5-
<PAGE>

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. We currently have
99 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. We currently have 62 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. We provide PET-only services through the use of
mobile equipment services at two of our sites. In addition, we have combined
PET/CT systems that blend the PET and CT imaging modalities into one scanner.
These combined systems are priced in the range of $1.8 million to $2.2 million.
We currently have 20 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. We
currently have 29 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 $50,000 to $250,000.
We currently have 189 x-ray systems in operation.

      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. We currently
have 164 ultrasound systems in operation.

                                      -6-
<PAGE>

      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. We currently have 109 mammography systems in
operation.

      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 $300,000. We currently have 77 fluoroscopy systems in operation.

COMPETITIVE STRENGTHS

      SIGNIFICANT AND KNOWLEDGEABLE PARTICIPANT IN THE NATION'S LARGEST ECONOMY
AND ON A NATIONAL SCALE

      We believe our group of regional networks of fixed-site, freestanding
outpatient diagnostic imaging facilities is the largest of its kind in
California, the nation's largest economy and most populous state and the largest
outpatient diagnostic imaging facility owner in the U.S. based on our 141
locations. Our two decades of experience in operating diagnostic imaging
facilities in almost every major population center in California gives us
intimate, first-hand knowledge of these geographic markets, as well as close,
long-term relationships with key payors, radiology groups and referring
physicians within these markets. The additional Radiologix centers reflect, for
the most part, a similar clustering philosophy, which we believe will provide an
opportunity to utilize our California model outside of California.

      ADVANTAGES OF REGIONAL NETWORKS WITH BROAD GEOGRAPHIC COVERAGE

      The organization of our diagnostic imaging facilities into regional
networks around major population centers 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.

      We have found that many 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. We believe that our regional network approach and
our utilization management system make us an attractive candidate for selection
as a preferred provider for these third-party payors.

      Through our advanced information technology systems, we can electronically
exchange information between radiologists in real time, enabling us to cover
larger geographic markets by using the specialized training of other
practitioners in our networks. In addition, many of our facilities digitally
transmit to our headquarters, on a daily basis, comprehensive data concerning
the diagnostic imaging services performed, which our corporate management
closely monitors to evaluate each facility's efficiency. Similarly, BRMG uses
our advanced information technology system to closely monitor radiologists to
ensure they consistently perform at expected levels.

      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. This results
in operating efficiencies and better equipment utilization rates and improved
response time for our patients.

      COMPREHENSIVE DIAGNOSTIC IMAGING SERVICES

      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 can help patients
avoid multiple visits or lengthy journeys between facilities, thereby decreasing
costs and time delays.

                                      -7-
<PAGE>

      STRONG RELATIONSHIPS WITH EXPERIENCED AND HIGHLY REGARDED RADIOLOGISTS

      Our contracted radiologists generally have outstanding credentials and
reputations, strong relationships with referring physicians, a broad mix of
sub-specialties and a willingness to embrace our approach for the delivery of
diagnostic imaging services. The collective experience and expertise of these
radiologists translates into more accurate and efficient service to patients.
Moreover, as a result of our close relationship with Dr. Berger and BRMG in
California and our long-term arrangements with radiologists outside of
California, we believe that we are able to better ensure that medical service is
provided at our 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 or short-term practice 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.

      DIVERSIFIED PAYOR MIX

      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
profitable revenue. 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, 2007.

      EXPERIENCED AND COMMITTED MANAGEMENT TEAM

      Our senior management group, together have over 100 years of 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. Our
management beneficially owns approximately 24% of our common stock.

BUSINESS STRATEGY

      MAXIMIZING PERFORMANCE AT OUR EXISTING FACILITIES

      We intend to enhance our operations and increase scan volume and revenue
at our existing facilities by:

      o     Establishing new referring physician and payor relationships;
      o     Increasing patient referrals through targeted marketing efforts to
            referring physicians;
      o     Adding modalities and increasing imaging capacity through equipment
            upgrades to existing machinery, adding new machinery and relocating
            machinery to meet the needs of our regional markets;
      o     Leveraging our multi-modality offerings to increase the number of
            high-end procedures performed; and
      o     Building upon our capitation arrangements to obtain fee-for-service
            business.

      FOCUSING ON PROFITABLE CONTRACTING

      We regularly evaluate our contracts with third-party payors 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 have one-year terms, we can regularly renegotiate these
contracts, if necessary. We believe our position as a leading provider of
diagnostic imaging services in the areas of our concentration, our experience
and knowledge of the various geographic markets in those areas, and the benefits
offered by our regional networks enable us to obtain more favorable contract
terms than would be available to smaller or less experienced organizations.

      EXPANDING 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.
We intend to introduce applications that will decrease scan and image-reading
time to increase our productivity.

                                      -8-
<PAGE>

      OPTIMIZING 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.

      EXPANDING OUR NETWORKS

      Following our Radiologix acquisition we intend to continue to expand our
networks of facilities through new developments and acquisitions, using a
disciplined approach for evaluating and entering new areas, including
consideration of whether we have adequate financial resources to expand. 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:

      o     There is sufficient patient demand for outpatient diagnostic imaging
            services;
      o     We believe we can gain significant market share;
      o     We can build key referral relationships or we have already
            established such relationships; and
      o     Payors are receptive to our entry into the market.

      OUR SERVICES

      We offer the following services: MRI, CT, PET, nuclear medicine, X-ray,
ultrasound, mammography and fluoroscopy. Our facilities provide standardized
services, regardless of location, to ensure patients, physicians and payors
consistency in service and quality. We monitor our level of service, including
patient satisfaction, timeliness of services to patients and reports to
physicians.

      The key features of our services include:

      o     Patient-friendly, non-clinical environments;
      o     A 24-hour turnaround on routine examinations;
      o     Interpretations within one to two hours, if needed;
      o     Flexible patient scheduling, including same-day appointments;
      o     Extended operating hours, including weekends;
      o     Reports delivered via courier, fax or email;
      o     Availability of second opinions and consultations;
      o     Availability of sub-specialty interpretations at no additional
            charge;
      o     Standardized fee schedules by region; and
      o     Fees that are more competitive than hospital fees.

      RADIOLOGY PROFESSIONALS

      In the states in which we provide services, 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 84% of net revenue or collections.

      At all but eight 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. Our fee is typically 80% to 90% of the
collected revenue of each company after deduction of the professional fees. In
addition, we generally own a percentage of the equity interests of the entity,
which owns the facility from which we are also entitled to a percentage of
income after a deduction of all expenses, including amounts paid for medical
services and medical supervision commensurate with our ownership percentage.

                                      -9-
<PAGE>

      BRMG

      At 77 of our facilities, BRMG is our contracted radiology group. At
December 31, 2007, BRMG employed 45 full-time and seven part-time radiologists.
Under our management agreement with BRMG we are paid, as compensation for the
use of our facilities and equipment and for our services, a percentage of the
amounts collected for the professional services BRMG physicians render which for
the year ended December 31, 2007, 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:

      o     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. In addition,
            either party may terminate the agreement if the other party defaults
            under its obligations, after notice and an opportunity to cure, and
            we may terminate the agreement if Dr. Berger no longer owns at least
            60% of the equity of BRMG. Dr. Berger owns 99% of the equity of
            BRMG.
      o     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 eight facilities for
            which we contract with separate medical groups.
      o     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.
      o     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.
      o     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.
      o     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.

      At the non-California locations and at eight California locations:

      Typically, one of our subsidiaries contracts with radiology practices to
provide professional services, including supervision and interpretation of
diagnostic imaging procedures performed in the imaging centers. 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; and a willingness to embrace our strategy for the delivery of diagnostic
imaging services.

      We have two models by which we contract with radiology practices: a
comprehensive services model and a technical services model. Under our
comprehensive services model, we enter into a long-term agreement with a
radiology practice group (typically 40 years). Under this arrangement, 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 imaging centers. Under our technical
services model, which relates primarily to six of our subsidiary operations, we
enter into a shorter-term agreement with a radiology practice group (typically
10 to 15 years) and pay a fee to the radiology group (typically between 10% to
15% of the cash collections from reimbursement for imaging procedures). In both
the comprehensive services and technical services models, we own the diagnostic
imaging assets and, therefore, receive 100% of the technical reimbursements
associated with imaging procedures. Additionally, in most instances, both the
comprehensive services and the technical services models contemplate an
incentive technical bonus for the radiology group if the net technical income
exceeds specific thresholds.

      The agreements with the radiology practices under our comprehensive
services model contain provisions whereby both parties have agreed to certain
restrictions on accepting or pursuing radiology opportunities within a five to
fifteen-mile radius of any of our owned, operated or managed diagnostic imaging
centers at which the radiology practice provides professional radiology services
or any hospital at which the radiology practice provides on-site professional
radiology services. Each of these agreements also restricts the applicable
radiology practice from competing with us and our other contracted radiology
practices within a specified geographic area during the term of the agreement.
In addition, the agreements require the radiology practices to enter into and
enforce agreements with their physician shareholders at each radiology practice
(subject to certain exceptions) that include covenants not to compete with us
for a period of two years after termination of employment or ownership, as
applicable.

                                      -10-
<PAGE>

      Under our comprehensive services model, we have the right to terminate
each agreement if the radiology practice or a physician of the contracted
radiology practice engages in conduct, or is formally accused of conduct, for
which the physician employee's license to practice medicine reasonably would be
expected to be subject to revocation or suspension or is otherwise disciplined
by any licensing, regulatory or professional entity or institution, the result
of any of which (in the absence of termination of this physician or other action
to monitor or cure this act or conduct) adversely affects or would reasonably be
expected to adversely affect the radiology practice.

      Under our comprehensive services model, upon termination of an agreement
with a radiology practice, depending upon the termination event, we may have the
right to require the radiology practice to purchase and assume, or the radiology
practice may have the right to require us to sell, assign and transfer to it,
the assets and related liabilities and obligations associated with the
professional and technical radiology services provided by the radiology practice
immediately prior to the termination. The purchase price for the assets,
liabilities and obligations would be the lesser of their fair market value or
the return of the consideration received in the acquisition. However, the
purchase price may not be less than the net book value of the assets being
purchased.

      The agreements with most of the radiology practices under our technical
services model contain non-compete provisions that are generally less
restrictive than those provisions under our comprehensive services model. The
geographic scope of and types of services covered by the non-compete provisions
vary from practice to practice. Under our technical services model, we generally
have the right to terminate the agreement if a contracted radiology practice
loses the licenses required to perform the service obligations under the
agreement, violates non-compete provisions relating to the modalities offered or
if income thresholds are not met.

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 REVENUE
                                         --------------------------------------
                                         TWO MONTHS ENDED         YEAR ENDED
                                         DECEMBER 31, 2006    DECEMBER 31, 2007
                                         -----------------    -----------------
Insurance (1)                                   52%                  57%
Managed Care Capitated Payors                   14%                  15%
Medicare/Medicaid                               25%                  22%
Other (2)                                        7%                   2%
Workers Compensation/Personal Injury             2%                   4%

----------------
(1) Includes Blue Cross/Blue Shield, which represented 18% of our net revenue
for the two months ended December 31, 2006, and 19% of our net revenue for the
year ended December 31, 2007.
(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.

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 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 physicians 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.

                                      -11-
<PAGE>

     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:

      |X|   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.

      |X|   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.

      |X|   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.

      MEDICARE/MEDICAID

      Medicare is the national health insurance program for people age 65 or
older and people under age 65 with certain disabilities. Medicaid is the state
health insurance program for qualifying low income persons. Medicare and
Medicaid reimburse us, directly or indirectly, including through the contracted
radiology group, in accordance with the Medicare Fee Schedule, which is a
schedule of rates applicable to particular services and annually adjusted
upwards or downwards, typically, within a 4-8% range. Medicare patients are not
responsible for any amount above the Medicare allowable amount. Medicaid
patients are not responsible for any unreimbursed portion.

      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 85 fixed-site,
freestanding outpatient diagnostic imaging facilities in California, 33 in the
Baltimore-Washington, D.C. area and 18 in the Rochester and Hudson Valley areas
of New York as well as one to three individual facilities each in Florida and
Kansas. We lease the premises at which these facilities are located, with the
exception of two facilities located in buildings we own. We lease the land on
which both of those buildings are located.

                                      -12-
<PAGE>

      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 and
fluoroscopy services. 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, 2007:

<TABLE>
                                                                             YEAR ENDED DECEMBER 31,
                                                                   ------------------------------------------
                                                                    2003     2004     2005     2006     2007
                                                                   ------   ------   ------   ------   ------
<S>                                                                    <C>      <C>      <C>      <C>     <C>
     Total facilities owned or managed (at beginning of year)          59       56       56       57      132
     Facilities added by:
     Acquisition*                                                      --       --       --       78       12
     Internal development                                               3        3        1        4        2
     Facilities closed or sold                                         (6)      (3)      --       (7)      (5)
     Total facilities owned (at end of year)                           56       56       57      132*     141

     * Includes 69 Radiologix facilities acquired on November 15, 2006.
</TABLE>

DIAGNOSTIC IMAGING EQUIPMENT

      The following table indicates, as of December 31, 2007, the quantity of
principal diagnostic equipment available at our facilities, by region:

<TABLE>
                                                                                                    Nuclear
                  MRI    Open MRI    CT    PET/CT   Mammography   Ultra Sound    X-ray   Medicine    Total
               ----------------------------------------------------------------------------------------------
<S>            <C>       <C>        <C>    <C>      <C>           <C>            <C>     <C>        <C>
Kansas              0           0     1         0             0             1        5          0         7
California         36          25    30        13            60            90      109         13       376
Florida             2           1     3         1             3             4        4          2        20
New York           13           2    11         0            15            25       23          2        91
Maryland           14           6    17         6            31            44       48         12       178
               ----------------------------------------------------------------------------------------------
  Total            65          34    62        20           109           164      189         29       672
</TABLE>

     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

Acquisitions
------------

      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.

      In July 2007, we acquired the assets and business of Borg Imaging Group
located in Rochester, NY for $11.7 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 $9.2 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.

                                      -13-
<PAGE>

      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 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 $2.8 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.

      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.

Divestitures
------------

      In June 2007 we divested a non-core center in Duluth, Minnesota to a local
multi-center operator for $1.3 million.

      In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.

      In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures resulting in a revised ownership of 49%. As a result
of this transaction, we no longer consolidate this joint venture. Accordingly,
our consolidated balance sheet at December 31, 2007 includes this 49% interest
as a component of our total investment in non-consolidated joint ventures where
it is accounted for under the equity method. The amounts eliminated from our
consolidated balance sheet as a result of the deconsolidation were not material.
Since the deconsolidation occurred at the end of 2007, no significant amounts
were eliminated from our statement of operations.

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, 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:

      o     Capture all necessary patient demographic, history and billing
            information at point-of-service;
      o     Automatically generate bills and electronically file claims with
            third-party payors;
      o     Record and store diagnostic report images in digital format;
      o     Digitally transmit on a real time basis 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;
      o     Perform claims, rejection and collection analysis; and
      o     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.

      Currently diagnostic reports and images are accessible via the Internet to
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 via their web portals. We are in the process of making such
services available outside of California.

PERSONNEL

      At December 31, 2007, we employed the following personnel (including
employees of BRMG):

                                      -14-
<PAGE>

      We employ a site manager who is 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. In turn, our 10 regional managers and directors 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 eastern and western chief operating officers.
Our chief financial officer, director of information services and our medical
director report to our chief executive officer.

      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.

EXECUTIVE OFFICERS

      Our executive officers are:

                                         Officer
      Name                         Age    Since    Position
      ----                         ---   -------   --------
      Howard G. Berger, M.D.        63     1992    President and Chief Executive
                                                     Officer

      John V. Crues, III, M.D.      58     2000    Medical Director

      Stephen M. Forthuber          46     2006    Executive Vice President and
                                                     Chief Operating Officer-
                                                     Eastern Operations

      Norman R. Hames               51     1996    Executive Vice President,
                                                     Secretary, Chief Operating
                                                     Officer-Western Operations

      Jeffrey L. Linden             65     2001    Executive Vice President and
                                                     General Counsel

      Mark D. Stolper               36     2004    Executive Vice President and
                                                     Chief Financial 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 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.

      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.

                                      -15-
<PAGE>

      Jeffrey L. Linden joined us in 2001 and currently serves as our Executive
Vice President and General Counsel. He is also associated with Cohen & Lord, a
professional corporation, outside general counsel to us. 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 prior to joining us. 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, backed by the Milken Family and NewsCorp, 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.

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

MARKETING

      Our California marketing team consists of one director of marketing, five
territory sales managers and 18 customer service representatives. Our eastern
marketing team consists of 27 customer sales representatives and three sales
managers who each report to a district manager. Our marketing team employs a
multi-pronged approach to marketing.

      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 games of the
Lakers, Clippers, Kings, Avengers and Sparks held at the Staples Center in Los
Angeles, Ducks games held at the Arrowhead Pond 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 venders 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, 2007, capital lease obligations,
excluding interest, totaled approximately $32.0 million through 2012, including
current installments totaling approximately $9.5 million (see Note 9). If we
open or acquire additional imaging facilities, we may have to incur material
capital lease obligations.

                                      -16-
<PAGE>

      Timely, effective maintenance is essential for achieving high utilization
rates of our imaging equipment. 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.

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
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 major national
competitors include Alliance Imaging, Inc., Medical Resources, Inc. and InSight
Health 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.

      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 most states, a covenant not to compete will be enforced only:

      o     to the extent it is necessary to protect a legitimate business
            interest of the party seeking enforcement;
      o     if it does not unreasonably restrain the party against whom
            enforcement is sought; and
      o     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.

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 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.

                                      -17-
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      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 he last several years which
has lengthened our billing and collection cycle.

      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 or exercising control over the medical
judgments or decisions of the radiology practices or their physicians or
violating the prohibitions against fee-splitting. However, because challenges to
these types of arrangements are not required to be reported, we cannot
substantiate our belief. 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 prohibition, 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, 2007,
approximately 22% of our revenue generated at our diagnostic imaging centers was
derived from government sponsored healthcare programs (principally Medicare and
Medicaid).

      Federal law prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or to induce, (i) the
referral of a person, (ii) the furnishing or arranging for the furnishing of
items or services reimbursable under the Medicare, Medicaid or other
governmental programs or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service reimbursable
under the Medicare, Medicaid or other governmental programs. Enforcement of this
anti-kickback law is a high priority for the federal government, which has
substantially increased enforcement resources and is scheduled to continue
increasing such resources. The applicability of the anti-kickback law to many
business transactions in the healthcare industry has not yet been subject to
judicial or regulatory interpretation. Noncompliance with the federal
anti-kickback legislation can result in exclusion from the Medicare, Medicaid or
other governmental programs and civil and criminal penalties.

      We receive fees under our service agreements for management and
administrative services, which include contract negotiation and marketing
services. We do not believe we are in a position to make or influence referrals
of patients or services reimbursed under Medicare or other governmental programs
to radiology practices or their affiliated physicians or to receive referrals.
However, we may be considered to be in a position to arrange for items or
services reimbursable under a federal healthcare program. Because the provisions
of the federal anti-kickback statute are broadly worded and have been broadly
interpreted by federal courts, it is possible that the government could take the
position that our arrangements with the contracted radiology practices implicate
the federal anti-kickback statute. Violation of the law can result in monetary
fines, civil and criminal penalties, and exclusion from participation in federal
or state healthcare programs, any of which could have an adverse effect on our
business and results of operations. While our service agreements with the
contracted radiology practices will not meet a safe harbor to the federal
anti-kickback statute, failure to meet a safe harbor does not mean that
agreements violate the anti-kickback statute. We have sought to structure our
agreements to be consistent with fair market value in arms' length transactions
for the nature and amount of management and administrative services rendered.
For these reasons, we do not believe that service fees payable to us should be
viewed as remuneration for referring or influencing referrals of patients or
services covered by such programs as prohibited by statute.

                                      -18-
<PAGE>

      Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions are commonly known as the Stark Law. The Stark Law
prohibits a physician from referring Medicare patients to an entity providing
designated health services, as defined under the Stark Law, including, without
limitation, radiology services, in which the physician has an ownership or
investment interest or with which the physician has entered into a compensation
arrangement. The penalties for violating the Stark Law include a prohibition on
payment by these governmental programs and civil penalties of as much as $15,000
for each 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
published final regulations to implement the Stark Law. Under the final
regulations, radiology and certain other imaging services and radiation therapy
services and supplies are services included in the designated health services
subject to the self-referral prohibition. Under the final regulations, such
services include the professional and technical components of any diagnostic
test or procedure using X-rays, ultrasound or other imaging services, CT, MRI,
radiation therapy and diagnostic mammography services (but not screening
mammography services). The final regulations, however, exclude from designated
health services: (i) X-ray, fluoroscopy or 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; (iii) nuclear
medicine procedures; and (iv) invasive or interventional radiology, because the
radiology services in these procedures are merely incidental or secondary to
another procedure that the physician has ordered. 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 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. 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 recently 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. Our or the radiology practices' activities may be investigated,
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.

      STATE ANTI-KICKBACK AND PHYSICIAN SELF-REFERRAL LAWS

      All of the states in which we now do business have adopted a form of
anti-kickback law and a form of Stark Law. The scope of these laws and the
interpretations of them are enforced by state courts and by regulatory
authorities with broad discretion. Generally, state law covers all referrals by
all healthcare providers for all healthcare services. A determination of
liability under such laws could result in fines and penalties and restrictions
on our ability to operate.

      FEDERAL FALSE CLAIMS ACT

      The Federal False Claims Act provides, in part, that the federal
government may bring a lawsuit against any person 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 there under may be initiated in the name of the United States by
an individual who is an original source of the allegations. The government has
taken the position that claims presented in violation of the federal

                                      -19-
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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.
We believe that we are in compliance with the rules and regulations that apply
to the Federal False Claims Act. However, we could be found to have violated
certain rules and regulations resulting in sanctions under the Federal False
Claims Act, and 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

      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 has 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.

      HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

      In an effort to combat healthcare fraud, Congress enacted the Health
Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA, among
other things, amends existing crimes and criminal penalties for Medicare fraud
and enacts new federal healthcare fraud crimes, including actions affecting
non-government payors. 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.

      Further, HIPAA requires healthcare providers and their business associates
to maintain the privacy and security of individually identifiable health
information. HIPAA imposes federal standards for electronic transactions with
health plans, the security of electronic health information and for protecting
the privacy of individually identifiable health information. Organizations such
as ours were obligated to be compliant with the initial HIPAA regulations by
April 14, 2003, and with the electronic data interchange mandates by October 16,
2003. The final security regulations were issued in February 2003 with a
compliance date of April 2005. We believe that we are in compliance with the
current requirements, but we anticipate that we may encounter certain costs
associated with future compliance. A finding of liability under HIPAA's privacy
or security provisions may also result in criminal and civil penalties, and
could have a material adverse effect on our business, financial condition, and
results of operations.

      Although our electronic systems are HIPAA compatible, consistent with the
HIPAA regulations, we cannot guarantee the enforcement agencies or courts will
not make interpretations of the HIPAA standards that are inconsistent with ours,
or the interpretations of the contracted radiology practices or their affiliated
physicians. A finding of liability under the HIPAA standards may result in
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.

                                      -20-
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      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, where all mammography facilities
are required to be accredited by an approved non-profit organization or state
agency. Pursuant to the accreditation process, each facility providing
mammography services must comply with certain standards including annual
inspection.

      Compliance with these standards is required to obtain payment for Medicare
services and to avoid various sanctions, including monetary penalties, or
suspension of certification. Although the Mammography Accreditation Program of
the American College of Radiology currently accredits all of our facilities,
which provide mammography services, and we anticipate continuing to meet the
requirements for accreditation, the withdrawal of such accreditation could
result in the revocation of certification. Congress has extended Medicare
benefits to include coverage of screening mammography subject to the prescribed
quality standards described above. The regulations apply to diagnostic
mammography and image quality examination as well as screening mammography.

      RADIOLOGIST LICENSING

      The radiologists 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.

      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

      On February 8, 2006, the President signed into law the Deficit Reduction
Act of 2005, referred to as the DRA. The DRA provides that reimbursement for the
technical component for imaging services (excluding diagnostic and screening
mammography) in non-hospital based freestanding facilities will be capped at the
lesser of reimbursement under the Medicare Part B physician fee schedule or the
Hospital Outpatient Prospective Payment System (HOPPS) schedule.

      Prior to January 1, 2007, the technical component of our imaging services
was reimbursed under the Part B physician fee schedule, which, in most cases,
allows for higher reimbursement than under the HOPPS. Under the DRA, as of
January 1, 2007 we are reimbursed at the lower of the two schedules.

      The DRA also codifies the reduction in reimbursement for multiple images
on contiguous body parts previously announced by the Centers for Medicare and
Medicaid Services (CMS). In November 2005, CMS announced that it will 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. Under current methodology, Medicare pays 100% of the technical
component of each procedure. CMS had indicated that it would phase in this rate
reduction over two years, so that the reduction was 25% for each additional
imaging procedure in 2006 and another 25% in 2007. CMS has issued a rule that
eliminated the 25% reduction in 2007.

      We believe the implementation of the reimbursement reductions contained in
the DRA will have a significant adverse effect on our business, financial
condition and results of operations.

                                      -21-
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ITEM 1A. RISK FACTORS

RISKS RELATING TO OUR BUSINESS

      OUR FAILURE TO INTEGRATE THE BUSINESSES WE ACQUIRE SUCCESSFULLY AND ON A
TIMELY BASIS INTO OUR OPERATIONS COULD REDUCE OUR PROFITABILITY.

      We expect that our acquisitions will generally result in some synergies,
business opportunities and growth prospects. We, however, may never realize
these expected synergies, business opportunities and growth prospects. 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 expected to result from
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 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 $18.1 million, $11.0 million, and $6.9
million for the year ended December 31, 2007, the two months ended December 31,
2006, and the year ended October 31, 2006, respectively. We had a stockholders'
deficit of $69.8 million, $47.0 million, and $78.8 million at December 31, 2007,
2006, and October 31, 2006, respectively. Also, in recent periods, we have
suffered liquidity shortfalls which have led us to, among other things,
undertake and complete a "pre-packaged" Chapter 11 plan of reorganization and in
2003 modify the terms of various of our financial obligations. While we believe
that by taking these and other actions in the future we will be able to address
these issues and solidify our financial condition, we cannot give assurances
that we will be able to generate sufficient cash flow from operations to satisfy
our debt obligations.

      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 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.

      CHANGES IN THIRD-PARTY REIMBURSEMENT RATES OR METHODS FOR DIAGNOSTIC
IMAGING SERVICES COULD RESULT IN A DECLINE IN OUR NET REVENUE AND NEGATIVELY
IMPACT OUR BUSINESS.

      The fees charged for the diagnostic imaging services performed at our
facilities are paid by insurance companies, Medicare and Medicaid, workers
compensation, private and other payors. Any change in the rates of or conditions
for reimbursement from these sources of payment could substantially reduce the
amounts reimbursed to us or to our contracted radiology practices for services
provided, which could have a material adverse effect on our net revenue. For
example, recent legislative changes in California's workers compensation rules
had a negative impact on reimbursement rates for diagnostic imaging services,
and federal Medicare changes taking effect beginning January 1, 2007 have also
had a negative impact on the rates paid for MRI, CT and PET services.

                                      -22-
<PAGE>

      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.
Managed care contracting has become very competitive, and reimbursement
schedules are at or below Medicare reimbursement levels. The development and
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 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 77 of our 85 California facilities with 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 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, the 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 with the other groups for terms as long, if not longer, 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.

      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 terminate 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.

      As part of our business strategy, we intend to increase our presence in
the areas we serve through selectively acquiring facilities, developing new
facilities, adding equipment at existing facilities, and directly or indirectly
entering into contractual relationships with high-quality radiology practices.

      However, our ability to successfully expand depends upon many factors,
including our ability to:

      o     Identify attractive and willing candidates for acquisitions;
      o     Identify locations in existing or new markets for development of new
            facilities;
      o     Comply with legal requirements affecting our arrangements with
            contracted radiology practices, including state prohibitions on
            fee-splitting, corporate practice of medicine and self-referrals;

                                      -23-
<PAGE>

      o     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;
      o     Recruit a sufficient number of qualified radiology technologists and
            other non-medical personnel;
      o     Expand our infrastructure and management; and
      o     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 also may make any
            acquisitions more expensive.

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

      o     Inability to obtain adequate financing;
      o     Possible adverse effects on our operating results;
      o     Diversion of management's attention and resources;
      o     Failure to retain key personnel;
      o     Difficulties in integrating new operations into our existing
            infrastructure; and
      o     Amortization or write-offs of acquired intangible assets.

      WE MAY BECOME SUBJECT TO PROFESSIONAL MALPRACTICE LIABILITY.

      Providing medical services subjects us to the risk of professional
malpractice and other similar claims. The physicians that our contracted
radiology practices employ are from time to time subject to malpractice claims.
We structure our relationships with the practices under our management
agreements with them 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. 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.

      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. 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 insurance.

      WE EXPERIENCE COMPETITION FROM OTHER DIAGNOSTIC IMAGING COMPANIES AND
HOSPITALS. 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 major national
competitors include Alliance Imaging, Inc., Medical Resources, Inc. and InSight
Health 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.

                                      -24-
<PAGE>

      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 (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.

      All of the states in which our diagnostic imaging centers are located have
adopted a form of anti-kickback law and almost all of those states have also
adopted a form of Stark Law. The scope of these laws and the interpretations of
them vary from state to state and are enforced by state courts and regulatory
authorities, each with broad discretion. A determination of liability under the
laws described in this risk factor could result in fines and penalties and
restrictions on our ability to operate in these jurisdictions.

      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. In that event, we may be 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 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.

      OUR SUCCESS DEPENDS IN PART ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO
RETAIN SUFFICIENT QUALIFIED PERSONNEL. IN ADDITION, FORMER EMPLOYEES COULD USE
THE EXPERIENCE AND RELATIONSHIPS DEVELOPED WHILE EMPLOYED 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, 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 adversely affect our business.

                                      -25-
<PAGE>

      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.

      CAPITATION FEE ARRANGEMENTS COULD REDUCE OUR OPERATING MARGINS.

      For fiscal 2007 we derived approximately 15% of our net revenue 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. 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.

      DISRUPTION OR MALFUNCTION IN OUR INFORMATION SYSTEMS COULD ADVERSELY
AFFECT OUR BUSINESS.

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

      o     Earthquakes, fires, floods and other natural disasters;
      o     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
      o     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.

      OUR ACTUAL FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM THE PROJECTIONS
WE FILED WITH THE BANKRUPTCY COURT.

      In connection with our "pre-packaged" Chapter 11 plan of reorganization
that was confirmed by the Bankruptcy Court on October 20, 2003, we were required
to prepare projected financial information to demonstrate to the Bankruptcy
Court the feasibility of the plan of reorganization and our ability to continue
operations upon our emergence from bankruptcy. As indicated in the disclosure
statement with respect to the plan of reorganization and the exhibits thereto,
the projected financial information and various estimates of value discussed
therein should not be regarded as representations or warranties by us or any
other person as to the accuracy of that information or that those projections or
valuations will be realized. We, and our advisors, prepared the information in
the disclosure statement, including the projected financial information and
estimates of value. This information was not audited or reviewed by our
independent accountants. The significant assumptions used in preparation of the
information and estimates of value were included as an exhibit to the disclosure
statement.

                                      -26-
<PAGE>

      Those projections are not included in this report and you should not rely
upon them in any way or manner. We have not updated, nor will we update, those
projections. At the time we prepared the projections, they reflected numerous
assumptions concerning our anticipated future performance with respect to
prevailing and anticipated market and economic conditions which were and remain
beyond our control and which may not materialize. Projections are inherently
subject to significant and numerous uncertainties and to a wide variety of
significant business, economic and competitive risks and the assumptions
underlying the projections may be wrong in many material respects. Our actual
results may vary significantly from those contemplated by the projections. As a
result, we caution you not to rely upon those projections.

      WE ARE VULNERABLE TO EARTHQUAKES AND OTHER NATURAL DISASTERS.

      Our headquarters and 85 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, which has suffered from hurricanes. An
earthquake or other natural disaster could seriously impair our operations, and
our insurance may not be sufficient to cover us for the resulting losses.

      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:

      o     The federal False Claims Act;
      o     The federal Medicare and Medicaid anti-kickback laws, and state
            anti-kickback prohibitions;
      o     Federal and state billing and claims submission laws and
            regulations;
      o     The federal Health Insurance Portability and Accountability Act of
            1996;
      o     The federal physician self-referral prohibition commonly known as
            the Stark Law and the state equivalent of the Stark Law;
      o     State laws that prohibit the practice of medicine by non-physicians
            and prohibit fee-splitting arrangements involving physicians;
      o     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
      o     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. For a more detailed discussion of the various federal and state laws
and regulations to which we are subject, see "Business - Government Regulation."

      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 testing facility to bill the Medicare program. Medicare
carriers have discretion in applying the independent diagnostic testing facility
requirements and therefore the application of these requirements may vary from
jurisdiction to jurisdiction. 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 opportunity to expand
our services.

                                      -27-
<PAGE>

      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, 2007, approximately 22% 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.

      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. However, because challenges to these types
of arrangements are not required to be reported, we cannot substantiate our
belief. 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 prohibition, 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
are numerous initiatives affecting the coverage of and payment for 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.

      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.

      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. Our substantial
indebtedness could also:

                                      -28-
<PAGE>

      |X|   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;
      |X|   Increase our vulnerability to adverse general economic and industry
            conditions;
      |X|   Limit our flexibility in planning for, or reacting to, changes in
            our business and the industry in which we operate;
      |X|   Place us at a competitive disadvantage compared to our competitors
            that have less debt; and
      |X|   Limit our ability to borrow additional funds on terms that are
            satisfactory to us or at all.

      WE HAVE INEFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING THAT IF
UNSUCCESSFULLY REMEDIATED COULD ADVERSELY AFFECT OUR ABILITY TO REPORT OUR
FINANCIAL RESULTS ON A TIMELY AND ACCURATE BASIS.

      The following material weaknesses were identified in our internal control
over financial reporting as of December 31, 2007:

VALUATION OF ACCOUNTS RECEIVABLE

      We have determined that our methodology for determining the net realizable
value of accounts receivable was inadequate and we recorded a post closing
adjustment of $8.5 million to reduce accounts receivable to the revised
estimated net realizable value at December 31, 2007. Our analysis overvalued
accounts sent to collection and did not factor in a reduction of the expected
collection percentages as the accounts age. The run-out of 2006 accounts
receivable, which was our primary tool with which we analyzed the collectability
of accounts receivable, indicated an overvaluation of our 2006 accounts
receivable. The results of the run-out analysis was not considered in our
initial analysis of the net realizable value of accounts receivable.

FINANCIAL STATEMENT CLOSE PROCESS

      We have determined that our financial statement close process is flawed.
There is not a sufficient review of the financial statements or underlying
reconciliations and account analyses prior to the closing of our books as is
evidenced by the number of errors noted and material post closing adjustments
recorded. For example, in addition to the material adjustment in accounts
receivable noted above, other adjustments recorded include (1) a failure to
record a non-cash accrual for a $600,000 bonus due to the our COO upon his
future exercising of his warrants; the recording of this accrual should have
been recorded upon vesting of his stock options in Q1 2007; (2) a missed
recording of the settlement of a litigation matter for $120,000, and (3) the
misstatement of the amortization of deferred financing cost by approximately
$300,000 because we used an inaccurate amortization period.

FIXED ASSET RECORDING

      We have concluded that we do not have an adequate process to determine the
appropriate date that an asset is placed in service. Our method has been to
record assets as placed in service based on the date an invoice is paid. This
has resulted in both the overstatement and understatement of depreciation, and
the understatement of fixed assets and accounts payable at applicable balance
sheet dates. As a result, we recorded an adjustment to increase depreciation
expense by approximately $1.2 million for the year ended December 31, 2007.
Prior to recording an adjustment, fixed assets and accounts payable were
understated by $4.3 million as of December 31, 2007.

LIABILITY FOR MEDICAL MALPRACTICE EXPOSURE

      We have determined that we do not have appropriate control activities in
place to account for our exposure to incurred but not reported malpractice
claims (IBNR or the tail liability). We have a claims made medical malpractice
insurance policy. We record a reserve for our portion of reported claims based
on the policy deductible. However, based on the guidance in the American
Institute of Certified Public Accountants' (AICPA's) Healthcare Audit Guide,
Chapter 8, we should have been recording a reserve to account for our exposure
to IBNR. Prior to recording an adjustment, the understatement of the medical
malpractice liability as of December 31, 2007 was approximately $1.7 million,
and the expense for medical malpractice insurance was understated by
approximately $170,000 for the year ended December 31, 2007.

ENTITY LEVEL CONTROLS

      We have determined that we do not have adequate entity level controls in
place as is evidenced by the number of material weaknesses noted above. We
believe that the lack of adequate entity level controls is manifested in the
lack of accounting personnel who are familiar with U.S. generally accepted
accounting principles (GAAP), and the fact that the overall review process did
not detect any of the accounting errors noted above, none of which involve
complex accounting rules or involve an estimation process, except for the
determination of the net realizable value of accounts receivable.

                                      -29-
<PAGE>

                           Our Remediation Initiatives
                           ---------------------------

VALUATION OF ACCOUNTS RECEIVABLE

      We have formed a Revenue Committee, which includes the participation of
the Chief Executive Officer, Chief Financial Officer, Director of Reimbursement
Operations and other financial personnel. The Committee will meet every month to
review the collection statistics applied to monthly and year-to-date gross
charges as well as review the collectability of accounts receivable balances as
of the end of each month. The Committee will review and analyze collection
run-out statistics and compare the cash collections to historical data and
trends. We believe that collection patterns and anomalies will be identified
more quickly and appropriate adjustments will be made in a more timely manner to
establish the accurate net realizable value of accounts receivable balances.
Furthermore, we have assigned additional personnel and other resources to
review, monitor and analyze billing and collection performance.

FINANCIAL STATEMENT CLOSE PROCESS

      Our planned remediation includes:

      i)    Implementing processes and procedures to perform the necessary
            analysis, critical review, approval, and reconciliation of journal
            entries and account balances;

      ii)   Hiring additional accounting personnel with strong GAAP accounting
            knowledge;

      iii)  Establishing a more comprehensive financial statement close-list,
            with pre-assigned roles and responsibilities for the completion of
            each item on the list;

      iv)   Establishing procedures for period end cut-offs, including, but not
            limited to, identifying and recognizing all incurred liabilities and
            the recording of assets;

      v)    Increasing supervisory review of the consolidation process in
            anticipation of implementing an automated consolidation process;

      vi)   Developing a more formalized process for the identification of
            subsequent events and complex or unusual transactions; and

      vii)  Establishing monthly communications between finance and accounting
            personnel and representatives from the purchasing, legal and
            operations level managers to identify and quantify potential
            unrecorded liabilities and fixed assets.

FIXED ASSET RECORDING

      We will assign additional resources to track, record and depreciate fixed
assets. We will schedule monthly meetings with the purchasing department and
monthly calls with the regional controllers to identify assets when they are
delivered to sites and record their correct in-service dates. We will focus on
recording assets and depreciating them in the month when they placed in-service.
Additionally, we will record expenses related to progress payments to vendors in
the period in which services are rendered so as to keep accurate balances of
Construction-in-Progress accounts.

LIABILITY FOR MEDICAL MALPRACTICE EXPOSURE

      We will engage a third-party actuary to determine the IBNR as of the end
of each reporting period. Accordingly, we will use the results of each actuarial
study to adjust our IBNR reserve as of the end of each period.

ENTITY LEVEL CONTROLS

      We will seek to add resources with GAAP accounting knowledge at the entity
level. Additionally, we will assign senior level oversight and review to entity
prepared trial balances and financial statements to insure that accounting
errors are detected and corrected prior to the corporate-level consolidation
process.

                                      -30-
<PAGE>

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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 52,941 square feet of warehouse and other space
under leases, which expire at various dates between April 2007 and January 2018.
We also occupy approximately 7,000 square feet in Dallas, Texas pursuant to a
lease, which expires on September 30, 2011. 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 involved in the following litigation:

      (a) In Re DVI, Inc. Securities Litigation. United States District Court,
Eastern District of PA, Docket No. 2:03-CV-05336-LDD

      This is a class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by shareholders of DVI,
Inc. ("DVI"), one of our former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.

      The putative plaintiff class consists of those persons who purchased or
otherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the fact that existing
DVI loans on the centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.

      We have answered the complaint. The matter is still in its discovery
stage, tentatively intended to terminate in May 2008. Upon its termination we
intend to seek a summary judgment pursuant to the decision in a recently
released U.S. Supreme Court case. We intend to vigorously contest the
allegations.

      (b) Fleet Nat'l Bank v. Boyle et. al., U.S. District Court for the Eastern
District of Pennsylvania, Docket No. 04-CV-1277

      This case is related to In re DVI Securities Litigation, but was filed by
several of DVI's lenders. It, too, arises from the DVI bankruptcy (referenced in
the matter above) and was brought against DVI officers and directors and a
number of third party defendants, including us.

      The plaintiff alleges violations of the Racketeering Influenced and
Corrupt Organizations Act, 18 U.S.C. 1961 et seq., ("RICO"), and common-law
claims, including conspiracy to commit fraud, tortious interference with a
contract, conspiracy to commit tortious interference with a contract, conspiracy
to commit conversion and aiding and abetting fraud. Plaintiffs allege that in
2000, we acquired from a third party one or more unprofitable imaging centers in
order to help DVI conceal the fact that existing DVI loans on the centers were
delinquent.

      We filed a motion to dismiss the complaint that was granted as to all
claims except the RICO claim. In an effort to end our legal expenses with
respect to this action we agreed to pay $120,000 in full and final settlement.
The settlement is subject to court approval, which we anticipate receiving
within the next few months. We accrued $120,000 as of December 31, 2007 for this
settlement which is included in operating expenses in our Statement of
Operations for the year ended December 31, 2007.

      (c) Siemens Medical Solutions USA, Inc. v. Radiologix, Inc., 192nd
Judicial District, Dallas County, Case No. 07-01245.

      The action, filed February 12, 2007, arose out of Radiologix notifying
Siemens of its revocation of certain equipment purchase orders. Siemens
contended there was a breach of contract and sought unspecified damages. This
complaint was terminated by Siemens in late 2007.

      (d) In the Matter of the Arbitration Between St. Paul Radiology and
Questar Duluth, Inc. AAA Case No. 33-193Y00282-07.

                                      -31-
<PAGE>

      In connection with our sale of our Duluth, Minnesota imaging center assets
in June 2007 we received a demand for arbitration from the radiologists
providing professional services at the center stating they were entitled to at
least $1.2 million of the $1.3 million paid to us for the imaging center assets.
We believe the claim is without merit in that our contract with the radiologists
is clear in providing ownership rights to us and we have denied the claim. We
intend to vigorously contest the claim. It is anticipated the matter will be
determined by arbitration in June 2008.

GENERAL

      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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Inapplicable

                                     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. Such quotations have been adjusted to reflect our reverse
one-for-two stock split effected in November 2006 and reflect interdealer prices
without adjustment for retail mark-up, markdown or commission, and may not
necessarily represent actual transactions.

                                                    LOW       HIGH

                QUARTER ENDED
                -------------
                December 31, 2007                   8.31      10.39
                September 30, 2007                  7.81      10.57
                June 30, 2007                       5.38       9.60
                March 31, 2007                     $4.50      $6.67

                December 31, 2006                   2.13       5.15
                September 30, 2006                  1.45       2.90
                June 30, 2006                       0.51       1.99
                March 31, 2006                     $0.25      $0.59

      The last low and high prices for our common stock on the NASDAQ Global
Market on March 31, 2008 were $6.00 and $7.19 respectively. As of March 31,
2008, the number of holders of record of our common stock was 3,786. 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 customers of
these broker-dealers beneficially own these shares and that the number of
beneficial owners of our common stock is approximately 4,013.

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
2002 to 2007 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 January 1, 2002 in the Common Stock and
in each of the foregoing indices and the reinvestment of dividends through
January 1, 2008. 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 2006 or 2007 and we do not expect to
pay any dividends in the foreseeable future.

                                      -32-
<PAGE>



                               [PERFORMANCE GRAPH]



<TABLE>
                                               ANNUAL RETURN PERCENTAGE            TWO MONTHS     YEAR
                                                      YEARS ENDED                    ENDED       ENDED
                                      ------------------------------------------    --------    --------
COMPANY / INDEX                       10/31/03   10/29/04    10/31/05    10/31/06   12/29/06    12/31/07
--------------------------------------------------------------------------------------------------------
<S>                                   <C>        <C>         <C>        <C>         <C>        <C>
RADNET, INC.                            -38.75      14.29      -33.93      594.59     -10.12      119.70
S&P 500 INDEX                            20.80       9.42        8.72       16.34       3.33        5.49
S&P HEALTH CARE SECTOR                    5.92       1.76        9.57       11.36       0.91        7.15


                                                    INDEXED RETURNS                TWO MONTHS     YEAR
                             BASE                     YEARS ENDED                    ENDED       ENDED
                            PERIOD    -------------------------------------------   --------    --------
COMPANY / INDEX            10/31/02   10/31/03    10/29/04    10/31/05   10/31/06   12/29/06    12/31/07
--------------------------------------------------------------------------------------------------------
RADNET, INC.                  100        61.25       70.00       46.25     321.25     288.75      634.37
S&P 500 INDEX                 100       120.80      132.18      143.71     167.19     172.76      182.25
S&P HEALTH CARE SECTOR        100       105.92      107.78      118.09     131.51     132.71      142.20
</TABLE>

RECENT SALES OF UNREGISTERED SECURITIES

      During the fiscal year ended December 31, 2007, we sold the following
securities pursuant to an exemption from registration provided under Section
4(2) of the Securities Act of 1933, as amended:

      o     In January 2007, we issued to a radiologist in order to induce him
            to accept employment with BRMG, a five-year warrant exercisable at a
            price of $4.79 per share, which was the public market closing price
            for our common stock on the transaction date, to purchase 500,000
            shares of our common stock.

                                      -33-
<PAGE>

      o     In January 2007, we issued to one of our key employees a five-year
            warrant exercisable at a price of $4.74 per share, which was the
            public market closing price of our common stock on the transaction
            date, to purchase 250,000 shares of our common stock.
      o     In February 2007, we issued to each of our four independent
            directors five-year warrants exercisable at $5.99 per share, which
            was the public market price closing price for our common stock on
            the transaction date, for each to purchase 25,000 shares of our
            common stock.
      o     In April 2007, we issued to four of our key employees five-year
            warrants exercisable at a price of $5.88 per share, which was the
            public market closing price for our common stock on the transaction
            date, to purchase 250,000 shares, 150,000 shares, 150,000 shares and
            50,000 shares, respectively, of our common stock.

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, 2007, October 31, 2006 and 2005,
the two months ended December 31, 2006, and the consolidated balance sheet data
as of December 31, 2007 and 2006, and October 31, 2006, 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, 2004 and 2003, and the consolidated
balance sheet data set forth below as of October 31, 2005, 2004 and 2003 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 guidance issued by the
Emerging Issues Task Force, or EITF, of the Financial Accounting Standards
Board, or FASB, in EITF's release 97-2. 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 are not reflected
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.

                                      -34-
<PAGE>
<TABLE>

                                        YEARS ENDED         TWO MONTHS ENDED                     YEARS ENDED
                                        DECEMBER 31,           DECEMBER 31,                      OCTOBER 31,
                                    -------------------    -------------------    -----------------------------------------
                                      2007       2006        2006       2005        2006       2005       2004       2003
                                    --------   --------    --------   --------    --------   --------   --------   --------
                                              (UNAUDITED)            (UNAUDITED)

                                                           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
<S>                                 <C>        <C>         <C>        <C>         <C>        <C>        <C>        <C>
Net revenue                         $425,470   $192,859    $ 57,374   $ 22,520    $161,005   $145,573   $137,277   $140,259
Operating expenses:
Operating expenses                   330,550    147,226      46,033     19,149     120,342    109,012    105,828    106,078
Depreciation and amortization         45,281     19,542       5,907      2,759      16,394     17,536     17,917     16,979
Provision for bad bebts               27,467     10,707       3,907        826       7,626      4,929      3,911      4,944
Loss (gain) on disposal of
  equipment, net                          72        335         (38)         -         373        696          -          -
Gain from sale of joint venture
  interests                           (1,868)         -           -          -           -          -          -          -
Loss from continuing operations      (18,131)   (17,722)    (10,983)      (155)     (6,894)    (3,570)   (14,731)    (5,569)
Income from discontinued operation         -          -           -          -           -          -          -      3,197
Net loss                             (18,131)   (17,722)    (10,983)      (155)     (6,894)    (3,570)   (14,731)    (2,372)

Basic and diluted loss per share       (0.52)     (0.57)      (0.35)     (0.01)      (0.33)     (0.17)     (0.72)     (0.12)

Balance Sheet Data:

Cash and cash equivalents           $     18   $  3,221    $  3,221   $      2    $      2   $      2   $      1   $     30
Total assets                         433,620    394,766     394,766    119,112     131,636    117,784    124,437    139,176
Total long-term liabilities          428,743    381,903     381,903     23,586     179,288     23,840    139,980    122,096
Total liabilities                    503,450    441,762     441,762    189,725     210,430    191,866    195,006    195,122
Working capital (deficit)             23,180     31,230      31,230   (141,586)      2,896   (143,430)   (32,172)   (44,615)
Stockholders' deficit                (69,830)   (46,996)    (46,996)   (70,613)    (78,794)   (74,082)   (70,569)   (55,946)
</TABLE>

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

OVERVIEW

      We operate a group of regional networks comprised of 141 diagnostic
imaging facilities located in seven states with operations primarily in
California, the Mid-Atlantic, the Treasure Coast area of Florida, Kansas and the
Finger Lakes (Rochester) and Hudson Valley areas of New York, providing
diagnostic imaging services including magnetic resonance imaging (MRI), computed
tomography (CT), positron emission tomography (PET), nuclear medicine,
mammography, ultrasound, diagnostic radiology, or X-ray, and fluoroscopy. The
Company's operations comprise a single segment for financial reporting purposes.

      The results of operations of Radiologix and its wholly-owned subsidiaries
have been included in the consolidated financial statements from the date of
acquisition, November 15, 2006. The consolidated financial statements also
include the accounts of Radnet Management, Inc., or RadNet Management, and
Beverly Radiology Medical Group III (BRMG), which is a professional partnership,
all collectively referred to as "us" or "we". The consolidated financial
statements also include Radnet Sub, Inc., Radnet Management I, Inc., Radnet
Management II, Inc., SoCal MR Site Management, Inc., Diagnostic Imaging
Services, Inc. (DIS), and Radiologix, Inc., all wholly owned subsidiaries of
RadNet Management.

      Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 16% 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 77 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. At eight former Radiologix
centers in California and at all of the former Radiologix centers which are
located outside of California, we have entered into long-term contracts with
prominent radiology groups in the area to provide physician services at those
facilities. The operations of BRMG are consolidated with us 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 the
guidance in Emerging Issues Task Force Issue 97-2 (EITF 97-2). BRMG is a
partnership of Pronet Imaging Medical Group, Inc. and Beverly Radiology Medical
Group, both of which are 99%-owned by Dr. Berger. RadNet provides non-medical,
technical and administrative services to BRMG for which it receives a management
fee (see "BRMG" for a discussion of our management agreement with BRMG).

                                      -35-
<PAGE>

      Through our wholly-owned subsidiary, Radiologix, we contract with
radiology practices to provide professional services, including supervision and
interpretation of diagnostic imaging procedures, in our non-California
diagnostic imaging centers and eight California centers. The radiology practices
maintain full control over the provision of professional radiological 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. Through Radiologix we own the
diagnostic imaging assets and, therefore, receive 100% of the technical
reimbursements associated with imaging procedures. Our Radiologix subsidiary has
no financial controlling interest in the contracted radiology practices, as
defined in EITF 97-2; 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 $23.2 million, $31.2 million, and $2.9
million at December 31, 2007, December 31, 2006, and October 31, 2006,
respectively. We had net losses of $18.1 million, $11.0 million, $155,000, $6.9
million, and $3.6 million for the year ended December 31, 2007, the two months
ended December 31, 2006 and 2005, and the years ended October 31, 2006 and 2005,
respectively. We also had a stockholders' deficit of $69.8 million, $47.0
million, and $78.8 million at December 31, 2007, 2006, and October 31, 2006,
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 significant amounts 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:

      |X|   Maximizing performance at our existing facilities;
      |X|   Focusing on profitable contracting;
      |X|   Expanding MRI, CT and PET applications;
      |X|   Optimizing operating efficiencies; and
      |X|   Expanding our networks

      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. Taking these factors into account, including our
historical experience and our discussions with our lenders to date, although no
assurance can be given, 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.

SOURCES AND USES OF CASH

      Cash provided by operating activities was $29.2 million, $440,000 and
$10.3 million for the year ended December 31, 2007, the two months ended
December 31, 2006 and the year ended October 31, 2006, respectively. The primary
reason for the increase in 2007 was due to consolidation of Radiologix.

      Cash used by investing activities for the year ended December 31, 2007 was
$45.9 million compared to cash used of $13.5 million for the year ended October
31, 2006. For the year ended December 31, 2007, we purchased property and
equipment for approximately $27.2 million, acquired the assets and businesses of
additional imaging facilities (see facility acquisitions and divestiture below)
for approximately $18.5 million, and increased our ownership interests in joint
ventures that we initially acquired with Radiologix. We also generated cash of
approximately $3.9 million from the sale of imaging centers and a joint venture
interest (see facility acquisitions and divestitures below).

      Cash provided by financing activities for the year ended December 31, 2007
was $13.5 million and was primarily related to additional financing with GE
Commercial Healthcare Financial Services, net of payments on notes and leases
payable, and line of credit balances, as well as proceeds from the exercise of
options and warrants of approximately $958,000. Cash provided by financing
activities for the year ended October 31, 2006 was $3.2 million.

                                      -36-
<PAGE>

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):

<TABLE>
                                  2008         2009         2010         2011         2012      THEREAFTER      TOTAL
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>
Notes payable                  $    3,536   $    3,455   $    2,617   $    2,558   $  238,421   $  139,235   $  389,822
Capital leases*                    11,608       10,437        7,579        5,427        1,274            -       36,325
Operating leases (1)               33,555       28,987       24,681       19,459       16,163       66,386      189,231
                               ----------   ----------   ----------   ----------   ----------   ----------   ----------
Total                          $   48,699   $   42,879   $   34,877   $   27,444   $  255,858   $  205,621   $  615,378
                               ==========   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>
(*) Includes interest.
(1) Includes all existing options to extend lease terms

      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.

ADOPTION OF THE PROVISIONS OF STAFF ACCOUNTING BULLETIN NO. 108 ("SAB NO. 108")

      In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
No. 108"), "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 specifies how
the carryover or reversal of prior year unrecorded financial statement
misstatements should be considered in quantifying a current year misstatement.
SAB No. 108 requires an approach that considers the amount by which the current
year Consolidated Statement of Operations is misstated ("rollover approach") and
an approach that considers the cumulative amount by which the current year
Consolidated Balance Sheet is misstated ("iron curtain approach").

      Prior to the issuance of SAB No. 108, either the rollover or iron curtain
approach was acceptable for assessing the materiality of financial statement
misstatements. Prior to the Company's application of the guidance in SAB No.
108, management used the rollover approach for quantifying financial statement
misstatements.

      Initial application of SAB No. 108 allows registrants to elect not to
restate prior periods but to reflect the initial application in their annual
financial statements covering the first fiscal year ending after November 15,
2006. The cumulative effect of the initial application should be reported in the
carrying amounts of assets and liabilities as of the beginning of that fiscal
year and the offsetting adjustment, net of tax, should be made to the opening
balance of retained earnings for that year. We elected to record the effects of
applying SAB No. 108 using the cumulative effect transition method. The
misstatement that has been corrected is described below.

      Subsequent to the completion of the financial statement close process for
the three and six months ended June 30, 2007, we determined that certain lease
rate escalation clauses had not been properly accounted for in accordance with
generally accepted accounting principles for the fiscal years ended October 31,
2004, 2005 and 2006 as well as for the two months ended December 31, 2006 (our
transition period) and for the quarter ended March 31, 2007. The Company had
been recording rent expense based on the contractual terms of the lease
agreements. We reviewed Statement of Financial Accounting Standards No. 13 (SFAS
No. 13) and its related interpretations including Financial Accounting Standards
Board Technical Bulletin 85-3 "Accounting for Operating Leases with Scheduled
Rent Increases" (FTB 85-3), scheduled rent increases and rent holidays in an
operating lease should be recognized by the lessee on a straight-line basis over
the lease term unless another systematic and rational allocation is more
representative of the time pattern in which leased property is physically
employed. FTB 85-3 specifically states that scheduled rent increases designed to
reflect the anticipated effects of inflation is not a justification to support
not straight lining the lease cost over the lease term. Based on our review, we
have concluded that the straight-line method is required.

      During the preparation of our financial statements for the year ended
December 31, 2007, we determined that we were under accrued for our obligations
under our claims-made medical malpractice insurance policy. We determined that
this accrual should have been on our balance sheet beginning in 2003, and
through December 31, 2006 the balance should have been $1.5 million. Also, we
concluded that we had overstated our restatement adjustment to our financial
statements for the year ended October 31, 2005 as disclosed in our Form 10-K for
the year ended October 31, 2006 related to the correction to the useful life of
our leasehold improvements.

                                      -37-
<PAGE>

      In accordance with the transition provisions of SAB No. 108, we recorded a
$4.5 million cumulative effect adjustment to retained earnings with an
offsetting amount of $5.1 million to long-term deferred rent and accrual
liabilities, and an increase to fixed assets of $0.6 million as of January 1,
2007.

      Based on the nature of these adjustments and the totality of the
circumstance surrounding these adjustments, we have concluded that these
adjustments are immaterial to prior years' consolidated financial statements
under our previous method of assessing materiality, and therefore, have elected,
as permitted under the transition provisions of SAB No. 108, to reflect the
effect of these adjustments in opening liabilities as of January 1, 2007, with
the offsetting adjustment reflected as a cumulative effect adjustment to opening
retained earnings as of January 1, 2007.

CRITICAL ACCOUNTING 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 generally accepted accounting principles, or GAAP. Management
makes estimates and assumptions when preparing financial statements. These
estimates and assumptions affect various matters, including:

      o     Our reported amounts of assets and liabilities in our consolidated
            balance sheets at the dates of the financial statements;
      o     Our disclosure of contingent assets and liabilities at the dates of
            the financial statements; and
      o     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 materially differ from these estimates.

      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 4 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.
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.

      We re-evaluated December 31, 2006 recorded receivable balances and
concluded that current revised estimates are less than the prior year recorded
amounts. As a result, we have recorded adjustments in 2007 to appropriately
reflect current estimates of December 31, 2006 recorded receivables which
decreased 2007 net revenue by $8.5 million. Information acquired during this
evaluation will be utilized in our ongoing estimation of the net realizable
value of accounts receivable.

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 clients and maintain an
allowance for bad debts based upon specific payor collection issues that we have
identified and our historical experience.

                                      -38-
<PAGE>

DEPRECIATION AND AMORTIZATION OF LONG-LIVED ASSETS

      We expense 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. Even though we expect to utilize our net
operating loss carry forwards in the future, the last three fiscal year losses
and available evidence cause the valuation of our net deferred tax assets to be
uncertain in the near term. As of December 31, 2007, we have provided a full
allowance on our net deferred tax assets.

VALUATION OF GOODWILL AND LONG-LIVED ASSETS

      Goodwill at December 31, 2007 totaled $84.4 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." 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. Using the services of an external valuation expert, we performed
our annual impairment test of goodwill as of October 1, 2007. Based on our
analysis , we recorded no impairment loss related to goodwill as of the year
ended December 31, 2007. 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 long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." An asset is considered impaired if its carrying
amount exceeds the future net cash flow the asset is expected to generate. If
such asset is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value. We assess the recoverability of our long-lived and intangible
assets by determining whether the unamortized balances can be recovered through
undiscounted future net cash flows of the related assets.

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. 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 Statement of Financial Accounting Standards No. 133,
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 other comprehensive income in the Company's Consolidated Statement
of Stockholders' Equity. The remaining gain or loss, if any, is recognized
currently in earnings. Amounts in accumulated other comprehensive income are
reclassified into net income in the same period in which the hedged forecasted
transaction affects earnings.

MEDICAL MALPRACTICE INSURANCE

      We and our affiliated physicians are insured by Fairway Physicians
Insurance Company. Fairway provides claims-made malpractice insurance coverage
that covers only asserted malpractice claims within policy limits. With the
assistance of actuarial advisors, we maintain an accrual for our exposure to
incurred but not reported claims. At December 31, 2007, this accrual was $1.7
million. The accrual is based on an estimate of the ultimate amount of claims we
expect to pay which have not been reported at December 31, 2007.

                                      -39-
<PAGE>

SIGNIFICANT EVENTS

RADIOLOGIX

      On November 15, 2006, we completed our acquisition of Radiologix, Inc. as
a stock purchase. Under the terms of the merger agreement, Radiologix
shareholders received aggregate consideration of 11,310,950 shares of our common
stock and $42,950,000 in cash.

                                                        (IN THOUSANDS)
                                                        --------------
        Value of stock given by RadNet to Radiologix*   $       39,400
        Cash                                                    42,950
        Transaction fees and expenses**                         15,208
                                                        --------------
        Total purchase price                            $       97,558
                                                        ==============

(*) Calculated as 11,310,950 shares multiplied by $3.48 (average closing price
of $3.48 from June 28, 2006 to July 13, 2006).

(**) Includes $8,274,000 in assumed liabilities of Radiologix, including
$3,210,000 in merger and acquisition fees and $5,064,000 in Radiologix bond
prepayment penalties.

      Under the purchase method of accounting, the total purchase price as shown
above is allocated to Radiologix's net tangible and intangible assets based on
their fair values as of the date of acquisition. The following table summarizes
the final purchase price allocation at the date of acquisition.

                                                        (IN THOUSANDS)
                                                        --------------
        Current assets                                  $      114,764
        Property and equipment, net                             78,644
        Identifiable intangible assets                          61,000
        Goodwill                                                47,762
        Investments in joint ventures                            9,482
        Other assets                                               974
        Current liabilities                                    (25,191)
        Accrued restructuring charges                             (314)
        Contracts                                               (8,994)
        Assumption of debt                                    (177,358)
        Long-term liabilities                                   (2,002)
        Minority interests in consolidated subsidiaries         (1,209)
                                                        --------------
        Total purchase price                            $       97,558
                                                        ==============

      CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: We valued cash,
marketable securities, investments and other assets at their respective carrying
amounts as we believe that these amounts approximated their current fair values.

      IDENTIFIABLE INTANGIBLE ASSETS: Identifiable intangible assets acquired
include management service agreements and covenants not to compete. Management
service agreements represent the underlying relationships and agreements with
certain professional radiology groups. Covenants not to compete are contracts
entered into with certain former members of management of Radiologix on the date
of acquisition.

Identifiable intangible assets consist of:

                                                   ESTIMATED
                                   ESTIMATED     AMORTIZATION       ANNUAL
       (IN THOUSANDS)              FAIR VALUE       PERIOD       AMORTIZATION
-----------------------------      ----------    ------------    ------------
Management service agreements      $   57,880      25 years      $      2,315
Covenants not to compete                3,120    1 to 2 years           1,810

      Estimated useful lives for the intangible assets were based on the average
contract terms, which are greater than the amortization period that will be used
for management contracts. Intangible assets are being amortized using the
straight-line method, considering the pattern in which the economic benefits of
the intangible assets are consumed.

      GOODWILL: $47,762,000 has been allocated to goodwill. This is an increase
of approximately $9.3 million from our previous estimate. The increase in
goodwill relates to an $8.0 million decrease to property and equipment, a
$100,000 increase to current assets, a 277,000 increase to deferred taxes and a
$1.1 million increase to accrued liabilities. Goodwill represents the excess of
the purchase price over the fair value of the underlying net tangible and
identifiable intangible assets. In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets" goodwill will not be amortized but instead will be
tested for impairment at least annually. We performed this test on October 1,
2007. As a result of this test, management determined that the value of goodwill
is not impaired. Because this goodwill was established through a stock purchase,
no amount is deductible for tax purposes.

                                      -40-
<PAGE>

      OPERATING LEASES: We assumed certain operating leases for both equipment
and facilities. All related historical deferred rent liabilities have been
eliminated.

      The following unaudited pro-forma financial information for the year ended
October 31, 2006, and the two months ended December 31, 2005 and 2006 represents
the combined results of the Company's operations and Radiologix as if the
Radiologix acquisition had occurred on November 1, 2005. The unaudited pro-forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company constituted a single entity during such
periods.

                                      YEAR ENDED           TWO MONTHS ENDED
                                      OCTOBER 31,            DECEMBER 31,
                                         2006           2005              2006
                                     ------------   ------------   ------------
      Net revenue                    $418,650,000   $ 66,719,000   $ 65,458,000
      Pro-forma net loss               (4,963,000)    (1,333,000)   (12,088,000)

      Pro-forma net loss per share   $      (0.24)  $      (0.06)  $      (0.39)

FACILITY ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

      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.

      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 $9.2 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 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 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 $2.8 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.

      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.

      Our allocation of the purchase price with respect to our 2007 acquisitions
to the fair value of the assets acquired and liabilities assumed is preliminary
and subject to change upon completion of our allocation analysis.

                                      -41-
<PAGE>

DIVESTITURES

      In June 2007 we divested a non-core center in Duluth, Minnesota to a local
multi-center operator for $1.3 million.

      In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.

      In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures resulting in a revised ownership of 49%. As a result
of this transaction, we no longer consolidate this joint venture. Accordingly,
our consolidated balance sheet at December 31, 2007 includes this 49% interest
as a component of our total investment in non-consolidated joint ventures where
it is accounted for under the equity method. The amounts eliminated from our
consolidated balance sheet as a result of the deconsolidation were not material.
Since the deconsolidation occurred at the end of 2007, no significant amounts
were eliminated from our statement 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.

<TABLE>
                          RADNET, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                 YEARS END        TWO MONTHS ENDED    FISCAL YEARS ENDED
                                                DECEMBER 31,        DECEMBER 31,          OCTOBER 31,
                                            ------------------   ------------------   ------------------
                                              2007      2006       2006      2005       2006      2005
                                            --------  --------   --------  --------   --------  --------
                                                    (unaudited)          (unaudited)
<S>                                           <C>       <C>        <C>       <C>        <C>       <C>
NET REVENUE                                   100.0%    100.0%     100.0%    100.0%     100.0%    100.0%

OPERATING EXPENSES
   Operating expenses                          77.7%     76.3%      80.2%     75.0%      74.7%     74.9%
   Depreciation and amortization               10.6%     10.1%      10.3%     10.8%      10.2%     12.0%
   Provision for bad debts                      6.5%      5.6%       6.8%      3.2%       4.7%      3.4%
   Loss (gain) on sale of equipment             0.0%      0.2%      -0.1%      0.0%       0.2%      0.5%
   Severance costs                              0.2%      0.1%       0.4%      0.0%       0.0%      0.0%
      Total operating expenses                 95.0%     92.3%      97.6%     89.1%      89.9%     90.8%


INCOME FROM OPERATIONS                          5.0%      7.7%       2.4%     10.9%      10.1%      9.2%

OTHER EXPENSES (INCOME)
   Interest expense                            10.4%     11.9%       9.8%     11.6%      12.6%     12.0%
   Gain from sale of joint venture interest    -0.4%      0.0%       0.0%      0.0%       0.0%      0.0%
   Loss (gain) on debt extinguishment, net      0.0%      4.8%      12.6%      0.0%       1.3%     -0.4%
   Other (income) expense                       0.0%      0.4%      -0.1%     -0.1%       0.5%      0.0%
      Total other expense                      10.0%     17.2%      22.3%     11.5%      14.4%     11.7%

LOSS BEFORE INCOME TAXES, MINORITY
   INTERESTS AND EARNINGS FROM
   MINORITY INVESTMENTS                        -5.0%     -9.5%     -19.9%     -0.6%      -4.3%     -2.5%
   Provision for income taxes                  -0.1%     -9.5%       0.0%      0.0%       0.0%      0.0%
   Minority interest in (income)
     loss of subsidiaries                      -0.1%      0.0%      -0.1%      0.0%       0.0%      0.0%
   Equity in earnings from joint ventures       1.0%      0.0%       0.9%      0.0%       0.1%      0.0%
                                            --------  --------   --------  --------   --------  --------

NET LOSS                                       -4.2%    -19.0%     -19.1%     -0.6%      -4.3%     -2.5%
                                            ========  ========   ========  ========   ========  ========
</TABLE>

                                      -42-
<PAGE>

YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
(UNAUDITED)

      During the year ended December 31, 2006, we completed our acquisition of
Radiologix. The results of Radiologix and its wholly owned subsidiaries have
been included in our consolidated financial statements from the date of
acquisition, November 15, 2006.

NET REVENUE

      Net revenue from continuing operations for the year ended December 31,
2007 was $425.5 million compared to $192.9 million for the year ended December
31, 2006, an increase of $232.6 million, or 120.6 %. Net revenue from the
acquisition of Radiologix, effective November 15, 2006, was $264.3 million and
$30.5 million for the years ended December 31, 2007 and 2006, respectively. Net
revenue excluding Radiologix increased $7.3 million for the year ended December
31, 2007 when compared to the year ended December 31, 2006. This increase is
mainly due to an increase in procedure volumes from existing centers as well as
from the addition of new centers and is net of the effects of reimbursement
reductions experienced as a result of the government's reduction of certain
Medicare payments (DRA), which became effective in January 2007.

      During 2007, we re-evaluated the net realizable value of our December 31,
2006 receivable balances and concluded that current revised estimates are less
than the prior year recorded amounts. As a result, we have recorded adjustments
in 2007 to appropriately reflect current estimates of the net realizable value
of our December 31, 2006 receivables which decreased 2007 net revenue by $8.5
million.

OPERATING EXPENSES

      Operating expenses from continuing operations for the year ended December
31, 2007 increased approximately $227.3 million, or 127.1%, to $404.3 million
for the year ended December 31, 2007 compared to $177.0 million for the year
ended December 31, 2006. The following table sets forth our operating expenses
for the years ended December 31, 2007 and 2006 (dollars in thousands):

                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                                     2007          2006
                                                  ----------    ----------
                                                                (UNAUDITED)
      Salaries and professional reading fees,
        excluding stock compensation              $  178,573    $   88,514
      Stock compensation                               3,313           510
      Building and equipment rental                   41,299        13,536
      General administrative expenses                107,245        44,666
      NASDAQ one-time listing fee                        120             -
                                                  ----------    ----------
      Operating expenses                             330,550       147,226

      Depreciation and amortization                   45,281        19,542
      Provision for bad debts                         27,467        10,707
      Loss on sale of equipment, net                      72           335
      Severance costs                                    934           205
                                                  ----------    ----------
      Total operating expenses                    $  404,304    $  178,015
                                                  ==========    ==========

      o     SALARIES AND PROFESSIONAL READING FEES (EXCLUDING STOCK COMPENSATION
            AND SEVERANCE)

            Salaries and professional reading fees increased $90.1 million, or
            101.7%, to $178.6 million for the year ended December 31, 2007
            compared to $88.5 million for the year ended December 31, 2006.
            Salaries and professional reading fees from Radiologix were $90.2
            million and $11.2 million for the years ended December 31, 2007 and
            2006, respectively. Salaries excluding Radiologix increased $11.1
            million for the year ended December 31, 2007 when compared to the
            same period last year. This increase includes a $600,000 accrual for
            a cash bonus tied to the vesting of certain warrants. The remaining
            increase of $10.5 million is in line with DRA effected increases in
            net revenue and increases in our procedure volumes.

                                      -43-
<PAGE>

      o     STOCK BASED COMPENSATION

            Stock compensation increased $2.8 million to $3.3 million for the
            year ended December 31, 2007 compared to $510,000 for the year ended
            December 31, 2006. This increase is primarily due to additional
            options and warrants granted during 2007 and $1.7 million of
            additional stock based compensation expense recorded during 2007 as
            a result of the vesting of certain warrants to our senior
            executives.

            Messrs. Linden, Hames and Stolper who hold the positions of
            Executive Vice President and General Counsel, Executive Vice
            President and Chief Operating Officer, Western Operations and
            Executive Vice President and Chief Financial Officer, respectively,
            were issued certain warrants in prior periods which fully vest upon
            the sooner of their respective multi-year vesting schedules or at
            such time as the 30 day average closing stock price of our shares in
            the public market in which it trades equals or exceeds $6.00. For
            the 30 day trading period ended March 7, 2007, the average closing
            price exceeded $6.00 per share. Accordingly, these warrants fully
            vested resulting in the expensing of the remaining unamortized fair
            value of these warrants of $1.7 million.

      o     SEVERANCE

            During the year ended December 31, 2007, we recorded severance costs
            of $934,000 associated with the integration of Radiologix.

      o     BUILDING AND EQUIPMENT RENTAL

            Building and equipment rental expenses increased $28.0 million, or
            206.4%, to $41.5 million for the year ended December 31, 2007
            compared to $13.5 million for the year ended December 31, 2006.
            Building and equipment rental expense from Radiologix was $29.8
            million and $4.0 million for the years ended December 31, 2007 and
            2006, respectively. Building and equipment rental expenses excluding
            Radiologix increased $2.0 million for the year ended December 31,
            2007 when compared to the same period in the previous year. The
            increase was due to normal consumer price index escalations built
            into existing operating leases as well as additional facility rent
            from new centers including approximately $288,000 from centers
            acquired during 2007 (see Note 3 to our consolidated financial
            statements). Also included in this increase is $381,000 resulting
            from straight-lining the fixed rent escalators existing in some of
            our lease contracts.

      o     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, which adjust with changes in net revenue. Overall,
            general and administrative expenses increased $62.4 million, or
            139.7%, to $107.1 million for the year ended December 31, 2007
            compared to $44.7 million for the year ended December 31, 2006.
            General and administrative expenses for Radiologix were $61.2
            million and $7.4 million for the years ended December 31, 2007 and
            2006, respectively. General and administrative expenses excluding
            Radiologix increased $8.8 million for the year ended December 31,
            2007 when compared to the same period last year. The increase is in
            line with our increase in procedure volumes at both existing centers
            as well as new centers. Also in this increase are increased
            expenditures for accounting fees associated with our efforts towards
            compliance with the Sarbanes-Oxley Act of 2002, as well as a
            $172,000 increases to accrued medical insurance and a $120,000
            increase to accrued legal settlements.

      o     NASDAQ ONE-TIME LISTING FEE

            During the year ended December 31, 2007, we recorded $120,000 for
            fees associated with listing our common stock with NASDAQ.

                                      -44-
<PAGE>

      o     DEPRECIATION AND AMORTIZATION

            Depreciation and amortization increased $25.8 million, or 131.7%, to
            $45.3 million for the year ended December 31, 2007 compared to $19.5
            million for the year ended December 31, 2006. Depreciation and
            amortization expense for Radiologix was $24.8 million and $3.0
            million for the years ended December 31, 2007 and 2006,
            respectively. Depreciation and amortization expense excluding
            Radiologix increased $3.9 million for the year ended December 31,
            2007 when compared to the same period last year primarily due to
            property and equipment additions, as well as the acceleration of the
            amortization of leasehold improvements related to our vacated San
            Francisco, Rancho Bernardo and San Gabriel facilities of
            approximately $716,000, as well as $743,000 related to adjustments
            to our in-service dates in our fixed asset system.

      o     PROVISION FOR BAD DEBTS

            Provision for bad debts increased $16.8 million, or 156.5%, to $27.5
            million, or 6.3% of net revenue, for the year ended December 31,
            2007 compared to $10.7 million, or 5.6% of net revenue, for the year
            ended December 31, 2006. Provision for bad debts for Radiologix was
            $21.2 million and $2.7 million, and was 8.0% and 8.8 % of net
            revenue, for the years ended December 31, 2007 and 2006,
            respectively. Historically, Radiologix has experienced higher bad
            debts/expense as compared to our business pre-acquisition due to the
            higher concentration of business associated with hospital payers in
            the markets that Radiologix serves and the poor collection
            percentages that are inherent with hospital business. Provision for
            bad debts excluding Radiologix was $6.3 million and $8.0 million for
            the years ended December 31, 2007 and 2006, respectively.

INTEREST EXPENSE

      Interest expense for the year ended December 31, 2007 increased
approximately $21.3 million, or 92.5%, to $44.3 million compared to $23.0
million for the year ended December 31, 2006. The increase was primarily due to
the increased indebtedness of $214 million incurred upon the acquisition of
Radiologix as well as an addition to our first lien Term Loan B of $25 million
in August 2007. Also included is the amortization of our deferred finance costs
associated with this new financing which was approximately $1.6 million for the
year ended December 31, 2007 as well as realized losses on our fair value hedges
of $820,000 for the year ended December 31, 2007.

GAIN ON SALE OF JOINT VENTURE INTERESTS

      During the year ended December 31, 2007, we recorded a gain of $1.9
million from the sale of part of our interest in a joint venture acquired from
our acquisition of Radiologix (see Acquisitions and Divestitures above).

INCOME TAX EXPENSE

      For the year ended December 31, 2007, we recognized $337,000 in income tax
expense related to certain state tax obligations of Radiologix.

MINORITY INTEREST IN INCOME OF SUBSIDIARIES

      For the year ended December 31, 2007, we recognized $600,000 in minority
interest in income of our consolidated joint ventures.

EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURES

      For the year ended December 31, 2007, we recognized equity in earnings
from unconsolidated joint ventures of $4.1 million.

            TWO MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THE TWO MONTHS ENDED
            DECEMBER 31, 2005 (UNAUDITED)

      During the two months ended December 31, 2006, we completed our
acquisition of Radiologix. The results of Radiologix and its wholly owned
subsidiaries have been included in our consolidated financial statements from
the date of acquisition, November 15, 2006, which is the primary reason for the
increase noted below.

NET REVENUE

      Net revenue from continuing operations for the two months ended December
31, 2006 was $57.4 million compared to $25.5 million for the two months ended
December 31, 2005, an increase of $31.9 million, or 125.1%. Net revenue from the
acquisition of Radiologix, effective November 15, 2006, was $30.5 million, and
net revenue from five new centers added during calendar 2006 (net of two closed
centers) was $1.4 million. On the other hand, our same store net revenue
decreased $405,000 when compared to the same period in 2005. The decrease was
primarily the result of our Beverly Hills locations in which net revenue
decreased $514,000 when compared to the same period in 2005 due to increased
competition in the area.

                                      -45-
<PAGE>

OPERATING EXPENSES

      Operating expenses from continuing operations for the two months ended
December 31, 2006 increased approximately $33.4 million, or 146.4%, from $22.6
million for the two months ended December 31, 2005 to $56.0 million for the two
months ended December 31, 2006. The following table sets forth our operating
expenses for the two months ended December 31, 2005 and 2006 (dollars in
thousands):

                                                      TWO MONTHS ENDED
                                                        DECEMBER 31,
                                                  ------------------------
                                                     2006          2005
                                                  ----------    ----------
                                                                (UNAUDITED)

      Salaries and professional reading fees      $   25,382    $   11,880
      Building and equipment rental                    6,112         1,388
      General administrative expenses                 14,539         5,881
                                                  ----------    ----------
      Operating expenses                              46,033        19,149

      Depreciation and amortization                    5,907         2,759
      Provision for bad debts                          3,907           826
      Gain on sale of equipment, net                     (38)           --
      Severance costs                                    205            --
                                                  ----------    ----------
      Total operating expenses                    $   56,014    $   22,734
                                                  ==========    ==========

      o     SALARIES AND PROFESSIONAL READING FEES

            Salaries and professional reading fees increased $13.5 million, or
            340.3%, from the two months ended December 31, 2005 to the two
            months ended December 31, 2006. During the two months ended December
            31, 2006, salaries and professional reading fees were $11.2 million
            and $0.6 million for Radiologix and the five new centers opened
            during calendar 2006 (net of two closed centers), respectively. In
            addition, salaries for the San Fernando Valley Interventional
            Radiology and Imaging Center, or SFVIR, were $27,000 for the two
            months ended December 31, 2006. The costs were for the preliminary
            set up of the facility that opened on March 12, 2007. Same store
            salaries and professional reading fees increased $0.9 million and
            $0.8 million, respectively, for the two months ended December 31,
            2006 when compared to the same period last year. The majority of the
            increases were at the sites of Palm Springs and Palm Desert,
            Modesto, Orange Imaging, Tarzana Advanced and Ventura due to
            increases in net revenue, and at corporate and the Beverly Hills
            facilities due to the hiring or retention of key employees or
            physicians.

      o     BUILDING AND EQUIPMENT RENTAL

            Building and equipment rental expenses increased $4.7 million, or
            340.3%, to $6.1 million in the two months ended December 31, 2006
            compared to $1.4 million in the two months ended December 31, 2005.
            During the two months ended December 31, 2006, building and
            equipment rental expense was $4.0 million and $0.2 million for
            Radiologix and the five new centers opened during calendar 2006 (net
            of two closed centers), respectively. In addition, building rent
            expense for SFVIR was $39,000 for the two months ended December 31,
            2006. Same store building and equipment rental expenses increased
            $114,000 and $347,000, respectively, for the two months ended
            December 31, 2006 when compared to the same period last year. The
            increase in building rent was due to normal escalations built into
            the operating leases, and the increase in equipment rental was
            primarily due to the increased costs of renting mobile MRI equipment
            while repairs were being done at our Orange facility.

      o     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 at 3.62% of net revenue for the two-month period. Overall,
            general and administrative expenses increased $8.7 million, or
            147.2%, for the two months ended December 31, 2006 compared to the

                                      -46-
<PAGE>

            previous period. During the two months ended December 31, 2006,
            general and administrative expenses were $7.4 million and $450,000
            for Radiologix and the five new centers opened during calendar 2006
            (net of two closed centers), respectively. In addition, general and
            administrative expenses for SFVIR were $26,000 for the two months
            ended December 31, 2006. Same store general and administrative
            expenses increased $0.8 million for the two months ended December
            31, 2006 when compared to the same period last year. The increase
            was primarily due to increased expenditures for accounting fees,
            costs related to repairs at our Orange facility, and employee and
            marketing expenditures at year-end.

      o     DEPRECIATION AND AMORTIZATION

            Depreciation and amortization increased by $3.1 million, or 114.1%,
            in the two months ended December 31, 2006 when compared to the same
            period last year. During the two months ended December 31, 2006,
            depreciation and amortization expense was $3.0 million and $0.2
            million for Radiologix and the five new centers opened during
            calendar 2006 (net of two closed centers), respectively. In
            addition, depreciation and amortization expense for SFVIR was
            $34,000 for the two months ended December 31, 2006. Same store
            depreciation and amortization expense decreased $7,000 for the two
            months ended December 31, 2006 when compared to the same period last
            year. Depreciation from same store property and equipment additions
            during the two months ended December 31, 2006 was offset by
            historical property and equipment fully depreciating during the same
            period.

      o     PROVISION FOR BAD DEBTS

            Provision for bad debts increased $3.1 million, or 373.0%, in the
            two months ended December 31, 2006 to $3.9 million compared to
            $826,000 for the two months ended December 31, 2005. During the two
            months ended December 31, 2006, the provision for bad debts was $2.7
            million and $0.1 million for Radiologix and the five new centers
            opened during calendar 2006 (net of two closed centers),
            respectively. Radiologix's provision for bad debts is higher due to
            the large number of hospital-based receivables they possess. Same
            store provision for bad debt expense increased $0.3 million for the
            two months ended December 31, 2006 when compared to the same period
            last year. The increase was primarily due to increased write-offs
            due to billing issues related to untimely filing, and incomplete or
            incorrect demographic information collected at the sites.

      o     SEVERANCE COSTS

            During the two months ended December 31, 2006, we recorded severance
            costs for Radiologix of $205,000 related to the acquisition.

INTEREST EXPENSE

      Interest expense for the two months ended December 31, 2006 increased
approximately $2.6 million, or 86.9%, from the same period in 2005. The increase
was primarily due to the increased indebtedness of $360.0 million upon the
acquisition of Radiologix.

LOSS (GAIN) ON DEBT EXTINGUISHMENTS, NET

      For the two months ended December 31, 2006, we recognized a loss from
extinguishments of debt of $7.2 million. With the acquisition or Radiologix, we
paid off existing notes payable and subordinated bond debentures and incurred
pre-payment penalties of $2.3 million, and wrote-off deferred financing costs
related to prior debt instruments of $4.9 million.

OTHER INCOME

      For the two months ended December 31, 2006 and 2005, we earned other
income of $51,000 and $29,000, respectively.

INCOME TAX EXPENSE

      For the two months ended December 31, 2006, we recognized $20,000 in
income tax expense related to Radiologix.

MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARIES

      For the two months ended December 31, 2006, we recognized $45,000 in
minority interest expense related to joint ventures of Radiologix.

                                      -47-
<PAGE>

EARNINGS FROM MINORITY INVESTMENTS

      For the two months ended December 31, 2006, we recognized earnings from
minority investments of $503,000 including $476,000 from investments of
Radiologix and $27,000 from an investment in a PET center in Palm Desert,
California.

YEAR ENDED OCTOBER 31, 2006 COMPARED TO THE YEAR ENDED OCTOBER 31, 2005

      During fiscal 2006, we continued our efforts to enhance our operations and
expand our network, while improving our financial position. Our results for
fiscal 2006 were aided by the opening and integration of new facilities,
increases in PET volume, and improvements in reimbursement from managed care
capitated contracts and other payors.

      During fiscal 2006, we made more progress in solidifying our financial
condition. Effective March 9, 2006, we completed the issuance of a $161 million
senior secured credit facility, which we used to refinance substantially all of
our existing indebtedness (except for $16.1 million of outstanding subordinated
debentures and approximately $5 million of capital lease obligations). We
incurred fees and expenses for the transaction of approximately $5.6 million.
Debt issue costs were being amortized on a straight-line basis over 65 months
and were classified as debt issue costs. In addition, we recorded a net loss on
extinguishments of debt of $2.1 million, which included $1.2 million in
pre-payment penalty fees that are unpaid as of October 31, 2006 and classified
as accrued expenses under current liabilities. See "Financial Condition -
Liquidity and Capital Resources."

NET REVENUE

      Net revenue from continuing operations for fiscal 2006 was $161.0 million
compared to $145.6 million for fiscal 2005, an increase of approximately $15.4
million, or 10.6%. The largest net revenue increases were at the following
facilities:

                                           FISCAL 06
                                           INCREASE            %
                                          ----------      ----------
                Temecula (5 sites)        $3,433,000         45.2%
                Tarzana  (2 sites)        $2,301,000         25.2%
                Palm Springs (6 sites)    $1,557,000         17.1%

      Palm Springs' net revenue increase was primarily due to increased patient
volume, improved contracting and increases in reimbursement from its managed
care capitated payors. Temecula's net revenue increase was primarily due to the
return of a managed care capitated contract and the opening and ramp-up in
business of an additional facility in Murrieta providing MRI, CT, PET, nuclear
medicine and x-ray services in December 2004. Tarzana's net revenue increase was
primarily due to increased PET volume with the hiring of a new physician and the
upgrade of one of its MRI machines that increased throughput and patient volume.

      In addition, we acquired five new facilities that generated net revenues
of $1.9 million for the fiscal year ended October 31, 2006 with the majority of
new sites added in the fourth quarter.

      Managed care capitated payor revenue increased from 26% of net revenue, or
approximately $38 million, to 27% of net revenue, or approximately $43 million,
for the years ended October 31, 2005 and 2006, respectively. We have been
successful in retaining existing contracts while obtaining increases in
reimbursement from the payors coupled with receiving increases in co-payments
from the individual patients upon service.

OPERATING EXPENSES

      Operating expenses from continuing operations for fiscal 2006 increased
approximately $12.5 million, or 9.5%, from $132.2 million in fiscal 2005 to
$144.7 million in fiscal 2006. The following table sets forth our operating
expenses for fiscal 2005 and 2006 (dollars in thousands):

                                                   YEAR ENDED OCTOBER 31,
                                                  ------------------------
                                                     2006          2005
                                                  ----------    ----------
      Salaries and professional reading fees      $   75,522    $   66,674
      Building and equipment rental                    8,811         7,919
      General administrative expenses                 36,009        34,419
                                                  ----------    ----------
      Operating expenses                             120,342       109,012

      Depreciation and amortization                   16,394        17,536
      Provision for bad debts                          7,626         4,929
      Loss on disposal of equipment, net                 373           696
                                                  ----------    ----------
      Total operating expenses                    $  144,735    $  132,173
                                                  ==========    ==========

                                      -48-
<PAGE>

      o     SALARIES AND PROFESSIONAL READING FEES

            Salaries and professional reading fees increased $8.8 million, or
            13.3%, from fiscal 2005 to 2006. The majority of the increase is due
            to the increase in net revenue from $145.6 million to $161.0
            million, or 10.6%, in fiscal 2005 and 2006, respectively. In
            addition to the hiring of additional employees to staff new centers,
            professional fees increased at certain sites due to contracts where
            compensation to the professionals is based upon a percentage of net
            revenue.

      o     BUILDING AND EQUIPMENT RENTAL

            Building and equipment rental expenses increased $0.9 million in
            fiscal year 2006 when compared to the same period last year. The
            increase is primarily due to cost of living rental increases within
            existing building lease agreements, the addition of new facilities
            and the related rental expense, and temporary equipment rental for
            MRI and CT equipment at two of our imaging centers.

      o     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 at 3.62% of net revenue. Overall, general and
            administrative expenses increased $1.6 million, or 4.6%, in fiscal
            2006 compared to the previous period primarily due to the increase
            in net revenue.

      o     DEPRECIATION AND AMORTIZATION

            Depreciation and amortization decreased by $1.1 million in fiscal
            year 2006 when compared to the same period last year. The decrease
            in depreciation and amortization was primarily related to aging
            property and equipment fully depreciating during the period not
            offset by the addition of new property and equipment.

      o     PROVISION FOR BAD DEBTS

            The $2.7 million increase in the provision for bad debts was
            primarily a result of increased net revenue and the increase in bad
            debts as a percentage of net revenue from 3.4% to 4.7% in fiscal
            2005 and 2006, respectively. The bad debt percentage increased due
            to maturing accounts receivable, the write-off of receivables due to
            incomplete demographic information and billing statute issues, and
            the faster write-off of slower-paying receivables to collection
            agencies to expedite cash receipts.

      o     LOSS ON DISPOSAL OF EQUIPMENT, NET

            During fiscal 2006, losses on disposal or sale of equipment were
            $0.4 million and were primarily due to the write-off of leasehold
            improvements at our Emeryville and Woodward Park facilities, and the
            sale of certain medical equipment at a loss. During fiscal 2005,
            losses on disposal of equipment were $0.7 million and were primarily
            due to the trade-in and upgrade of an MRI at our Tarzana Advanced
            facility that was initiated to improve the existing equipment
            increasing throughput and patient volume at the site.

INTEREST EXPENSE

      Interest expense for fiscal 2006 increased approximately $2.9 million, or
16.4%, from the same period in fiscal 2005. Interest expense is primarily from
our outstanding notes payable and capital lease obligations, subordinated bond
debentures, related party payables and our outstanding line of credit. The
increase was primarily the result of increases in notes payable and capital
lease obligations and our mark to market interest rate adjustment of $0.9
million for fiscal 2006 related to the swap arrangement. As part of the March
2006 refinancing, we were required to swap at least 50% of the aggregate
principal amount of the facilities to a floating rate within 90 days of the
close of the agreement on March 9, 2006. On April 11, 2006, effective April 28,
2006, on $73.0 million (one half of our First and Second Lien Term Loans of
$146.0 million), we entered into an interest rate swap fixing the LIBOR rate of
interest at 5.47% for a period of three years. Previously, the interest rate on
the $73.0 million was based upon a spread over LIBOR, which floats with market
conditions. The amount is classified in long-term accrued expenses.

                                      -49-
<PAGE>

LOSS (GAIN) ON DEBT EXTINGUISHMENTS, NET

      For the year ended October 31, 2005, we recognized gains from
extinguishments of debt for $0.5 million for the write-off of certain notes
payable past the statute of limitations for $475,000 and the settlement of other
notes payable at a discount of $40,000. For the year ended October 31, 2006, due
to the March 2006 debt restructuring, we recognized a net loss on extinguishment
of debt of $2.1 million. The loss is comprised of a gain of $2.1 million for a
discount on notes payable, offset by $2.1 million in pre-payment penalties and
$2.1 million for the write-off of capitalized debt issue costs.

OTHER INCOME

      For the year ended October 31, 2005, we earned other income of $0.4
million. During fiscal 2005, we recognized gains from write-off of liabilities
previously expensed in fiscal 2004 for approximately $210,000, deferred rental
income of $90,000, and record copy income of $57,000. We had no other income
during the year ended October 31, 2006.

OTHER EXPENSE

      In the years ended October 31, 2005 and 2006, we incurred other expense of
$349,000 and $788,000, respectively. During the twelve months ended October 31,
2005, we recognized losses on the write-off of loan fees and other assets of
$349,000. During the twelve months ended October 31, 2006, we recorded expenses
of $788,000 that included the $500,000 settlement payment to Broadstream and
related legal fees.

EQUITY IN INCOME OF INVESTEE

      In the year ended October 31, 2006, we earned income for our 47.5%
investment in a PET center of approximately $83,000. The investment of $237,000
was made in February 2006.

INCOME TAX EXPENSE

      In fiscal 2005 and 2006, the valuation allowance was fully reserved.

RELATED PARTY TRANSACTIONS

      We describe certain transactions between us and certain related parties
under "Certain Relationships and Related Transactions" which is incorporated by
reference herein to the Proxy Statement for the Annual Meeting of Stockholders
to be held on May 12, 2008 (the "Proxy Statement").

RECENT ACCOUNTING PRONOUNCEMENTS

      In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS,
which defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 157 in 2008 to have a
material impact on our consolidated financial statements.

      In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES, INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115, which is effective for fiscal years beginning after November
15, 2007. SFAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other U.S. generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. We do not expect the adoption of SFAS 159 in
2008 to have a material impact on our consolidated financial statements.

      In December 2007, the FASB issued SFAS 141(R), BUSINESS COMBINATIONS and
SFAS 160, NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS. The
standards are intended to improve, simplify, and converge internationally the
accounting for business combinations and the reporting of noncontrolling
(minority) interests in consolidated financial statements. SFAS 141(R) requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS 141(R) is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier adoption is prohibited. We have not evaluated the potential
impact that SFAS 141(R) will have on our financial statements.

                                      -50-
<PAGE>

      SFAS 160 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, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and minority interests by requiring they be treated as equity transactions. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
In addition, SFAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. We do not have any material
outstanding minority interests at December 31, 2007.

      Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed
by management to, have a material impact on our present or future consolidated
financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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.

      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. On November 15, 2006, we entered into a
$405 million senior secured credit facility with GE Commercial Finance
Healthcare Financial Services. 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 to provide financing for
working capital needs post-acquisition. The facility consists of a revolving
credit facility of up to $45 million, a $225 million term loan and a $135
million second lien term loan. The revolving credit facility has a term of five
years, the 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 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 February 22, 2008, we secured an incremental $35 million ("Second
Incremental Facility") 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 ability to further increase the second lien term loan by up to $25
million and the first line term loan or revolving credit facility 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 the term loan and 9.0% for the second lien
term loan. The additions to RadNet's existing credit facilities are intended to
provide capital for near-term opportunities and future expansion.

      As part of the financing, we were required to swap at least 50% of the
aggregate principal amount of the facilities to a floating rate within 90 days
of the close of the agreement on November 15, 2006. 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 closed on March 9,
2006. In addition, on November 15, 2006, we entered into an interest rate swap
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 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.

      In addition, our credit facility, classified as a long-term liability on
our financial statements, is interest expense sensitive to changes in the
general level of interest because it is based upon the current prime rate plus a
factor.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Financial Statements are attached hereto and begin on page 54.

                                      -51-
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders of RadNet, Inc.

We have audited the accompanying consolidated balance sheet of RadNet, Inc. and
subsidiaries (the "Company" or "RadNet") as of December 31, 2007, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended. Our audit also includes the financial statement
schedule listed in the index at Item 15(a) for the year ended December 31, 2007.
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 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 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 audit provides 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, 2007, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 2007, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

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, 2007, 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 31, 2008,
expressed an adverse opinion thereon.

                                                /s/ Ernst & Young LLP

Los Angeles, California
March 31, 2008

                                      -52-

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders
RadNet, Inc.

We have audited the accompanying consolidated balance sheets of RadNet, Inc. and
affiliates (the "Company") as of December 31, 2006 and October 31, 2006 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the two moth period ended December 31, 2006 and for each of the two
years in the period ended October 31, 2006. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RadNet,
Inc. and affiliates as of December 31, 2006 and October 31, 2006, and the
consolidated results of their operations and their cash flows for the two month
period ended December 31, 2006 and for each of the two years in the period ended
October 31, 2006, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

As described in Notes 4 and 11 to the consolidated financial statements,
effective November 1, 2005, the Company changed its method of accounting for
share-based payment arrangements to conform to Statement of Financial Accounting
Standards No. 123R, SHARE-BASED PAYMENT.

                                                /s/ Moss Adams LLP

Los Angeles, California
April 17, 2007

                                      -53-
<PAGE>
<TABLE>
<CAPTION>
                                           RADNET, INC. AND SUBSIDIARIES
                                            CONSOLIDATED BALANCE SHEETS
                                          (IN THOUSANDS EXCEPT SHARE DATA)


                                                                     December 31,    December 31,     October 31,
                                                                         2007            2006            2006
                                                                     ------------    ------------    -----------
<S>                                                                  <C>             <C>             <C>
                                                       ASSETS
CURRENT ASSETS
      Cash and cash equivalents                                      $         18    $      3,221    $          2
      Accounts receivable, net                                             87,285          70,794          30,163
      Due from affiliates                                                      --           1,427              --
      Refundable income taxes                                                 105           6,464              --
      Prepaid and other current assets                                     10,273           7,929           3,873
                                                                     ------------    ------------    ------------
            Total current assets                                           97,681          89,835          34,038
PROPERTY AND EQUIPMENT, NET                                               164,097         158,542          64,566
OTHER ASSETS
      Goodwill                                                             84,395          61,607          23,099
      Other intangible assets                                              58,908          60,484              --
      Deferred financing costs, net                                         9,161           9,422           5,195
      Investment in joint ventures                                         15,036          10,125              --
      Deposits and other                                                    4,342           4,751           4,738
                                                                     ------------    ------------    ------------
            Total other assets                                            171,842         146,389          33,032
                                                                     ------------    ------------    ------------
            Total assets                                             $    433,620    $    394,766    $    131,636
                                                                     ============    ============    ============

                                       LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
      Cash disbursements in transit                                  $         --    $      5,099    $        612
      Accounts payable and accrued expenses                                59,965          45,911          26,221
      Due to affiliates                                                     1,350              --             737
      Notes payable                                                         3,536           2,969           1,162
      Current portion of deferred rent                                        195              --              --
      Obligations under capital leases                                      9,455           4,626           2,410
                                                                     ------------    ------------    ------------
            Total current liabilities                                      74,501          58,605          31,142
                                                                     ------------    ------------    ------------

LONG-TERM LIABILITIES
      Subordinated debentures payable                                          --              --          16,031
      Line of credit                                                        4,222              22          12,437
      Deferred rent, net of current portion                                 4,394              --              --
      Deferred taxes                                                          277              --              --
      Notes payable, net of current portion                               382,064         360,083         145,987
      Obligations under capital lease, net of current potion               22,527          11,305           3,889
      Other non-current liabilities                                        15,259          10,493             944
                                                                     ------------    ------------    ------------
            Total long-term liabilities                                   428,743         381,903         179,288
                                                                     ------------    ------------    ------------

COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS                                                            206           1,254              --
STOCKHOLDERS' DEFICIT
      Common stock - $.0001 par value, 200,000,000 shares authorized;
       35,239,558, 34,973,780 and 22,985,252 shares issued;
       35,239,558, 34,061,281 and 22,072,752 shares outstanding
       at December 31, 2007, 2006 and October 31, 2006, respectively            4               3               2
      Paid-in-capital                                                     149,631         146,056         103,203
      Accumulated other comprehensive loss                                 (4,579)            (73)             --
      Accumulated deficit                                                (214,886)       (192,287)       (181,304)
                                                                     ------------    ------------    ------------
                                                                          (69,830)        (46,301)        (78,099)
      Less:  Treasury stock - 912,500 shares at cost                         --              (695)           (695)
                                                                     ------------    ------------    ------------
       Total stockholders' deficit                                        (69,830)        (46,996)        (78,794)
                                                                     ------------    ------------    ------------
      Total liabilities and stockholders' deficit                    $    433,620    $    394,766    $    131,636
                                                                     ============    ============    ============


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

                                                       -54-
<PAGE>

                                                 RADNET, INC. AND SUBSIDIARIES
                                             CONSOLIDATED STATEMENTS OF OPERATIONS
                                                (IN THOUSANDS EXCEPT SHARE DATA)


                                                       YEAR ENDED         TWO MONTHS ENDED              FISCAL YEARS ENDED
                                                      DECEMBER 31,           DECEMBER 31,                  OCTOBER 31,
                                                      ------------   ---------------------------   ---------------------------
                                                          2007           2006           2005           2006           2005
                                                      ------------   ------------   ------------   ------------   ------------
                                                                                     (unaudited)

NET REVENUE                                           $    425,470   $     57,374   $     25,520   $    161,005   $    145,573

OPERATING EXPENSES
   Operating expenses                                      330,550         46,033         19,149        120,342        109,012
   Depreciation and amortization                            45,281          5,907          2,759         16,394         17,536
   Provision for bad debts                                  27,467          3,907            826          7,626          4,929
   Loss (gain) on sale of equipment                             72            (38)            --            373            696
   Severance costs                                             934            205             --             --             --
                                                      ------------   ------------   ------------   ------------   ------------
      Total operating expenses                             404,304         56,014         22,734        144,735        132,173

INCOME FROM OPERATIONS                                      21,166          1,360          2,786         16,270         13,400

OTHER EXPENSES (INCOME)
   Interest expense                                         44,307          5,620          2,970         20,362         17,493
   Gain from sale of joint venture interest                 (1,868)            --             --             --             --
   Loss (gain) on debt extinguishment, net                      --          7,212             --          2,097           (515)
   Other (income) expense                                      (29)           (51)           (29)           788             (8)
                                                      ------------   ------------   ------------   ------------   ------------
      Total other expense                                   42,410         12,781          2,941         23,247         16,970

LOSS BEFORE INCOME TAXES, MINORITY
   INTERESTS AND EARNINGS FROM

   MINORITY INVESTMENTS                                    (21,244)       (11,421)          (155)        (6,977)        (3,570)
   Provision for income taxes                                 (337)           (20)            --             --             --
   Minority interest in (income) loss subsidiaries            (600)           (45)            --             --             --
   Equity in earnings of joint ventures                      4,050            503             --             83             --
                                                      ------------   ------------   ------------   ------------   ------------
NET LOSS                                              $    (18,131)  $    (10,983)  $       (155)  $     (6,894)  $     (3,570)
                                                      ============   ============   ============   ============   ============

BASIC AND DILUTED NET LOSS PER SHARE                  $      (0.52)  $      (0.35)  $      (0.01)  $      (0.33)  $      (0.17)

WEIGHTED AVERAGE SHARES OUTSTANDING
   Basic and diluted                                    34,592,716      30,972,282    20,703,406     21,013,957     20,603,955


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

                                                             -55-
<PAGE>

                                                    RADNET, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                                  (IN THOUSANDS EXCEPT SHARE DATA)

                                                                                                           Accumulated
                                                                         Treasury stock,                      Other
                                     Common Stock                            at cost                         Compre-      Total
                               ----------------------     Paid-in     ----------------------  Accumulated    hensive   Stockholders'
                                  Shares      Amount      Capital       Shares      Amount      Deficit       Loss       Deficit
                               ------------  --------   ------------  ----------  ----------  ------------ ----------- -------------
BALANCE - OCTOBER 31, 2005      21,615,906   $      2   $    101,021   (912,500)  $    (695)  $  (174,410)  $      --  $    (74,082)

   Issuance of warrant           1,290,062         --          1,451         --          --            --          --         1,451
   Issuance of common
     stock upon exercise
     of options/warrants            56,084         --            156         --          --            --          --           156
   Conversion of bonds              23,200         --            116         --          --            --          --           116
   Share-based
     compensation                       --         --            459         --          --            --          --           459
   Net loss                             --         --             --         --          --        (6,894)         --        (6,894)
                                                                                                                       -------------
    Comprehensive loss                                                                                                       (6,894)
                               ------------  --------   ------------  ----------  ----------  ------------ ----------- -------------
BALANCE - OCTOBER 31, 2006      22,985,252   $      2   $    103,203   (912,500)  $    (695)  $  (181,304)  $      --  $    (78,794)

   Issuance of common
     stock to shareholders
     of Radiologix              11,310,950          1         39,399         --          --            --          --        39,400
   Issuance of common
     stock upon conversion
     of bonds                      674,600         --          3,373         --          --            --          --         3,373
   Issuance of common
     stock upon exercise of
     options/warrants                3,125         --              3         --          --            --          --             3
    Stock split partial
     shares                           (147)        --             --         --          --            --          --            --
   Share-based compensation             --         --             78         --          --            --          --            78
   Unrealized loss on the
     change in fair value
     of cash flow hedging               --         --             --         --          --            --         (73)          (73)
   Net loss                             --         --             --         --          --       (10,983)         --       (10,983)
                                                                                                                       -------------
    Comprehensive loss                                                                                                      (11,056)
                               ------------  --------   ------------  ----------  ----------  ------------ ----------- -------------
BALANCE - DECEMBER 31, 2006     34,973,780   $      3   $    146,056   (912,500)  $    (695)  $  (192,287)  $     (73) $    (46,996)
   Cumulative effect
     adjustment pursuant
     to adoption of SAB
     No. 108                            --         --             --         --          --        (4,468)         --        (4,468)
   Issuance of common
     stock upon exercise
     of options/warrants         1,178,278          1            957         --          --            --          --           958
   Retirement of treasury
     shares                       (912,500)        --           (695)   912,500         695            --          --            --
   Share-based compensation             --         --          3,313         --          --            --          --         3,313
   Change in fair value of
     cash flow hedge                    --         --             --         --          --            --      (4,506)       (4,506)
   Net loss                             --         --             --         --          --       (18,131)         --       (18,131)
                                                                                                                       -------------
     Comprehensive loss                                                                                                     (22,637)
                               ------------  --------   ------------  ----------  ----------  ------------ ----------- -------------
BALANCE - DECEMBER 31, 2007     35,239,558   $      4   $    149,631         --   $      --   $  (214,886)  $  (4,579) $    (69,830)
                               ============  ========   ============  ==========  ==========  ============ =========== =============


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

                                                                -56-
<PAGE>

                                                  RADNET, INC. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)


                                                       YEAR ENDED         TWO MONTHS ENDED              FISCAL YEARS ENDED
                                                      DECEMBER 31,           DECEMBER 31,                  OCTOBER 31,
                                                          2007           2006           2005           2006           2005
                                                      ------------   ------------   ------------   ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES                                                 (unaudited)

  Net loss                                            $    (18,131)  $    (10,983)  $       (155)  $     (6,894)  $     (3,570)
  Adjustments to reconcile net loss to net cash
   provided by operating activities:
  Depreciation and amortization                             45,281          5,907          2,759         16,394         17,536
  Provision for bad debts                                   27,467          3,907            826          7,626          4,929
  Minority interest in income of subsidiarie                   600             45             --             --             --
  Distributions to minority interests                       (1,219)          (285)            --             --             --
  Equity in earnings of joint ventures                      (4,050)          (503)            --            (83)            --
  Distributions from joint ventures                          4,570            179             --             --             --
  Deferred rent amortization                                 1,037             --             --             --             --
  Deferred financing cost interest expense                   1,632            233             21            710            204
  Net loss (gain) on disposal of assets                         72            (38)            --            373            696
  Gain from sale of joint venture interest                  (1,868)            --             --             --             --
  Loss (gain) on extinguishment of debt                         --          4,939             --          2,097           (430)
  Accrued interest expense and interest related to swap         --          2,426            189          1,366          1,044
  Refinancing fees and pre-payment penalties                    --          2,273             --             --             --
  Share-based compensation                                   3,313             78             28            459             --
  Amortization of tenant improvements and other
   contracts                                                    --            (46)            --             98             --
  Changes in operating assets and liabilities,
   net of assets acquired and liabilities assumed in
   purchase transactions:
     Accounts receivable                                   (42,923)        (2,705)          (866)       (13,727)        (6,127)
     Other current assets                                    4,396            621             63             --             --
     Other assets                                              588          2,077           (229)        (1,973)        (2,572)
     Accounts payable and accrued expenses                   8,436         (7,685)        (1,739)         3,805           (570)
                                                      ------------   ------------   ------------   ------------   ------------
       Net cash provided by operating activities            29,201            440            897         10,251         11,140
                                                      ------------   ------------   ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of imaging facilities                           (18,465)            --             --         (4,092)            --
  Purchase of property and equipment                       (27,207)        (2,513)          (453)        (9,452)        (4,063)
  Purchase of Radiologix, net of cash acquired                (370)        12,708             --             --             --
  Proceeds from sale of equipment                              845             19             --             47             65
  Proceeds from sale of joint venture interest               2,260             --             --             --             --
  Purchase of equity interest in joint ventures             (4,413)            --             --             --             --
  Proceeds from the divestiture of imaging centers           1,625             --             --             --             --
  Purchase of covenant not to compete contract                (250)            --             --             --             --
  Payments collected on notes receivable                       111             --             --             --             --
                                                      ------------   ------------   ------------   ------------   ------------
       Net cash provided (used) by investing
         activites                                         (45,864)        10,214           (453)       (13,497)        (3,998)
                                                      ------------   ------------   ------------   ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Cash disbursements in transit                             (5,099)         4,488          1,511         (2,813)           889
  Principal payments on notes and leases                   (10,398)          (708)        (3,070)        (6,962)       (14,146)
  Repayment of debt upon extinguishments                        --       (348,411)            --       (141,242)            --
  Proceeds from borrowings upon refinancing                     --        360,000             --        146,468             --
  Proceeds from borrowings on notes payable &
   revolving credit facility                                33,137             --          1,115         11,425          4,746
  Proceeds from borrowings from line of credit                  --          4,918             --            737          1,370
  Deferred financing costs                                  (1,351)        (9,655)            --         (5,864)            --
  Payments on notes to related party                            --           (737)            --             --             --
  Payments on line of credit                                (3,787)       (17,333)            --             --             --
  Proceeds from issuance of common stock                       958              3             --          1,497             --
                                                      ------------   ------------   ------------   ------------   ------------
       Net cash provided (used) by financing
         activities                                         13,460         (7,435)          (444)         3,246         (7,141)
                                                      ------------   ------------   ------------   ------------   ------------

NET INCREASE (DECREASE) IN CASH                             (3,203)         3,219             --             --              1
CASH, BEGINNING OF PERIOD                                    3,221              2              2              2              1
                                                      ------------   ------------   ------------   ------------   ------------
CASH, END OF PERIOD                                   $         18   $      3,221   $          2   $          2   $          2
                                                      ============   ============   ============   ============   ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid during the period for interest            $     41,382   $      3,229   $      2,894   $     18,392   $     16,073
  Cash paid during the period for income taxes        $        186   $         --   $         --   $         --   $         --


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

                                                              -57-
<PAGE>
</TABLE>

                          RADNET, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

      We entered into capital leases for financed equipment through notes
payable for approximately $19.6 million, $6.0 million, $0 (unaudited), $4.0
million, and $4.8 million for the year ended December 31, 2007, the two months
ended December 31, 2006 and 2005, and the years ended October 31, 2006 and 2005,
respectively.

      Detail of non-cash investing and financing activity related to
acquisitions can be found in Notes 2 and 3.

                                      -58-
<PAGE>

                           RADNET, INC. AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

      RadNet, Inc. or RadNet (formerly Primedex Health Systems, Inc.) (the
Company) was incorporated on October 21, 1985. We operate a group of regional
networks comprised of 141 diagnostic imaging facilities located in seven states
with operations primarily in California, the Mid-Atlantic, the Treasure Coast
area of Florida, Kansas and the Finger Lakes (Rochester) and Hudson Valley areas
of New York, providing diagnostic imaging services including magnetic resonance
imaging (MRI), computed tomography (CT), positron emission tomography (PET),
nuclear medicine, mammography, ultrasound, diagnostic radiology, or X-ray, and
fluoroscopy. The Company's operations comprise a single segment for financial
reporting purposes.

      The results of operations of Radiologix and its wholly-owned subsidiaries
have been included in the consolidated financial statements from November 15,
2006, the date of acquisition. The consolidated financial statements also
include the accounts of Radnet Management, Inc., or RadNet Management, and
Beverly Radiology Medical Group III (BRMG), which is a professional partnership,
all collectively referred to as "us" or "we". The consolidated financial
statements also include RadNet Sub, Inc., RadNet Management I, Inc., RadNet
Management II, Inc., SoCal MR Site Management, Inc., and Diagnostic Imaging
Services, Inc. (DIS), all wholly owned subsidiaries of RadNet Management.

      Howard G. Berger, M.D. is our President and Chief Executive Officer, a
member of our Board of Directors and owns approximately 16% 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 52 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. At eleven former Radiologix
centers in California and at all of the former Radiologix centers which are
located outside of California, we have entered into long-term contracts with
prominent radiology groups in the area to provide physician services at those
facilities. The operations of BRMG are consolidated with us 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 the
guidance in Emerging Issues Task Force Issue 97-2 (EITF 97-2). BRMG is a
partnership of Pronet Imaging Medical Group, Inc. and Beverly Radiology Medical
Group, both of which are 99%-owned by Dr. Berger. RadNet provides non-medical,
technical and administrative services to BRMG for which it receives a management
fee.

      Radiologix, our wholly-owned subsidiary, contracts with radiology
practices to provide professional services, including supervision and
interpretation of diagnostic imaging procedures, in its diagnostic imaging
centers. The radiology practices maintain full control over the provision of
professional radiological 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.

      Radiologix enters 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, it provides management services and receives a fee based
on the practice group's professional revenue, including revenue derived outside
of its diagnostic imaging centers. Radiologix owns the diagnostic imaging assets
and, therefore, receives 100% of the technical reimbursements associated with
imaging procedures. Radiologix enters into managed care contracts normally for a
term of one year. The radiology practice groups retain the professional
reimbursements associated with imaging procedures after deducting our management
service fees. Our management service fees are included in net revenue in the
consolidated statement of operations and totaled $31.2 million and $1.8 million
for the year ended December 31, 2007 and the two months ended December 31, 2006.
Radiologix has no financial controlling interest in the contracted radiology
practices, as defined in EITF 97-2; 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 $23.2 million, $31.2 million, and $2.9
million at December 31, 2007, 2006, and October 31, 2006, respectively. We had
net losses of $18.1 million, $11.0 million, $155,000, $6.9 million, and $3.6
million for the year ended December 31, 2007, the two months ended December 31,
2006 and 2005, and the years ended October 31, 2006 and 2005, respectively. We
also had a stockholders' deficit of $69.8 million, $47.0 million, and $78.8
million at December 31, 2007, 2006, and October 31, 2006, respectively.

                                      -59-
<PAGE>

      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:

            o     Maximizing performance at our existing facilities;
            o     Focusing on profitable contracting;
            o     Expanding MRI, CT and PET applications;
            o     Optimizing operating efficiencies; and
            o     Expanding our networks

      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. Taking these factors into account, including our
historical experience although no assurance can be given, 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.

      REVERSE STOCK SPLIT

      All share and per share amounts included herein have been retroactively
adjusted for the one-for two reverse common stock split effected November 28,
2006.

NOTE 2 - BUSINESS ACQUISITION

      On November 15, 2006, we completed our acquisition of Radiologix, Inc. as
a stock purchase. Under the terms of the merger agreement, Radiologix
shareholders received aggregate consideration of 11,310,950 shares of our common
stock and $42,950,000 in cash.

                                                         (IN THOUSANDS)
                                                         --------------
      Value of stock given by RadNet to Radiologix*      $       39,400
      Cash                                                       42,950
      Transaction fees and expenses**                            15,208
                                                         --------------
      Total purchase price                               $       97,558
                                                         ==============

(*) Calculated as 11,310,950 shares multiplied by $3.48 (average closing price
of $3.48 from June 28, 2006 to July 13, 2006).

(**) Includes $8,274,000 in assumed liabilities of Radiologix, including
$3,210,000 in merger and acquisition fees and $5,064,000 in Radiologix bond
prepayment penalties.

      Under the purchase method of accounting, the total purchase price as shown
above is allocated to Radiologix's net tangible and intangible assets based on
their fair values as of the date of acquisition. The following table summarizes
the final purchase price allocation at the date of acquisition.

                                                         (IN THOUSANDS)
                                                         --------------
      Current assets                                     $      114,764
      Property and equipment, net                                78,644
      Identifiable intangible assets                             61,000
      Goodwill                                                   47,762
      Investments in joint ventures                               9,482
      Other assets                                                  974
      Current liabilities                                       (25,191)
      Accrued restructuring charges                                (314)
      Contracts                                                  (8,994)
      Assumption of debt                                       (177,358)
      Long-term liabilities                                      (2,002)
      Minority interests in consolidated subsidiaries            (1,209)
                                                         --------------
      Total purchase price                               $       97,558
                                                         ==============

                                      -60-
<PAGE>

      CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: We valued cash,
marketable securities, investments and other assets at their respective carrying
amounts as we believe that these amounts approximated their current fair values.

      IDENTIFIABLE INTANGIBLE ASSETS: Identifiable intangible assets acquired
include management service agreements and covenants not to compete. Management
service agreements represent the underlying relationships and agreements with
certain professional radiology groups. Covenants not to compete are contracts
entered into with certain former members of management of Radiologix on the date
of acquisition.

Identifiable intangible assets consist of:

                                                      ESTIMATED
                                         ESTIMATED   AMORTIZATION      ANNUAL
            (IN THOUSANDS)              FAIR VALUE       PERIOD     AMORTIZATION
            --------------              ----------   ------------   ------------
      Management service agreements     $   57,880     25 years     $      2,315
      Covenants not to compete               3,120   1 to 2 years          1,810

      Estimated useful lives for the intangible assets were based on the average
contract terms, which are greater than the amortization period that will be used
for management contracts. Intangible assets are being amortized using the
straight-line method, considering the pattern in which the economic benefits of
the intangible assets are consumed.

      GOODWILL: $47,762,000 has been allocated to goodwill. This is an increase
of approximately $9.3 million from our previous estimate. The increase in
goodwill relates to an $8.0 million decrease to property and equipment, a
$100,000 increase to current assets, a 277,000 increase to deferred taxes and a
$1.1 million increase to accrued liabilities. Goodwill represents the excess of
the purchase price over the fair value of the underlying net tangible and
identifiable intangible assets. In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets" goodwill will not be amortized but instead will be
tested for impairment at least annually. We performed this test on October 1,
2007. As a result of this test, management determined that the value of goodwill
is not impaired. Because this goodwill was established through a stock purchase,
no amount is deductible for tax purposes.

      OPERATING LEASES: We assumed certain operating leases for both equipment
and facilities. All related historical deferred rent liabilities have been
eliminated.

      The following unaudited pro-forma financial information for the year ended
October 31, 2006, and the two months ended December 31, 2005 and 2006 represents
the combined results of the Company's operations and Radiologix as if the
Radiologix acquisition had occurred on November 1, 2005. The unaudited pro-forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company constituted a single entity during such
periods.

                                      YEAR ENDED          TWO MONTHS ENDED
                                      OCTOBER 31,           DECEMBER 31,
                                         2006           2005           2006
                                     ------------   ------------   ------------
      Net revenue                    $418,650,000   $ 66,719,000   $ 65,458,000
      Pro-forma net loss               (4,963,000)    (1,333,000)   (12,088,000)

      Pro-forma net loss per share         $(0.24)        $(0.06)        $(0.39)

NOTE 3 - FACILITY ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

      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.

      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 $9.2 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.

                                      -61-
<PAGE>

      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 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 $2.8 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.

      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.

DIVESTITURES

      In June 2007 we divested a non-core center in Duluth, Minnesota to a local
multi-center operator for $1.3 million.

      In October 2007 we divested a non-core center in Golden, Colorado for
$325,000.

      In December 2007, we sold 24% of a 73% investment in one of our
consolidated joint ventures for approximately $2.3 million resulting in a
revised ownership of 49%. As a result of this transaction, we no longer
consolidate this joint venture. Accordingly, our consolidated balance sheet at
December 31, 2007 includes this 49% interest as a component of our total
investment in non-consolidated joint ventures where it is accounted for under
the equity method. The amounts eliminated from our consolidated balance sheet as
a result of the deconsolidation were not material. Since the deconsolidation
occurred at the end of 2007, no significant amounts were eliminated from our
statement of operations.

NOTE 4 - 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.

      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 their analysis of current and past due accounts, past
collection experience in relation to amounts billed and other relevant
information. 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.

      During 2007, we re-evaluated the net realizable value of our December 31,
2006 recorded receivable balances and concluded that current revised estimates
are less than the prior year recorded amounts. As a result, we have recorded
adjustments in 2007 to appropriately reflect current estimates of the net
realizable value of our December 31, 2006 receivables which decreased 2007 net
revenue by $8.5 million.

                                      -62-
<PAGE>

      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,
2007, December 31, 2006 and October 31, 2006, our allowance for bad debts was
$11.6 million, $8.5 million, and $1.5 million, respectively.

      CASH AND CASH EQUIVALENTS - We consider all highly liquid investments
purchased 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 respective loan.

      PROPERTY AND EQUIPMENT - Property and equipment are state at cost, less
accumulated depreciation and amortization. Depreciation and amortization of
property and equipment are provided using the straight-line method over their
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.

      GOODWILL - Goodwill at December 31, 2007 totaled $84.4 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." 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 on October 1, 2007. Based on our
review, we noted no impairment related to goodwill as of October 1, 2007.
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.

      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. Income taxes are further explained in
Note 10.

      UNINSURED RISKS - The Company maintains a high deductible insurance
program for workers' compensation. The liability is based on the Company's
estimate of losses for claims incurred but unpaid. Funding is made directly to
the providers and/or claimants through a third party administrator. To guarantee
performance under the workers' compensation program, the Company maintains a
cash collateral account with the administrator. The cash collateral account is
restricted as security for potential claims. The Company has recorded restricted
cash of approximately $1.3 million, $1.3 million and $1.3 million as of December
31, 2007, December 31, 2006 and October 31, 2006, respectively. These amounts
are included in the other current assets balance sheet line item. At December
31, 2007, December 31, 2006 and October 31, 2006, the Company has recorded a
reserve of approximately $3.0 million, $1.7 million and $482,000, respectively,
for potential losses on existing claims as such amounts are believed to be
probable and reasonably estimable.

      We and our affiliated physicians are insured by Fairway Physicians
Insurance Company. Fairway provides claims-made medical malpractice insurance
coverage that covers only asserted medical malpractice claims within policy
limits. We have accrued a value of $1.7 million as of December 31, 2007 for our
exposure to incurred but not reported claims. We currently hold a $300,000 asset
for the cost basis of our investment in the common stock we hold in Fairway
Physicians Insurance Company, the risk retention group that holds our medical
malpractice policy.

                                      -63-
<PAGE>

      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 revenue exceeds the costs, 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 revenue
exceeds forecasted costs. 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 will be accreted into operations
over the remaining term of the acquired management service agreements. As of
December 31, 2007 and 2006, the remaining accrual balance is $8.5 million, and
$8.9 million, respectively.

      EQUITY BASED COMPENSATION -We have three long-term incentive stock option
plans. The 1992 plan has not issued options since the inception of the 2000 plan
and the 2000 plan has not issued options since the adoption of the 2006 plan.
The 2006 plan reserves 1,000,000 shares of common stock. Options granted under
the plan are intended to qualify as incentive stock options under existing tax
regulations. In addition, we have issued non-qualified stock options from time
to time in connection with acquisitions and for other purposes and have also
issued stock under the plans. Employee stock options generally vest over three
to five years and expire five to ten years from date of grant.

      As of November 1, 2005, we adopted SFAS No. 123(R), "Share-Based Payment,"
applying the modified prospective method. This Statement requires all
equity-based payments to employees, including grants of employee options, to be
recognized in the consolidated statement of earnings based on the grant date
fair value of the award. Under the modified prospective method, we are required
to record equity-based compensation expense for all awards granted after the
date of adoption and for the unvested portion of previously granted awards
outstanding as of the date of adoption. The fair values of all options were
valued using a Black-Scholes model.

      The compensation expense recognized for all equity-based awards is net of
estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation within operating expenses with the same line item as
the majority of the cash compensation paid to employees

      SEGMENTS OF AN ENTERPRISE - The Company reports segment information in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). Under SFAS 131 all publicly traded companies
are required to report certain information about the operating segments,
products, services and geographical areas in which they operate and their major
customers. The Company operates in a single business segment and operates only
in the United States.

      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 Statement of Financial Accounting Standards No. 133,
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 other comprehensive income in the Company's Consolidated Statement
of Stockholders' Deficit. The remaining gain or loss, if any, is recognized
currently in earnings. Amounts in accumulated other comprehensive income are
reclassified into income in the same period in which the hedged forecasted
transaction affects earnings.

      COMPREHENSIVE INCOME - SFAS No. 130 REPORTING COMPREHENSIVE INCOME
establishes rules for reporting and displaying comprehensive income and its
components. SFAS No. 130 requires unrealized gains or losses on the change in
fair value of the Company's cash flow hedging activities to be included in
comprehensive income. The components of comprehensive loss are included in the
Consolidated Statement of Stockholders Deficit.

      RECLASSIFICATIONS - Certain prior period amounts have been reclassified to
conform with the current period presentation. These changes have no effect on
income.

      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):

                                      -64-
<PAGE>
<TABLE>
<CAPTION>
                                            YEAR ENDED           TWO MONTHS ENDED                   YEARS ENDED
                                           DECEMBER 31,             DECEMBER 31,                    OCTOBER 31,
                                           ------------    ----------------------------    ----------------------------
                                               2007            2006            2005            2006            2005
                                               ----            ----            ----            ----            ----
                                                                            (unaudited)
<S>                                        <C>             <C>             <C>             <C>             <C>
Net loss                                   $    (18,131)   $    (10,983)   $       (155)   $     (6,894)   $     (3,570)

BASIC EARNINGS (LOSS) PER SHARE
Weighted average number of common
shares outstanding during the year           34,592,716      30,972,282      20,703,406      21,013,957      20,603,955
                                           ------------    ------------    ------------    ------------    ------------
Basic earnings (loss) per share:
Basic loss per share                       $      (0.52)   $      (0.35)   $      (0.01)   $      (0.33)   $      (0.17)
                                           ------------    ------------    ------------    ------------    ------------
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average number of common
shares outstanding during the year           34,592,716      30,972,282      20,703,406      21,013,957      20,603,955
                                           ------------    ------------    ------------    ------------    ------------
Add additional shares issuable upon
exercise of stock options and warrants               --              --              --              --              --
                                           ------------    ------------    ------------    ------------    ------------
Weighted average number of common shares
used in calculating diluted earnings
per share                                    34,592,716    30,972,282 hare   20,703,406      21,013,957      20,603,955
                                           ------------    ------------    ------------    ------------    ------------
Diluted earnings (loss) per share:
Diluted loss per share                     $      (0.52)   $      (0.35)   $      (0.01)   $      (0.33)   $      (0.17)
                                           ------------    ------------    ------------    ------------    ------------
</TABLE>

      For the fiscal year ended December 31, 2007, the two months ended December
31, 2006 and 2005, and the fiscal years ended October 31, 2006 and 2005, we
excluded all options, warrants and convertible debentures 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 nine 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
$4.9 million to $15.0 million at December 31, 2007 compared to $10.1 million at
December 31, 2006. This increase is primarily related to our purchase of an
additional $4.4 million of share holdings in joint ventures that were existing
as of December 31, 2006 as well as the addition of $789,000 from the
de-consolidation of another joint venture that we are now accounting for under
the equity method (see note 3).

      Total assets at December 31, 2007 include notes receivable from certain
unconsolidated joint ventures aggregating $254,000. Interest income related to
these notes receivable was approximately $55,000 for the year ended December 31,
2007. We also received management service fees of $5.0 million and $456,000 for
the year ended December 31, 2007 and the two months ended December 31, 2006,
respectively, from the centers underlying these joint ventures.

      The following table is a summary of key financial data for these joint
ventures as of and for the year ended December 31, 2007 (in thousands):

                                      -65-
<PAGE>

Balance Sheet Data:
Current assets                                      $       21,076
Noncurrent assets                                           13,691
Current liabilities                                         (3,360)
Noncurrent liabilities                                      (5,300)
                                                   ----------------
  Total net assets                                  $       26,107
                                                   ================

    Book value of Radnet joint venture interests    $       11,856
    Cost in excess of book value of acquired
       joint venture interests                               3,180
                                                   ----------------
      Total value of Radnet joint venture
         interests                                  $       15,036
                                                   ================

      Total book value of other joint venture
         partner interests                          $       14,251
                                                   ================

    Net revenue                                     $       59,501
    Net income                                      $       11,758

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

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

      The Company reviewed its investment in unconsolidated joint ventures
obtained through the acquisition of Radiologix and contracted radiology practice
arrangements as of December 31, 2007 and under the provisions of FIN 46 and has
determined that none of its arrangements or investments meet the definition of a
variable interest entity.

NOTE 5 - RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

      In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
No. 108"), "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 specifies how
the carryover or reversal of prior year unrecorded financial statement
misstatements should be considered in quantifying a current year misstatement.
SAB No. 108 requires an approach that considers the amount by which the current
year Consolidated Statement of Operations is misstated ("rollover approach") and
an approach that considers the cumulative amount by which the current year
Consolidated Balance Sheet is misstated ("iron curtain approach").

      Prior to the issuance of SAB No. 108, either the rollover or iron curtain
approach was acceptable for assessing the materiality of financial statement
misstatements. Prior to the Company's application of the guidance in SAB No.
108, management used the rollover approach for quantifying financial statement
misstatements.

      Initial application of SAB No. 108 allows registrants to elect not to
restate prior periods but to reflect the initial application in their annual
financial statements covering the first fiscal year ending after November 15,
2006. The cumulative effect of the initial application should be reported in the
carrying amounts of assets and liabilities as of the beginning of that fiscal
year and the offsetting adjustment, net of tax, should be made to the opening
balance of retained earnings for that year. We elected to record the effects of
applying SAB No. 108 using the cumulative effect transition method. The
misstatements that have been corrected are described below.

      Subsequent to the completion of the financial statement close process for
the three and six months ended June 30, 2007, we determined that certain lease
rate escalation clauses had not been properly accounted for in accordance with
generally accepted accounting principles for the fiscal years ended October 31,
2004, 2005 and 2006 as well as for the two months ended December 31, 2006 (our
transition period) and for the quarter ended March 31, 2007. The Company had
been recording rent expense based on the contractual terms of the lease

                                      -66-
<PAGE>

agreements. We reviewed Statement of Financial Accounting Standards No. 13 (SFAS
No. 13) and its related interpretations including Financial Accounting Standards
Board Technical Bulletin 85-3 "Accounting for Operating Leases with Scheduled
Rent Increases" (FTB 85-3), scheduled rent increases and rent holidays in an
operating lease should be recognized by the lessee on a straight-line basis over
the lease term unless another systematic and rational allocation is more
representative of the time pattern in which leased property is physically
employed. FTB 85-3 specifically states that scheduled rent increases designed to
reflect the anticipated effects of inflation is not a justification to support
not straight lining the lease cost over the lease term. Based on our review, we
have concluded that the straight-line method is required.

      During the preparation of our financial statements for the year ended
December 31, 2007, we determined that we were under accrued for our obligations
under our claims-made medical malpractice insurance policy. We determined that
this accrual should have been on our balance sheet beginning in 2003, and
through December 31, 2006 the balance should have been $1.5 million. Also, we
concluded that we had overstated our restatement adjustment to our financial
statements for the year ended October 31, 2005 as disclosed in our Form 10-K for
the year ended October 31, 2006 related to the correction to the useful life of
our leasehold improvements.

      In accordance with the transition provisions of SAB No. 108, we recorded a
$4.5 million cumulative effect adjustment to retained earnings with an
offsetting $5.1 million to long-term deferred rent and accrued liabilities, and
an increase to fixed assets of $0.6 million as of January 1, 2007.

      Based on the nature of these adjustments and the totality of the
circumstance surrounding these adjustments, we have concluded that these
adjustments are immaterial to prior years' consolidated financial statements
under our previous method of assessing materiality, and therefore, have elected,
as permitted under the transition provisions of SAB No. 108, to reflect the
effect of these adjustments in opening assets and liabilities as of January 1,
2007, with the offsetting adjustment reflected as a cumulative effect adjustment
to opening retained earnings as of January 1, 2007.

      In July 2006, the FASB issued SFAS Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS Statement No. 109" ("FIN
48"), and effective January 1, 2007, we adopted FIN 48. FIN 48 applies to all
"tax positions" accounted for under SFAS 109. FIN 48 refers to "tax positions"
as positions taken in a previously filed tax return or positions expected to be
taken in a future tax return which are reflected in measuring current or
deferred income tax assets and liabilities reported in the financial statements.
FIN 48 further clarifies a tax position to include, but not be limited to, the
following:

      o     an allocation or a shift of income between taxing jurisdictions,

      o     the characterization of income or a decision to exclude reporting
            taxable income in a tax return, or

      o     a decision to classify a transaction, entity, or other position in a
            tax return as tax exempt.

      FIN 48 clarifies that a tax benefit may be reflected in the financial
statements only if it is "more likely than not" that a company will be able to
sustain the tax return position, based on its technical merits. If a tax benefit
meets this criterion, it should be measured and recognized based on the largest
amount of benefit that is cumulatively greater than 50% likely to be realized.
This is a change from current practice, whereby companies may recognize a tax
benefit only if it is probable a tax position will be sustained.

      FIN 48 also requires that we make qualitative and quantitative
disclosures, including a discussion of reasonably possible changes that might
occur in unrecognized tax benefits over the next 12 months; a description of
open tax years by major jurisdictions and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on an aggregated basis.

      We are subject to tax audits in several tax jurisdictions within the U.S.
and will remain subject to examination until the statute of limitations expires
for each respective tax jurisdiction. Tax audits by their very nature are often
complex and can require several years to complete. Information relating to our
tax examinations by jurisdiction is as follows:

      o     Federal -- we are subject to U.S. federal tax examinations by tax
            authorities for the tax years ended 2003 to 2007

      o     State -- we are subject to state tax examinations by tax authorities
            for the tax years ended 2002 to 2007

      The adoption of FIN 48 did not have a material impact on our financial
statements or disclosures. As of January 1, 2007 and December 31. 2007 we did
not recognize any assets or liabilities for unrecognized tax benefits relative
to uncertain tax positions. We do not currently anticipate that any significant
increase or decrease to the gross unrecognized tax benefits will be recorded
during the next 12 months. Any interest or penalties resulting from examinations
will continue to be recognized as a component of the income tax provision;
however, since there are no unrecognized tax benefits as a result of tax
positions taken, there is no accrued interest and penalties.

      Additionally, the future utilization of the Company's net operating loss
carryforwards to offset future taxable income may be subject to a substantial
annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future.

                                      -67-
<PAGE>

      In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS,
which defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 157 in 2008 to have a
material impact on our consolidated financial statements.

      In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES, INCLUDING AN AMENDMENT OF FASB
STATEMENT NO. 115, which is effective for fiscal years beginning after November
15, 2007. SFAS 159 permits entities to measure eligible financial assets,
financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other U.S. generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair
value must be recorded in earnings. We do not expect the adoption of SFAS 159 in
2008 to have a material impact on our consolidated financial statements.

      In December 2007, the FASB issued SFAS 141(R), BUSINESS COMBINATIONS and
SFAS 160, NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS. The
standards are intended to improve, simplify, and converge internationally the
accounting for business combinations and the reporting of noncontrolling
(minority) interests in consolidated financial statements. SFAS 141(R) requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS 141(R) is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Earlier adoption is prohibited. We have not evaluated the potential
impact that SFAS 141(R) will have on our financial statements.

      SFAS 160 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, SFAS 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and minority interests by requiring they be treated as equity transactions. SFAS
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
In addition, SFAS 160 shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented. We do not have any material
outstanding minority interests at December 31, 2007.

      Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed
by management to, have a material impact on our present or future consolidated
financial statements.

NOTE 6 - PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                         DECEMBER 31,           OCTOBER 31,
                                                  --------------------------    -----------
                                                     2007           2006           2006
                                                  -----------    -----------    -----------
<S>                                               <C>            <C>            <C>
      Buildings                                   $       602    $       602    $       600
      Medical equipment                               142,423        134,655        107,729
      Office equipment, furniture and fixtures         42,466         42,060         13,371
      Leasehold improvements                           80,518         66,960         33,453
      Equipment under capital lease                    43,162         21,551         11,110
                                                  -----------    -----------    -----------
                                                      309,171        265,828        166,263
      Accumulated depreciation and amortization      (145,074)      (107,286)      (101,697)
                                                  -----------    -----------    -----------
                                                  $   164,097    $   158,542    $    64,566
                                                  ===========    ===========    ===========
</TABLE>

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

      Depreciation and amortization expense on property and equipment, including
amortization of equipment under capital leases, for the fiscal year ended
December 31, 2007, the two months ended December 31, 2006 and 2005, and the
fiscal years ended October 31, 2006 and 2005 was $40.7 million, $5.4 million,
$2.7 million, $16.2 million, and $17.3 million, respectively.

                                      -68-
<PAGE>

NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS

      Goodwill at December 31, 2007 totaled $84.4 million. Goodwill is recorded
as a result of business combinations. Activity in goodwill for the year ended
October 31, 2006, the two months ended December 31, 2006, and the year ended
December 31, 2007 is provided below (in thousands):

<TABLE>
<CAPTION>
<S>                                                                                                     <C>
         Balance as of October 31, 2006 and 2005                                                        $    23,099
              Goodwill acquired through the acquisition of Radiologix (see Note 2)                           38,508
                                                                                                        -----------
         Balance as of December 31. 2006                                                                     61,607
              Adjustments to our preliminary allocation of the purchase price of Radiologix (see Note 2)      9,253
              Goodwill acquired through the acquisition of Walnut Creek Open MRI (see Note 3)                    50
              Goodwill acquired through the acquisition of Valley Imaging Center, Inc. (see Note 3)           2,818
              Goodwill acquired through the acquisition of Borge Imaging Group (see Note 3)                   9,202
              Goodwill acquired through the acquisition of Rockville Open MRI (see Note 3)                      365
              Goodwill acquired through the acquisition of Liberty Pacific Imaging (see Note 3)               1,100
                                                                                                        -----------
         Balance as of December 31, 2007                                                                $    84,395
                                                                                                        ===========
</TABLE>

      Other intangible assets are primarily related to the value of management
service agreements obtained through our acquisition of Radiologix and are
recorded at cost of $57.9 million less accumulated amortization of $2.6 million
at December 31, 2007. 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 $5.1 million less accumulated amortization of
$2.3 million, as well as the value of trade names associated with acquired
imaging facilities totaling $1.5 million less accumulated amortization of
$637,000. Amortization expense for the year ended December 31, 2007 was $4.5
million. Intangible assets are amortized using the straight-line method.
Management service agreements are amortized over 25 years using the straight
line method. The weighted average amortization period of identifiable intangible
assets is 23 years.

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

<TABLE>
                                                            YEAR ENDED DECEMBER 31,
                                          2008          2009          2010          2011          2012       THEREAFTER
                                       ----------    ----------    ----------    ----------    ----------    ----------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
Management service agreements          $    2,315    $    2,315    $    2,315    $    2,315    $    2,315    $   43,701
Covenent not to compete contracts           1,513           357           357           357           185             -
Trade names                                   150           150           150           150           150           113
                                       ----------    ----------    ----------    ----------    ----------    ----------
   Total annual amortization           $    3,978    $    2,822    $    2,822    $    2,822    $    2,650    $   43,814
                                       ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>

NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES (IN THOUSANDS)

                                            DECEMBER 31,           OCTOBER 31,
                                     --------------------------    -----------
                                        2007           2006           2006
                                     -----------    -----------    -----------
      Accounts payable               $    13,288    $    17,935    $    10,545
      Accrued expenses                    31,950         15,442         10,118
      Accrued payroll and vacation         8,216          3,612          5,025
      Accrued professional fees            6,511          8,008            533
      Other                                   --            914             --
                                     -----------    -----------    -----------
        Total                        $    59,965    $    45,911    $    26,221
                                     ===========    ===========    ===========

NOTE 9 - NOTES PAYABLE, LONG-TERM DEBT, 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 to 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 revolving credit facility has a term of five
years, the 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

                                      -69-
<PAGE>

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. The Incremental
Facility will be used to fund certain identified strategic initiatives and for
general corporate purposes. The terms of our first lien term loan as explained
above will remain unchanged.

      On February 22, 2008, we secured an 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 ability to further increase the second lien term loan by up to $25
million and the first lien term loan or revolving credit facility 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 the term loan and to 9.0% from 6% 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 the 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 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 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.

      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 Statement of
Financial Accounting Standards No. 133, 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 other comprehensive income in the
Company's Consolidated Statement of Stockholders' Equity. The remaining gain or
loss, if any, is recognized currently in earnings. Of the derivatives that were
not designated as cash flow hedging instruments, we recorded an increase to
interest expense of approximately $820,000, a decrease of $210,000 and an
increase of $920,000 for the year ended December 31, 2007, two months ended
December 31, 2006 and the year ended October 31, 2006, respectively. The
corresponding liability of approximately $1.5 million, $710,000, and $920,000 is
included in the other non-current liabilities in the consolidated balance sheets
at December 31, 2007, October 31, 2006, and December 31, 2006, respectively. Of
the derivatives that were designated as cash flow hedging instruments, we
recorded $4.6 million to accumulated other comprehensive loss, and an offsetting
liability of the same amount for the fair value of these hedging instruments at
December 31, 2007.

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

                                      -70-
<PAGE>
<TABLE>
<CAPTION>
                                                    DECEMBER 31,           OCTOBER 31,
                                             --------------------------    -----------
                                                2007           2006            2006
                                             -----------    -----------    -----------
<S>                                          <C>            <C>            <C>
Revolving lines of credit                    $     4,222    $        22    $    12,437
Notes payable at interest rates ranging
from 8.8% to 13.5%, due through 2009,
collateralized by medical equipment              385,600        363,052        147,149

Obligations under capital leases at
interest rates ranging from 9.1% to 13.0%,
due through 2012, collateralized by
medical and office equipment                      31,982         15,931          6,299
                                             -----------    -----------    -----------
                                                 421,804        379,005        165,885

Less: current portion                            (12,991)        (7,595)        (3,572)
                                             -----------    -----------    -----------
                                             $   408,813    $   371,410    $   162,313
                                             ===========    ===========    ===========
</TABLE>

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

                  2008                               $       3,536
                  2009                                       3,455
                  2010                                       2,617
                  2011                                       2,558
                  2012                                     238,422
                  Thereafter                               139,234
                                                     -------------
                                                     $     389,822
                                                     =============

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

                  2008                               $      11,608
                  2009                                      10,437
                  2010                                       7,579
                  2011                                       5,427
                  2012                                       1,274
                                                     -------------
                  Total minimum payments                    36,325
                  Amount representing interest              (4,343)
                                                     -------------
                  Present value of net minimum
                  lease payments                            31,982
                  Less current portion                      (9,455)
                                                     -------------
                  Long-term portion                  $      22,527
                                                     =============

NOTE 10 - INCOME TAXES

      Income taxes have been recorded under SFAS No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial and
income tax reporting purposes and operating loss carryforwards. For the year
ended December 31, 2007 and the two months ended December 31, 2006, we
recognized $337,000 and $20,000, respectively, of state income tax related to
profitable imaging centers from Radiologix. We did not incur any federal or
state income taxes during the two months ended December 31, 2005 or the fiscal
years ended October 31, 2006 and 2005.

                                      -71-
<PAGE>

      Following is a reconciliation between the effective tax rate and the
statutory tax rates:

<TABLE>
<CAPTION>
                                                YEAR ENDED        TWO MONTHS ENDED             YEAR ENDED
                                               DECEMBER 31,          DECEMBER 31,              OCTOBER 31,
                                               ------------   ------------------------   ------------------------
                                                   2007          2006          2005         2006          2005
                                               ------------   ----------    ----------   ----------    ----------
                                                                           (unaudited)
<S>                                               <C>          <C>           <C>          <C>           <C>
Federal tax                                      -34.00%       (34.00)%      (34.00)%     (34.00)%      (34.00)%
State franchise tax, net of federal benefit       -4.79%        (5.02)%       (5.80)%      (5.80)%       (5.80)%
Non deductible expenses                            1.14%         0.70%         0.00%        0.70%         0.00%
Provision to return reconciliation and other       1.36%

Changes in valuation allowance                    38.41%        38.32%        39.80%       39.10%        39.80%
                                               ------------   ----------    ----------   ----------    ----------
Income tax expense                                 2.12%         0.00%         0.00%        0.00%         0.00%
                                               ------------   ----------    ----------   ----------    ----------

      Our deferred tax assets and liabilities were comprised of the following
items:

      Deferred Tax Assets & Liabilities:
      ------------------------------------
                                                   DECEMBER 31,          OCTOBER 31,
                                           --------------------------    -----------
      Deferred tax assets:                     2007           2006           2006
                                           -----------    -----------    -----------
      Net operating losses                 $    61,108    $    71,389    $    61,537
      MSA liability                              3,348          3,220             --
      Capital leases                                --          1,581             --
      Allowance for doubtful accounts            1,482            674          1,545
      Accrued expenses                              --          1,166            990
      Other                                      1,567             --            160

                                           -----------    -----------    -----------
      Total Deferred Tax Assets            $    67,505    $    78,030    $    64,232
                                           -----------    -----------    -----------

      Deferred tax liabilities:
      Fixed and intangible assets              (19,492)       (23,780)       (11,090)
      Other                                       (288)           (82)            --

                                           -----------    -----------    -----------
      Total Deferred Tax Liabilities       $   (19,780)   $   (23,862)   $   (11,090)
                                           -----------    -----------    -----------

      Net deferred tax Asset (Liability)        47,725         54,168         53,142

      Valuation Allowance                      (48,002)       (54,168)       (53,142)

                                           -----------    -----------    -----------
                                           $      (277)   $        --    $        --
                                           ===========    ===========    ===========
</TABLE>

As of December 31, 2007, we had federal and state net operating loss
carryforwards of approximately $163,641,000 and $110,823,000, respectively,
which expire at various intervals from the years 2007 to 2026. As of December
31, 2007, $24,597,000 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. As of December
31, 2006, 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.
Included in the net operating loss is $3.4 million of excess tax benefits
related to the exercise of nonqualified stock options which will be recorded in
equity when realized.

For the next five years, and thereafter, federal net operating loss
carryforwards expire as follows (in thousands):

                                      -72-
<PAGE>

                            TOTAL NET OPERATING      AMOUNT SUBJECT
          YEAR ENDED         LOSS CARRYFORWARDS    TO 382 LIMITATION
       ----------------     -------------------    -----------------
       2008                  $            2,513     $          2,513
       2009                              18,562                5,337
       2010                              13,283                1,737
       2011                               1,501                1,501
       2012                                  --                    -
       Thereafter                       127,782               13,509
                            -------------------    -----------------
                             $          163,641     $         24,597
                            ===================    =================

NOTE 11 - CAPITAL STRUCTURE AND CAPITAL TRANSACTIONS

STOCK INCENTIVE PLANS

      We have three long-term incentive stock option plans. The 1992 plan has
not issued options since the inception of the 2000 plan and the 2000 plan has
not issued options since the adoption of the 2006 plan. The 2006 plan reserves
1,000,000 shares of common stock. Options granted under the plan are intended to
qualify as incentive stock options under existing tax regulations. In addition,
we have issued non-qualified stock options from time to time in connection with
acquisitions and for other purposes and have also issued stock under the plans.
Employee stock options generally vest over three to five years and expire five
to ten years from date of grant.

      As of December 31, 2007, 225,250, or approximately 48.4%, of all the
outstanding stock options are fully vested. During the year ended December 31,
2007, we granted options to acquire 260,000 shares of common stock.

      We have issued warrants under various types of arrangements to employees,
in conjunction with debt financing and in exchange for outside services. All
warrants are issued with an exercise price equal to the fair market value of the
underlying common stock on the date of issuance. The warrants expire from five
to seven years from the date of grant. Warrants issued to employees can vest
immediately or up to seven years. Vesting terms are determined by the board of
directors at the date of issuance.

      As of December 31, 2007, 3,396,667, or approximately 72.3%, of all the
outstanding warrants are fully vested. During the year ended December 31, 2007,
we granted warrants to acquire 1,450,000 shares of common stock.

      In anticipation of the adoption of SFAS No. 123(R), we did not modify the
terms of any previously granted awards.

      Mssrs. Linden, Hames and Stolper who hold the positions of Executive Vice
President and General Counsel, Executive Vice President and Chief Operating
Officer, Western Operations and Executive Vice President and Chief Financial
Officer, respectively, were issued certain warrants in prior periods which fully
vest upon the sooner of their respective multi-year vesting schedules or at such
time as the 30 day average closing stock price of our shares in the public
market in which it trades equals or exceeds $6.00. For the 30 day trading period
ended March 7, 2007, the average closing price exceeded $6.00 per share.
Accordingly, these warrants fully vested resulting in the expensing of the
remaining unamortized fair value of these warrants of $1.7 million in the first
quarter of 2007. In 2007, we also recorded $600,000 in bonus expense for the
$0.40 cash bonus Mr. Hames will receive for each vested share exercised (see
Note 12).

      The compensation expense recognized for all equity-based awards is net of
estimated forfeitures and is recognized over the awards' service period. In
accordance with Staff Accounting Bulletin ("SAB") No. 107, we classified
equity-based compensation in operating expenses with the same line item as the
majority of the cash compensation paid to employees.

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

                                      -73-
<PAGE>
<TABLE>
<CAPTION>
                                  FOR THE YEAR ENDED            FOR THE TWO MONTHS ENDED       FOR THE YEAR ENDED
                                  DECEMBER 31, 2007                DECEMBER 31, 2006            OCTOBER 31, 2006
                                IMPACT OF EQUITY-BASED          IMPACT OF EQUITY-BASED        IMPACT OF EQUITY-BASED
                                     COMPENSATION                    COMPENSATION                  COMPENSATION

                              AS REPORTED   COMPENSATION      AS REPORTED   COMPENSATION    AS REPORTED   COMPENSATION
                              -----------   ------------      -----------   ------------    -----------   ------------
<S>                           <C>           <C>               <C>           <C>             <C>           <C>
Income from operations        $    21,166   $     (3,313)     $     1,360   $        (78)   $    16,270   $       (459)
Loss before income tax        $   (17,794)  $     (3,313)     $   (10,963)  $        (78)   $    (6,894)  $       (459)
Net loss                      $   (18,131)  $     (3,313)     $   (10,983)  $        (78)   $    (6,894)  $       (459)
Net basic and diluted
earning per sha re            $     (0.52)  $      (0.10)     $     (0.35)  $      (0.00)   $     (0.33)  $      (0.02)
</TABLE>

      Prior to November 1, 2005, we accounted for equity-based awards under the
intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25 and related Interpretations.

      The following summarizes all of our option and warrant transactions from
November 1, 2006 to December 31, 2007:

<TABLE>
<S>                                                                             <C>
                                                                       WEIGHTED AVERAGE
                                                  WEIGHTED AVERAGE        REMAINING          AGGREGATE
                                                   EXERCISE PRICE      CONTRACTUAL LIFE      INTRINSIC
OUTSTANDING OPTIONS                   SHARES      PER COMMON SHARE        (IN YEARS)           VALUE
---------------------------------  -----------  --------------------  -------------------  --------------
Balance, October 31, 2006              353,750     $          1.02
Granted                                     --                  --
Exercised                               (3,125)               0.92
Canceled or expired                         --                  --
                                   -----------
Balance, December 31, 2006             350,625                1.01
Granted                                260,000                9.03
Exercised                             (138,125)               0.85
Canceled or expired                     (7,250)               3.26
                                   -----------
Balance, December 31, 2007             465,250     $          5.50                 6.59     $ 2,161,558
                                   ===========
Exercisable at December 31, 2007       225,250     $          1.73                 1.60     $ 1,897,308
                                   ===========


                                                                       WEIGHTED AVERAGE
                                                  WEIGHTED AVERAGE        REMAINING          AGGREGATE
                                                   EXERCISE PRICE      CONTRACTUAL LIFE      INTRINSIC
OUTSTANDING OPTIONS                   SHARES      PER COMMON SHARE        (IN YEARS)           VALUE
---------------------------------  -----------  --------------------  -------------------  --------------
Balance, October 31, 2006            4,628,167     $          1.20
Granted                                     --                  --
Exercised                                   --                  --
Canceled or expired                    (37,500)               1.90
                                   -----------
Balance, December 31, 2006           4,590,667                1.20
Granted                              1,450,000                5.32
Exercised                           (1,040,153)               0.92
Canceled or expired                   (303,847)               2.31
                                   -----------
Balance, December 31, 2007           4,696,667     $          2.45                 4.01     $ 31,835,336
                                   ===========
Exercisable at December 31, 2007     3,396,667     $          1.49                 2.77     $ 28,793,936
                                   ===========
</TABLE>

                                      -74-
<PAGE>

      The aggregate intrinsic value in the table above represents the total
pretax intrinsic value (the difference between our closing stock price on
December 31, 2007 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, 2007. Total intrinsic
value of options and warrants exercised during the year ended December 31, 2007
was approximately $11.1 million. As of December 31, 2007, total unrecognized
share-based compensation expense related to non-vested employee awards was
approximately $5.5 million, which is expected to be recognized over a weighted
average period of approximately 3.5 years.

FAIR VALUE DISCLOSURES - PRIOR TO ADOPTING SFAS NO. 123(R)

      We adopted SFAS 123(R) using the modified prospective transition method,
which requires that application of the accounting standard as of November 1,
2005, the first day of our fiscal year 2006. In accordance with the modified
prospective transition method, our consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123(R).

      The following table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition principles of SFAS No. 123 to
stock-based employee compensation (in thousands except per share date):

                                                              ----------------
                                                                    2005
                                                              ----------------
      Net loss as reported                                      $      (3,570)

      Deduct: Total stock-based employee compensation
           expense determined under fair value-based method              (341)
                                                              ----------------

      Pro forma net loss                                        $      (3,911)
                                                              ----------------

      Loss per share:

           Basic - as reported                                  $       (0.17)
                                                              ----------------
           Basic - pro forma                                    $       (0.19)
                                                              ----------------
           Diluted - as reported                                $       (0.17)
                                                              ----------------
           Diluted - pro forma                                  $       (0.19)
                                                              ----------------

      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:

<TABLE>
<CAPTION>
                              RISK-FREE              EXPECTED               EXPECTED        EXPECTED
                            INTEREST RATE              LIFE                VOLATILITY       DIVIDENDS
                            -------------              ----                ----------       ---------
<S>                       <C>                        <C>               <C>                         <C>
December 31, 2007                      4.54%         4.19 years                   94.38%           --
December 31, 2006         No options were granted during the two months                            --
October 31, 2006              4.75% to 5.07%          3.5 years        96.21% to 101.31%           --
October 31. 2005                       3.00%            5 years                   99.22%           --
</TABLE>

      We have determined the 2007 expected term assumption under the "Simplified
Method" as defined in SAB 107. 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.

      The weighted average fair value of options granted during the year ended
December 31, 2007 was $3.43. No options were issued during the two months ended
December 31, 2006. The weighted average fair value of options granted during the
year ended October 31, 2006 was $1.30.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

LEASES - We lease various operating facilities and certain medical equipment
under operating leases with renewal options expiring through 2029. 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. Minimum annual payments
under noncancellable operating leases for future years ending December 31 are as
follows (in thousands):

                                      -75-
<PAGE>

                          FACILITIES       EQUIPMENT           TOTAL
                        --------------   --------------   --------------
          2008           $     23,227     $     10,328     $     33,555
          2009                 21,269            7,719           28,988
          2010                 20,218            4,463           24,681
          2011                 18,005            1,454           19,459
          2012                 16,163                -           16,163
          Thereafter           66,386                -           66,386
                        --------------   --------------   --------------
                         $    165,268     $     23,964     $    189,232
                        ==============   ==============   ==============

      Total rent expense, including equipment rentals, for the year ended
December 31, 2007, the two months ended December 31, 2006 and 2005, and the
years ended October 31, 2006 and 2005, was $34.3 million, $6.1 million, $1.4
million, $8.8 million, and $7.9 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.

      In consideration of the continued employment by Norman Hames, our
Executive Vice President and Chief Operating Officer - Western Operations and a
director in March 2006 we issued to Mr. Hames a seven year warrant to purchase
1,500,000 shares at an exercise price of $1.12 per share, the price of our
common stock on the date of the transaction in the public market in which it
trades, vesting over the seven year period. We have agreed to provide to Mr.
Hames a bonus of $0.40 per share for each share exercised. This warrant fully
vested in March 2007. Accordingly, we have accrued $600,000 as of December 31,
2007 for the vested $0.40 per share bonus.

      We also have employment agreements with officers, key employees and
through BRMG physicians, at annual compensation rates ranging from $50,000 to
$600,000 per year and for periods extending up to five years through September
2011. Total commitments under the agreements are approximately $26,019,000 for
calendar 2007. The majority of the contracts are for one year.

EQUIPMENT SERVICE CONTRACT

      On March 1, 2000, we entered into an equipment maintenance service
contract through October 2005, extended through October 2009, with GE Medical
Systems to provide maintenance and repair on the majority of our medical
equipment for a fee based upon a percentage of net revenues, subject to certain
minimum aggregate net revenue requirements. Net revenue is reduced by the
provision for bad debts, mobile PET revenue and other professional reading
service revenue to obtain adjusted net revenue.

LITIGATION

      We are involved in the following litigation:

      (a)   In Re DVI, Inc. Securities Litigation. United States District Court,
Eastern District of PA, Docket No. 2:03-CV-05336-LDD

      This is a class action securities fraud case under Section 10(b) of the
Securities Exchange Act and Rule 10b-5. It was brought by shareholders of DVI,
Inc. ("DVI"), one of our former major lenders, against DVI officers and
directors and a number of third party defendants, including us. The case arises
from bankruptcy proceedings instituted by DVI in August 2003. We were named as a
defendant in the Third Amended Complaint filed in July 2004.

      The putative plaintiff class consists of those persons who purchased or
otherwise acquired DVI, Inc. securities between August of 1999 and August of
2003. Plaintiffs allege that in 2000, we acquired from a third party one or more
unprofitable imaging centers in order to help DVI conceal the fact that existing
DVI loans on the centers were delinquent. Plaintiffs argue that we should have
known that DVI was engaging in fraudulent practices to conceal losses, and our
alleged "lack of due diligence" in investigating DVI's finances in the course of
these acquisitions amounted to complicity in deceptive and misleading practices.

      We have answered the complaint. The matter is still in its discovery
stage, tentatively intended to terminate in May 2008. Upon its termination we
intend to seek a summary judgment pursuant to the decision in a recently
released U.S. Supreme Court case. We intend to vigorously contest the
allegations.

                                      -76-
<PAGE>

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 fiscal years ended
December 31, 2007 and October 31, 2006. 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).

<TABLE>
                                                2007 QUARTER ENDED                           2006 QUARTER ENDED
                                     -----------------------------------------   -----------------------------------------
                                      Mar 31    June 30    Sept 30     Dec 31     Jan 31     Apr 30     Jul 31     Oct 31
                                     --------   --------   --------   --------   --------   --------   --------   --------
                                       (as        (as        (as        (1)
                                     restated)  restated)  restated)
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Statement of Operations Data:
Net revenue                          $105,815   $107,027   $110,209   $102,419   $ 38,538   $ 39,588   $ 40,336   $ 42,543

Total operating expenses              101,406     96,875    101,546    104,477     34,638     34,820     36,400     38,877

Total other expense                    10,837      9,728     11,575     10,270      4,410      7,469      5,392      5,976

Equity in earnings of joint ventures      995        982      1,103        970          -          -        (61)       (22)

Minority interests in income of
  subsidiaries                           (115)      (170)      (198)      (117)         -          -          -          -

Income tax expense                         16         13         86        222          -          -          -          -

Net income (loss)                      (5,564)     1,223     (2,093)   (11,697)      (510)    (2,701)    (1,517)    (2,332)

Basic earnings (loss) per share:        (0.16)      0.04      (0.06)     (0.33)     (0.02)     (0.13)     (0.07)     (0.11)

Diluted earnings (loss) are:            (0.16)      0.03      (0.06)     (0.33)     (0.02)     (0.13)     (0.07)     (0.11)

(1) During the quarter ended December 31, 2007, the Company revised its estimate
of the net realizable value of its accounts receivable and recorded a charge of
$8.5 million.
</TABLE>

      Results for the quarters ended March 31, 2007, June 30, 2007, and
September 30, 2007 have been restated to properly reflect adjustments identified
during the preparation of our financial statements for the year ended December
31, 2007 (see Note 5). These adjustments were primarily related to an increase
in our accrued liabilities for medical malpractice insurance exposure ($43,000,
$43,000 and $43,000 for the quarters ended March 31, June 30, and September 30,
2007, respectively) and employee bonus ($600,000 for the quarter ended March 31,
2007), as well as adjustments to depreciation expense for corrections to
in-service dates in our fixed asset system ($260,000, $139,000 and $174,000 for
the quarters ended March 31, June 30, and September 30, 2007, respectively).
These adjustments resulted in an increase to total operating expense, total
other expenses, and net loss and net loss per shares as follows (in thousands
except for earnings per share):

<TABLE>
                                 MARCH 31, 2007          JUNE 30, 2007       SEPTEMBER 30, 2007
                              --------------------   --------------------   --------------------
                                 AS      PREVIOSLY      AS      PREVIOSLY      AS      PREVIOSLY
                              ADJUSTED   REPORTED    ADJUSTED   REPORTED    ADJUSTED   REPORTED
                              --------   --------    --------   --------    --------   --------
<S>                           <C>        <C>         <C>        <C>         <C>        <C>
Total operating expenses      $101,406   $100,141    $ 96,875   $ 96,693    $101,546   $101,329
Total other expenses            10,837     10,916       9,728      9,807      11,575     11,654
Net income (loss)               (5,564)    (4,378)      1,223      1,326      (2,093)    (1,955)
Basic income (loss) per          (0.16)     (0.13)       0.04       0.04       (0.06)     (0.06)
Diluted (loss) per share         (0.16)     (0.13)       0.03       0.04       (0.06)     (0.06)
</TABLE>

                                      -77-
<PAGE>

NOTE 15 - SUBSEQUENT EVENTS

      On, February 1, 2008, we acquired the Rolling Oaks Radiology imaging
centers in Thousand Oaks, California, an affluent suburb of Los Angeles in
Southern Ventura County. 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 acquired
facilities will add approximately $9.0 million of revenue on an annualized
basis. The purchase price consisted of approximately $5.9 million in cash and
the assumption of approximately $5.9 million of debt.

      On February 22, 2008, we secured an incremental $35 million ("Second
Incremental Facility") 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 ability to further increase the second lien term loan by up to $25
million and the first lien term loan or revolving credit facility 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%
from 2%for the revolving credit facility and the term loan and to 9.0% from 6%
for the second lien term loan. The additions to RadNet's existing credit
facilities are intended to provide capital for near-term opportunities and
future expansion.

      On February 26, 2008, we signed a definitive agreement to purchase the
assets of six Los Angeles imaging centers from InSight Health Corp. for $8.5
million. The cash purchase price will be funded by a portion of the Second
Incremental Facility provided by GE Healthcare Financial Services. The
operations of the to-be-acquired centers produce approximately $10 million in
annual revenue. The centers that we will acquire include InSight's centers in
Simi Valley, Thousand Oaks, Westlake, Encino, Van Nuys and Valencia. The
facilities operate a combination of imaging modalities, including MRI, CT,
X-ray, Ultrasound and Mammography. The transaction is expected to close in March
or April 2008.

                                      -78-
<PAGE>

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

      Inapplicable.

ITEM 9A. CONTROLS AND PROCEDURES

      Our management, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as defined under Rule l3a-15(e) and 15d-15(e) promulgated under the
Securities Exchange0 Act of 1934, as amended (the "Exchange Act"). Based on this
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were not effective as of
December 31, 2007, the end of the period covered by this annual report on Form
10-K, due to the existence of the material weaknesses described below.

MANAGEMENT'S 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 Rule 13a-15(f). Management, under the supervision and with the participation
of the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the INTERNAL CONTROL- INTEGRATED FRAMEWORK issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on its
evaluation, management concluded that our internal control over financial
reporting was not effective as of December 31, 2007 due to the existence of
material weaknesses discussed below.

      A deficiency in internal control over financial reporting exists when the
design or operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company's annual or interim financial statements will not be prevented or
detected on a timely basis.

      The following material weaknesses were identified in our internal control
over financial reporting as of December 31, 2007:

VALUATION OF ACCOUNTS RECEIVABLE

      We have determined that our methodology for determining the net realizable
value of accounts receivable was inadequate and we recorded a post closing
adjustment of $8.5 million to reduce accounts receivable to the revised
estimated net realizable value at December 31, 2007. Our analysis overvalued
accounts sent to collection and did not factor in a reduction of the expected
collection percentages as the accounts age. The run-out of 2006 accounts
receivable, which was our primary tool with which we analyzed the collectability
of accounts receivable, indicated an overvaluation of our 2006 accounts
receivable. The results of the run-out analysis was not considered in our
initial analysis of the net realizable value of accounts receivable.

FINANCIAL STATEMENT CLOSE PROCESS

      We have determined that our financial statement close process is flawed.
There is not a sufficient review of the financial statements or underlying
reconciliations and account analyses prior to the closing of our books as is
evidenced by the number of errors noted and material post closing adjustments
recorded. For example, in addition to the material adjustment in accounts
receivable noted above, other adjustments recorded include (1) a failure to
record a non-cash accrual for a $600,000 bonus due to the our COO upon his
future exercising of his warrants; the recording of this accrual should have
been recorded upon vesting of his stock options in Q1 2007; (2) a missed
recording of the settlement of a litigation matter for $120,000 and (3) the
misstatement of the amortization of deferred financing cost by approximately
$300,000 because we used an inaccurate amortization period.

FIXED ASSET RECORDING

      We have concluded that we do not have an adequate process to determine the
appropriate date that an asset is placed in service. Our method has been to
record assets as placed in service based on the date an invoice is paid. This
has resulted in both the overstatement and understatement of depreciation, and
the understatement of fixed assets and accounts payable at applicable balance
sheet dates. As a result, we recorded an adjustment to increase depreciation
expense by approximately $1.2 million for the year ended December 31, 2007.
Prior to recording an adjustment, fixed assets and accounts payable were
understated by $4.3 million as of December 31, 2007.

                                      -79-
<PAGE>

LIABILITY FOR MEDICAL MALPRACTICE EXPOSURE

      We have determined that we do not have appropriate control activities in
place to account for our exposure to incurred but not reported malpractice
claims (IBNR or the tail liability). We have a claims made medical malpractice
insurance policy. We record a reserve for our portion of reported claims based
on the policy deductible. However, based on the guidance in the American
Institute of Certified Public Accountants' (AICPA's) Healthcare Audit Guide,
Chapter 8, we should have been recording a reserve to account for our exposure
to IBNR. Prior to recording an adjustment, the understatement of the medical
malpractice liability as of December 31, 2007 was approximately $1.7 million,
and the expense for medical malpractice insurance was understated by
approximately $170,000 for the year ended December 31, 2007.

ENTITY LEVEL CONTROLS

      We have determined that we do not have adequate entity level controls in
place as is evidenced by the number of material weaknesses noted above. We
believe that the lack of adequate entity level controls is manifested in the
lack of accounting personnel who are familiar with U.S. generally accepted
accounting principles (GAAP), and the fact that the overall review process did
not detect any of the accounting errors noted above, none of which involve
complex accounting rules or involve an estimation process, except for the
determination of the net realizable value of accounts receivable.

      The effectiveness of our internal control over financial reporting as of
December 31, 2007 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report thereon which
appears herein.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      Except as noted above, there have been no changes in our internal control
over financial reporting during the quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

                      MANAGEMENT'S REMEDIATION INITIATIVES

VALUATION OF ACCOUNTS RECEIVABLE

      We have formed a Revenue Committee, which includes the participation of
the Chief Executive Officer, Chief Financial Officer, Director of Reimbursement
Operations and other financial personnel. The Committee will meet every month to
review the collection statistics applied to monthly and year-to-date gross
charges as well as review the collectability of accounts receivable balances as
of the end of each month. The Committee will review and analyze collection
run-out statistics and compare the cash collections to historical data and
trends. We believe that collection patterns and anomalies will be identified
more quickly and appropriate adjustments will be made in a more timely manner to
establish the accurate net realizable value of accounts receivable balances.
Furthermore, we have assigned additional personnel and other resources to
review, monitor and analyze billing and collection performance.

FINANCIAL STATEMENT CLOSE PROCESS

      Our planned remediation includes:

      i)    Implementing processes and procedures to perform the necessary
            analysis, critical review, approval, and reconciliation of journal
            entries and account balances;

      ii)   Hiring additional accounting personnel with strong GAAP accounting
            knowledge;

      iii)  Establishing a more comprehensive financial statement close-list,
            with pre-assigned roles and responsibilities for the completion of
            each item on the list;

      iv)   Establishing procedures for period end cut-offs, including, but not
            limited to, identifying and recognizing all incurred liabilities and
            the recording of assets;

      v)    Increasing supervisory review of the consolidation process in
            anticipation of implementing an automated consolidation process;

      vi)   Developing a more formalized process for the identification of
            subsequent events and complex or unusual transactions; and

      vii)  Establishing monthly communications between finance and accounting
            personnel and representatives from the purchasing, legal and
            operations level managers to identify and quantify potential
            unrecorded liabilities and fixed assets.

                                      -80-
<PAGE>

FIXED ASSET RECORDING

      We will assign additional resources to track, record and depreciate fixed
assets. We will schedule monthly meetings with the purchasing department and
monthly calls with the regional controllers to identify assets when they are
delivered to sites and record their correct in-service dates. We will focus on
recording assets and depreciating them in the month when they placed in-service.
Additionally, we will record expenses related to progress payments to vendors in
the period in which services are rendered so as to keep accurate balances of
Construction-in-Progress accounts.

LIABILITY FOR MEDICAL MALPRACTICE EXPOSURE

      We will engage a third-party actuary to determine the IBNR as of the end
of each reporting period. Accordingly, we will use the results of each actuarial
study to adjust our IBNR reserve as of the end of each period.

ENTITY LEVEL CONTROLS

      We will seek to add resources with GAAP accounting knowledge at the entity
level. Additionally, we will assign senior level oversight and review to entity
prepared trial balances and financial statements to insure that accounting
errors are detected and corrected prior to the corporate-level consolidation
process.

      The certifications required by Section 302 of the Sarbanes-Oxley Act of
2002 are filed as exhibits 31.1 and 31.2, respectively, to this Form 10-K.

                                      -81-
<PAGE>

             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, 2007, 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 "Report of
Management on Internal Control over Financial Reporting." Our responsibility is
to express an opinion on the Company'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.

A material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses have been identified and are included in management's
assessment. Management has identified the following material weaknesses related
to: (1) the estimation process used to determine the net realizable value of
accounts receivable; (2) the Company's financial statement close process; (3)
controls over the capitalization and depreciation of property and equipment; (4)
the estimation of liabilities related to medical malpractice insurance and (5)
entity level controls, as more fully described in management's assessment. These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2007 financial statements, and
this report does not affect our report dated March 31, 2008 on those financial
statements.

In our opinion, because of the effect of the material weaknesses described above
on the achievement of the objectives of the control criteria, RadNet has not
maintained effective internal control over financial reporting as of December
31, 2007, based on the COSO criteria.


                                        /s/ Ernst & Young LLP

Los Angeles, California
March 31, 2008

                                      -82-
<PAGE>

ITEM 9B. OTHER INFORMATION.

      None

                                    PART III

As used in this Part III, "RadNet" and the "Company" means RadNet, Inc.

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 "Executive Compensation -
Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate
Governance - Board Committees and Related Matters" in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on May 12,
2008 (the "Proxy Statement"). Information regarding the Company's executive
officers is set forth in Part 1 of this Report under the caption "Executive
Officers."

      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.

ITEM 11. EXECUTIVE COMPENSATION

      The information required by this item is incorporated by reference to the
sections entitled "Executive Compensation" and "Compensation Committee" in the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS

      The information required by this item is incorporated by reference to the
sections entitled "Beneficial Ownership of Common Stock" and "Executive
Compensation - Equity Compensation Plan Information" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

      The information required by this item is incorporated by reference to the
section entitled "Executive Compensation - Certain Relationships and Related
Transactions" and "Corporate Governance - Affirmative Determinations Regarding
Director Independence and Other Matters" in the Proxy Statement.

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-
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                     PAGE NO.
                                                                        --------

(a) Financial Statements - The following financial statements
are filed herewith:

Reports of Independent Registered Public Accounting Firms               52 to 53

Consolidated Balance Sheets                                             54

Consolidated Statements of Operations                                   55

Consolidated Statements of Stockholders' Deficit                        56

Consolidated Statements of Cash Flows                                   57

Notes to Consolidated Financial Statements                              58 to 79

(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.

                                      -84-
<PAGE>

RADNET, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
                                                     BALANCE AT   CHARGES                    BALANCE
                                                     BEGINNING    AGAINST     DEDUCTIONS     AT END
                                                      OF YEAR      INCOME    FROM RESERVE    OF YEAR
                                                     ---------   ---------   ------------   ---------
<S>                                                  <C>         <C>         <C>            <C>
Year Ended December 31, 2007
  Accounts Receivable-Allowance for Bad Debts        $   8,486   $  27,467   $     24,382   $  11,571

Two Months Ended December 31, 2006
  Accounts Receivable-Allowance for Bad Debts        $   1,490   $   3,907   $     (3,087)  $   8,486

Year Ended October 31, 2006
  Accounts Receivable-Allowance for Bad Debts        $     980   $   7,626   $      7,116   $   1,490

Year Ended October 31, 2005
  Accounts Receivable-Allowance for Bad Debts        $     741   $   4,929   $      4,690   $     980
</TABLE>

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

                                      -85-
<PAGE>
<TABLE>
                                                                                               INCORPORATED BY
EXHIBIT NO.                                 DESCRIPTION OF EXHIBIT                               REFERENCE TO
-----------                                 ----------------------                               ------------
<S>              <C>                                                                             <C>
2.1.1            Agreement and Plan of Merger, dated as of July 6, 2006, by and among                 (O)
                 Primedex, Radiologix, RadNet and Merger Sub
3.1.1            Certificate of Incorporation as amended                                              (A)

3.1.2            November 17, 1992 amendment to the Certificate of Incorporation                      (A)

3.1.3            December 27, 2000 amendment to the Certificate of Incorporation                      (E)

3.1.4            November 15, 2006 amendment to the Certificate of Incorporation                      (Q)

3.1.5            November 27, 2006 amendment to the Certificate of Incorporation                      (Q)

3.2              By-laws                                                                              (P)

3.2.1            First Amendment to By-laws

4.1              Form of Common Stock Certificate                                                     (R)

4.2              Form of Supplemental Indenture between Registrant and American Stock                 (B)
                 Transfer and Trust Company as Incorporated by Indenture Trustee with
                 respect to the 11.5% Series A Convertible Subordinated Debentures due 2008

4.3              Form of 11.5% Series A Convertible Subordinated Debenture Due 2008                   (B)
                 [Included in Exhibit 4.2]

10.1             Employment Agreement dated as of June 12, 1992 between RadNet and Howard             (C)
                 G. Berger, M.D.
                 and amendment to Agreement.*                                                         (I)

10.6             Securities Purchase Agreement dated March 22, 1996, between the Company              (D)
                 and Diagnostic Imaging Services, Inc.

10.7             Stockholders Agreement by and among the Company, Diagnostic Imaging                  (D)
                 Services, Inc. and Norman Hames

10.8             Securities Purchase Agreement dated June 18, 1996 between the Company and            (D)
                 Norman Hames

10.10            DVI Securities Purchase Agreement                                                    (E)

10.11            General Electric Note Purchase Agreement                                             (E)

10.12            Securities Purchase Agreement between the Company and Howard G. Berger, M.D.         (E)

10.13            2000 Long-Term Incentive Plan*                                                       (F)

10.14            Employment Agreement dated April 16, 2001, with Jeffrey L. Linden                    (G)
                 and amendment to agreement*                                                          (I)

10.15            Employment Agreement with Norman R. Hames dated May 1, 2001                          (G)
                 and amendment to agreement*                                                          (I)

10.16            Amended and Restated Management Agreement with Beverly Radiology Medical             (H)
                 Group III dated as of January 1, 2004

10.18            Incentive Stock Option Plan*                                                         (H)

10.19            DVI Agreement as amended                                                             (J)


                                      -86-
<PAGE>

                                                                                               INCORPORATED BY
EXHIBIT NO.                                 DESCRIPTION OF EXHIBIT                               REFERENCE TO
-----------                                 ----------------------                               ------------

10.20            Master Amendment Agreement with General Electric Capital Corporation,                (K)
                 General Electric Company and GE Healthcare Financial Services

10.21            Amended, Restated and Consolidated Loan and Security Agreement with DVI              (K)
                 Financial Services, Inc.

10.22            Amendment to Loan Documents re US Bank Portfolio Services                            (K)

10.23            Credit Agreement with Wells Fargo Foothill, Inc.                                     (K)

10.24            Employment Agreement with Mark Stolper dated July 30, 2004*                          (N)

10.25            Second Amended and Restated Loan and Security Agreement with Post Advisory           (L)
                 Group, LLC

10.26            Amended, Restated and Consolidated Loan and Security Agreement with Post             (L)
                 Advisory Group, LLC

10.27            Fourth Amendment to Credit Agreement Substituting Bridge Healthcare                  (M)
                 Finance, LLC for Wells Fargo Foothill, Inc.

10.28            2006 Incentive Stock Plan*                                                           (O)

10.29            Credit Agreement, dated as November 15, 2006, among Radnet Management,               (P)
                 Inc., the Credit Parties designated therein, General Electric Capital
                 Corporation, as Agent, the lenders described therein, and GE Capital
                 Markets, Inc.

10.30            Guaranty, dated as of November 15, 2006, by and among the Guarantors                 (P)
                 identified therein and General Electric Capital Corporation.

10.31            Pledge Agreement, dated as of November 15, 2006, by and among the Pledgors           (P)
                 identified therein and General Electric Capital Corporation.

10.32            Security Agreement, dated as of November 15, 2006, by and among the                  (P)
                 Grantors identified therein and General Electric Capital Corporation.

10.33            Second Lien Credit Agreement, dated as of November 15, 2006, among Radnet            (P)
                 Management, Inc., the Credit Parties designated therein, General Electric
                 Capital Corporation, as Agent, the Lenders described therein,
                 and GE Capital Markets, Inc.

10.34            Second Lien Guaranty, dated as of November 15, 2006, by and among the                (P)
                 Guarantors identified therein and General Electric Capital Corporation.

10.35            Pledge Agreement, dated as of November 15, 2006, by and among
                 the Pledgors (P) identified therein and General Electric
                 Capital Corporation.

10.36            Second Lien Security Agreement, dated as of November 15, 2006, by and                (P)
                 among the Grantors identified therein and General Electric Capital
                 Corporation.
10.37            Retention Agreement with Stephen Forthuber dated November 15, 2006.                  (S)

10.38            Amendment of Existing Credit Agreement with General Electric Capital                 (T)
                 Corporation dated November 2007.

10.39            Amendment of Existing Credit Agreement with General Electric Capital                 (V)
                 Corporation dated February 2008.

14               Code of Financial Ethics                                                             (H)

21               List of Subsidiaries                                                                 (V)

23.1             Consent of Registered Independent Public Accounting Firm                             (V)

                                      -87-
<PAGE>

                                                                                               INCORPORATED BY
EXHIBIT NO.                                 DESCRIPTION OF EXHIBIT                               REFERENCE TO
-----------                                 ----------------------                               ------------

31.1             CEO Certification pursuant to Section 302                                            (V)

31.2             CFO Certification pursuant to Section 302                                            (V)

32.1             CEO Certification pursuant to Section 906                                            (V)

32.2             CFO Certification pursuant to Section 906                                            (V)
</TABLE>
--------------
* Management contract with compensatory arrangement.

(A)      Incorporated by reference to exhibit filed with Registrant's
         Registration Statement on Form S-1 File No. 33-51870.

(AA)     Incorporated by reference to exhibit filed with Registrant's
         Registration Statement on Form S-3 File 33-73150.

(B)      Incorporated by reference to exhibit filed with Registrant's
         Registration Statement on Form T-3 File No. 022-28703.

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

(D)      Incorporated by reference to exhibit filed with Form 10-K for the year
         ended October 31, 1996.

(E)      Incorporated by reference to exhibit filed with the Form 10-K for the
         year ended October 31, 2000.

(F)      Incorporated by reference to exhibit filed with the Form 10-Q for the
         quarter ended January 31, 2000.

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

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

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

(J)      Incorporated by reference to exhibit filed with the Form 10-Q for the
         quarter ended April 30, 2004.

(K)      Incorporated by reference to exhibit filed with the Form 8-K report for
         August 2, 2004.

(L)      Incorporated by reference to exhibit filed with Form 8-K for November
         29, 2004.

(M)      Incorporated by reference to exhibit filed with Form 8-K for September
         14, 2005.

(N)      Incorporated by reference to exhibit filed with Form 10-K for October
         31, 2004.

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

(P)      Incorporated by reference to exhibit filed with Form 8-K for November
         15, 2006.

(Q)      Incorporated by reference to exhibit filed with Form 8-K for November
         27, 2006.

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

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

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

(U)      Incorporated by reference to exhibit filed with Form 8-K for November
         30, 2007.

(V)      Filed herewith.

                                      -88-
<PAGE>

                                   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 31, 2008                      /s/ HOWARD G. BERGER, M.D.
                                           -------------------------------------
                                           HOWARD G. BERGER, M.D., PRESIDENT,
                                           CHIEF EXECUTIVE OFFICER AND DIRECTOR

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


By /s/ HOWARD G. BERGER, M.D.
-------------------------------------
HOWARD G. BERGER, M.D., DIRECTOR, CHIEF EXECUTIVE OFFICER AND PRESIDENT

Date: March 31, 2008


By /s/    MARVIN S. CADWELL
-------------------------------------
MARVIN S. CADWELL, DIRECTOR

Date: March 31, 2008


By /s/ JOHN V. CRUES, III, M.D.
-------------------------------------
JOHN V. CRUES, III, M.D., DIRECTOR

Date: March 31, 2008


By /s/ NORMAN R. HAMES
-------------------------------------
NORMAN R. HAMES, DIRECTOR

Date: March 31, 2008


By /s/ DAVID L. SWARTZ
-------------------------------------
DAVID L. SWARTZ, DIRECTOR

Date: March 31, 2008


By /s/ LAWRENCE L. LEVITT
-------------------------------------
LAWRENCE L. LEVITT, DIRECTOR

Date: March 31, 2008


By /s/ MICHAEL L. SHERMAN, M.D.
-------------------------------------
MICHAEL L. SHERMAN, M.D., DIRECTOR

Date: March 31, 2008


By /s/ MARK D. STOLPER
-------------------------------------
MARK D. STOLPER, CHIEF FINANCIAL OFFICER (Principal Accounting Officer)

Date: March 31, 2008

                                      -89-